South African energy and chemicals group Sasol is preparing to invest the equivalent of around two-thirds of its current market capitalisation into three major projects in the US over the coming seven years, which could also position it as the State of Louisiana’s largest foreign direct investor.
The group’s market capitalisation current stands at around R263-billion and the three North American projects collectively represent possible capital expenditure (capex) of between R146-billion ($16-billion) and R192-billion ($21-billion), at current rand/dollar exchange rates.
The group is pursuing a $5-billion to $7-billion ethane cracker project in Lake Charles, which is situated near to the US Gulf Coast and within close proximity to existing gas and logistics infrastructure.
A final investment decision on the cracker and downstream ethylene derivatives is expected during the first half of 2014 – the plant could be operational by 2017.
Sasol is also conducting front-end engineering design on two gas-to-liquids (GTL) projects at the same complex, where investment decisions are likely to flow over the coming 18 to 24 months.
The GTL projects would be a first for the US and would involve capex of between $11-billion and $14-billion.
It is currently envisaged that the GTL plants would be delivered in two 48 000 bbl/d phases to produce four-million tons a year of fuel and value-added products, such as waxes and base oils. These plants could be commissioned by around 2020 or 2021.
CEO David Constable says the megaprojects mark a "significant chapter" in the JSE-listed group's efforts to "enhance" its position as an international energy and chemicals company.
He is also sanguine about the perceived threat posed to the GTL projects by the current rise in US crude oil production, stressing that the products produced at the facility would be linked primarily to the international diesel market rather than the oil market.
The funding plan is built on the group’s ability to generate significant levels of cash, primarily out of South Africa, as well as its strong balance sheet, which currently has gearing of 6.6%, which is well below its gearing target of between 20% to 40%.
CFO Christine Ramon reported that, during the interim period to December 31, 2012, R21.4-billion in cash was generated, which was lower than the R22.7-billion generated in the corresponding period during 2011. Cash flow from operations increased 6%, but was offset by working capital charges.
The group also expects to make use of a combination of other capital-raising instruments, including dollar-denominated bonds. On November 7, Sasol issued a $1-billion bond, with a tenure of 10 years and a fixed coupon rate of 4.5%.
The issuance was oversubscribed by 3.47 times and Ramon indicated that further issuances would be timed to “match cash flows” with its “US growth projects”, which could see Sasol approaching the US capital markets later in 2013 or in early 2014.
The South African company, which is the largest producer of fuel and chemical from coal, is assessing ways to mitigate the risks of pursuing the large-scale developments, including the phasing of projects to meet gearings targets and sustain its progressive dividend policy.
Sasol expects the peak capital outflow to be during its 2016/17 financial year and it is already working on ways to mitigate the risk associated with the peak year.
But Constable also stresses that projects are well placed when assessed against the group’s key project parameters of feedstock availability, access to competitive technology and production platforms, the size and attractiveness of markets and the group's capability to execute.
Senior group executive, global chemicals and North American operations André de Ruyter tells Engineering News Online that, besides pursuing the projects in phases, modular engineering techniques will also be adopted. In other words, key plant and equipment will be fabricated and assembled in low-cost territories and shipped to site for erection and commissioning.
The group is also beefing up its internal project management capacity and will also undertake future recruitment in the US once the projects move towards construction and operations – the company already employs around 500 people in Louisiana having acquired operations in Lake Charles some time back.
The support and incentives on offer from the State of Louisiana have also been a factor, with Governor Bobby Jindal having personally visited the Sasol site three times.
By the time the projects are operations, Sasol will be a significantly “different company”, De Ruyter asserts.
“We are going to invest approximately two-thirds of our total market capitalisation, the total value of Sasol, in North America in these three projects. So, the nature of the company will fundamentally change,” he outlines, while stressing that South and Southern Africa will remain a key operational and profit centre.
The importance of South Africa is also emphasised by Constable, who notes that more than 72% of its current capex is being investment in South Africa.
The group will spend R31-billion on capital projects in 2012/13 and a further R35-billion in 2013/14, with more than 60% of that capex destined for South Africa.
“From out vantage point, South Africa is not only our home base, but it is also a great entry point to one of the world’s largest growth areas, [which is Africa],” Constable stresses.