What: Shares of Sasol sank more than 10% by 11:00 a.m. ET on Monday after the company released an update on its expected fiscal 2016 earnings and the costs for its chemical plant.
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So what: The steep decline in oil and gas prices is expected to take a chunk out of Sasol's earnings. That's because the company expects to record up to $770 million in asset impairments, which will likely cause its profit to fall by 10% to 30% this year. Driving the writedown is the company's Montney shale gas property in Canada, which is expected to endure another writedown after seeing its value impaired just this past December.
In addition to the company's weaker projected earnings, Sasol also announced an updated cost for its Lake Charles Chemical Project, which it put under review in March. The company said that the chemicals complex is now expected to cost as much as $11 billion, up from its prior estimate of $8.9 billion due to construction delays. Because of that increased cost estimate, the company's returns from the project are projected to decline to around its weighted average cost of capital. That suggests that the project might not create much value for Sasol's investors if current conditions persist.
Cost overruns are pretty common in the energy sector. Chevron , for example, initially pegged the costs for its massive Gorgon liquified natural gas (LNG) project in Australia at $37 billion. However, due to engineering challenges and other issues, Chevron now expects the project to cost $54 billion. That higher cost, as well as a weakening LNG market, have also cut into the projected returns of the project. That being said, the Chevron-led project is expected to produce for the next 40 years, which gives the market plenty of time to recover so that the project could still yield decent returns. A similar long-term time horizon applies to Sasol's chemicals plant, which could enable it to deliver stronger returns in the future than are currently projected if commodity prices cooperate.
Now what: Weak commodity prices are wreaking havoc on Sasol's earnings and the projected returns from its massive chemicals project. That said, the company's assets and investments are geared for the long term, so these shrinking values and returns could improve in the future if commodity prices rebound.
The article Here's Why Sasol Limited's Stock Is Slumping Today originally appeared on Fool.com.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chevron. The Motley Fool recommends Sasol. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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