Sasol Ltd (SSL) 2017 Q4 法說會逐字稿

Good morning, and good afternoon, ladies and gentlemen, and welcome to the Sasol results conference call. Today's call will be hosted by Stephen Cornell and Bongani Nqwababa, joint President and Chief Executive Officers; and Paul Victor, Chief Financial Officer. Following the opening remarks, an interactive Q&A session will take place. I would now like to hand the call over to Bongani Nqwababa. Please go ahead, sir.

Thank you, operator. Good day, everyone. This is Bongani Nqwababa speaking. Thank you for joining us for this call during which Stephen Cornell and Paul Victor and I will discuss Sasol's 2017 annual results. We have published a slide presentation on our financial results, which you can now download from our Investor Centre on the Sasol website. In the interest of time, we'll not strictly follow the presentation for the call, as we'd like to make more time available for your questions.

Before we begin, I would like to refer you to the safe harbor note of the forward-looking statements contained on Slide 2 of the presentation.

In 2017, Sasol delivered a robust performance, notwithstanding the volatile macroeconomic environment in which we operate. This is a testament to the strong achievement we have in place and the great work we have done to position Sasol for long-term growth. The results issued today reflect that we are able to operate profitably and generate healthy cash flows at oil prices of USD 40 a barrel. Paul will provide a high-level summary in a short while.

We recorded a solid progress on our near- to medium-term strategy. Underpinning our 2017 results was operational and marketing excellence and disciplined cost control. Additionally, we have managed our financial risk through a very effective hedging program and forecast cash conservation. This forecast has enabled us to continue paying dividends to our shareholders.

Thank you for that introduction, Bongani. Good day, everyone. This is Stephen Cornell speaking. What you will hear from us today is the following: Despite an ongoing challenged environment for our business and industry, we delivered a robust all-around performance.

The fundamentals of our business are sound, as reflected in our competitive cost base. Here, our cash and capital conversation and cost savings programs continue to deliver against stretched targets. To maintain our resilience, we are actively managing the balance sheet to protect as well as to strengthen it. We are enabling this through our heightened focus on activities to mitigate our exposure to macroeconomic risks.

We recorded solid progress on our near- to medium-term strategy by driving our value-based growth projects in Southern Africa and North America. Both our Lake Charles Chemicals Project in the United States and the Field Development Plan for the Production Sharing Agreement license area in Mozambique remain on track. Building on our success over the last few years, we will be driving continuous improvements to embed a culture of value creation in all aspects of our business. And to drive future value-based growth, we are also refining our long-term strategy.

One of the hallmarks of Sasol is our competitive cost base, driven in recent years by sustainable cost savings in our cash and capital conservation program. Through our continued focus on cost control, we achieved our full Business Performance Enhancement Programme, or BPEP, savings target of ZAR 5.4 billion in 2017. This is one year earlier than planned.

With this capital savings having changed, we have now closed out BPEP, and we are forecasting utilization towards a continuous improvement that also drive future value. In 2017, through our low oil price Response Plan, we convert ZAR 32.3 billion in cash and capital. The total value convert since the start of the plan is now ZAR 69.4 billion. This brings us close to the upper end of our target range of ZAR 65 billion to ZAR 75 billion through to the end of the next financial year.

We have also increased our sustainable savings target for the Response Plan from ZAR 2.5 billion to at least ZAR 3 billion. Together, with the ZAR 5.4 billion from BPEP, we will achieve at least ZAR 8.4 billion in sustainable cost savings from financial year 2019.

Owing to our competitive cost base, we can now operate profitably within a USD 40 oil price environment.

Let's now discuss our Lake Charles Chemical Project or LCCP. The LCCP in Louisiana met key project milestones and were 74% complete by year-end. Construction execution now stands at 42%, with startup of the first units still forecast for the second half of calendar year 2018. Capital expenditure to date amounts to USD 7.5 billion, and we are closely tracking spend against the revised cost estimate of USD 11 billion.

Key mitigating actions, which included project management changes and improvement in managing fieldwork execution, have ensured that productivity on construction has now been the first quintile of industry comparisons. The project's contingency, measured against industry norms for this stage of completion, is still considered sufficient to effectively complete the project to beneficial operation within the revised budget.

We have also put in place a fully integrated business and operations readiness plan to enable the facility to successfully get product to market. Our commissioning and marketing plans are well developed in this regard.

Looking at LCCP economics, we rely extensively on the views of independent market consultants for formulating our long-term assumptions. Their views differ significantly, which is indicative of the volatile environment we face. The current view of the long-term internal rate of return, or IRR of the project, is expected to be between 7% and 8%. This is largely due to our change in the assumptions on polyethylene margins and our continued use of conservative ethane pricing scenarios. We believe these assumptions are prudent in evaluating our long-term assets, such as LCCP. At spot market prices, however, using the last quarter of 2017, the IRR is between 8% to 8.5%. We remain focused on improving future project returns and managing the capital expenditure of LCCP.

In Mozambique, we remain committed to our growth plans. This is despite the current financial challenges the country is facing. Our USD 1.4 billion initial development of the PSA progressed within our approved budget and schedule. By year-end, 6 wells had been drilled, 4 oil and 2 gas wells, with capital expenditure at USD 384 million to date. Gas reserves are in line with expectations, but oil production is expected to be in the mid- to lower end of the range. As such, we are also optimizing the design of the surface facilities to drive improved economics with lower capital requirement. The PSA is key to our integrated cost monetization strategy in Mozambique and South Africa. Our investment affirms that Mozambique is critical to our 2015 strategy for Southern Africa, given the importance of securing gas restock for our integrated value chain.

As mentioned earlier on the call, we are refocusing the organization towards continuous improvement to drive our competitive advantage. Our objective is to innovate, grow our return on invested capital and continue to manage our cost to below inflation. This approach will be driven by critically objective assessments of our performance in all respects, supported by regular independent benchmarking. It will require excellence in all we do of achieving 0 harm to containing cost and operating all of our assets effectively and efficiently. We have also initiated a detailed asset review process to ensure that all assets in our portfolio deliver against our stringent financial metrics. A further push is being focused on using current technology applications to redefine our customer experiences and to embed digital advantages throughout Sasol's business. A digital strategy and roadmap is being developed in this regard.

I'll now touch on our long-term strategy before opening the call for questions. Our continued focus on delivering our strategic investment in North America and Southern Africa is pivotal to Sasol. As our results demonstrate, we made commendable progress in delivering on our medium-term strategy this year.

For the longer term, we are further refining our corporate strategy. This is to ensure that we have a robust set of principles to drive our future growth and investments irrespective of the macroeconomic environment. It will also entail clarifying our strategic choices towards LCCP. Our stringent capital discipline has allowed us to optimize our overall capital expenditure. This ensures that the project pipeline is focused and value-accretive for our shareholders.

We look forward to sharing further details on this work at our Capital Markets days from November this year, both here in Johannesburg and New York City. Thank you. Paul will now take you through the summary of our financial and operational performance. We'll then open up the call for questions.

Thank you, Steve and Bongani, and good afternoon, ladies and gentlemen. It is my pleasure to present the 2017 financial results to you today.

Turning to your packs to Slide 14, 2017 marked the start of an exciting year for Sasol as we position ourselves to drive further value-based growth to enable us to deliver superior returns to our shareholders guided by our updated capital allocation framework. Sasol is one of the few companies globally that has stability to generate sustainable cash flows at oil prices of USD 40 to the barrel. This competitive advantage is [an unparalleled] foundation business that we are continuously improving, so to remain agile and flexible to operate in these volatile times.

Our continuous improvement drive, as mentioned by Steve and Bongani, will embrace innovation and leverage of our cost and cash programs that have contributed to this current strong competitive position. We are monitoring market conditions as we proactively mitigate our financial risks through a disciplined and continuous hedging program to protect the balance sheet, create headroom and ensure sufficient liquidity. These actions provide the foundation to enable future value-based growth.

If we'll move on to Slides 15 to 17 in your packs. The volatility in the global economic markets and political forces continue to add pressure and ultimately adding negative impact on our results for 2017. Overall, we delivered a resilient operational performance across most of the value chain, with record production volumes being achieved through Secunda Synfuels. Our European assets also produced at levels last recorded in 2015. Operating profit of ZAR 31.7 billion was up 31%, largely as a result of the higher average oil price and stellar cost performance as well as the positive impact of late remeasurement items and once-off items. The increase was partially negated by the impact of the stronger rand.

Looking at our segment profitability at a high level, mining's operating profit decreased by 21% to ZAR 3.7 billion, mainly as a result of increased costs associated with the treatment mine strike during the first half of the financial year. A business improvement plan is underway to refocus our effort on improving productivity, focus on cost efficiency as well as restore mining flexibility.

Exploration and Production International returned to profitability through focused management integrations focused at optimizing the asset portfolio. Cash fixed cost for both O&E was down 29% compared to the comparative period.

On a normalized basis, Performance Chemicals' operating profit increased by 2%. The strong performance is largely the result of the higher sales volumes and improved resilient margins across most of our PC project lines. Normalized operating profit for Base Chemicals was down, unfortunately, 13% due to the stronger average rand. This was partly negated by the 6% higher dollar basket prices for Base Chemicals as well as the high sales volumes.

Our Energy business delivered inflationary results relative to the current macroeconomic environment, as evidenced by the 19% decline in petrol differentials. Petrol differentials were, however, 11% higher.

The sum of it all, realized into a headline earnings per share that decreased by 15% to ZAR 35.15 per share, while the earnings per share increased by 54% to ZAR 33.36 per share. Core headline earnings per share, which is the headline earnings per share adjusted for relation of once-off items as well as the feedback of currency revaluations at year-end, amounted to ZAR 39.06 per share, which is 6% up compared to the comparative period. A strategic focus to diversify earnings by product slide and by geography is gaining momentum, as illustrated on the pie chart on Slide 16.

The LCCP, once commissioned, will move the product slide more to chemicals, with the geographical split from foreign sources increasing to approximately 50%. A final dividend of ZAR 7.80 has been declared. This leads to total dividends for the financial year to ZAR 12.60, and equates to 36% payout ratio or 2.8x headline earnings per share.

Capital expenditure dominated by the spend of LCCP decreased to ZAR 60 billion, which is below the market guidance. This was largely the result of the strengthening of the rand/dollar exchange rate, the repricing of the LCCP capital cash flow as well as actively managing the capital portfolio.

Moving on to Slide 23. Looking forward, our 2018 forecast is capital reduces slightly to ZAR 59 billion, largely due to the impact of the stronger rand as well as the optimization of the LCCP still in petrol. With this capital forecast in mind, the group is still maintaining a positive cash position. We estimate that the cash on hand, together with the funds generated from our operations and our existing borrowing facilities, will be sufficient to cover our capital and debt service requirements in the years ahead. The current market volatility and stage of execution of our growth program requires from us to proactively manage our balance sheet to ensure that we've got sufficient liquidity headroom available. We will achieve this through a continuous contribution of our cash and capital conservation programs, the sustained performance of our diversified global assets and the execution of several financial risk mitigation strategies, such as our oil and currency hedging programs, which I touched on earlier.

Reporting to net, that we have commenced with a deeper review of all of our assets, and we'll be critically evaluating against stringent financial metrics as we target to improve our return on invested capital to our foundation businesses. Outcomes of these projects will be communicated to the market in due course and will be available. We continue to execute on our hedging policy to mitigate against specific financial risks, which will enable us to predict and strengthen the balance sheet in a strong rand and low oil price environment.

Our gearing increased to 27%, which is 2% lower than our own internal estimates. Our net debt-to-EBITDA has increased to 1.1x and really make one confident that we will be able to manage our gearing and our net debt-to-EBITDA to below our self-imposed internal target of 44% gearing and below 2x net debt-to-EBITDA.

Our credit ratings, as a critical focus area, will remain key to us, as we strive to keep value-based grade at above investment levels. We remain confident that when the integration is already implied that we'll ensure that we navigate through a volatile macroeconomic environment safely. We remain committed to our current dividend policy and our capital allocation framework. We'll use this framework to guide us to drive our value-based strategy as we look beyond the startup of the LCCP. Further details of this process will be communicated at the Capital Markets Day later this year.

Moving on to Slide 24 of the outlook. We expect macroeconomic headwinds to continue for financial year '18. However, we will leverage our sell position to continue to deliver sustainable value at low oil price environment. We expect to start seeing the positive result of our mining business improvement plan with cost and production returning to normalized levels in financial year '18. We project South African liquid fuels sales volumes to be approximately 60 million barrels, with ORYX GTL utilization rate averaging above 90%. Base Chemicals sales volumes are expected to be between 3% and 5% higher from the current asset base. We expect normalized operating profit to be between ZAR 3 billion and ZAR 5 billion.

Performance Chemicals sales volumes are also expected to be between 2% and 3% higher, with our Wax Expansion Project delivering approximately 116-kilo tons of hard wax. Average margins are expected to remain quite resilient for this business unit. We expect our balance sheet to reach gearing levels of between 35% and 44% on gearing and the net debt-to-EBITDA to remain below 2x.

In closing, as we are prepared for the first units of the LCCP coming online and the expected increased cash flows, our balance sheet will start to deleverage from financial year '19. We are committed to a disciplined capital allocation framework, which will prioritize dividends for our shareholders, as we target maximum sustainable shareholder returns.

On that note, I will hand back to Steve, who will open the floor for questions and answers.

Thank you, Paul. Operator, you can open up the line for calls.

(Operator Instructions) And our first question, we'll hear from Gerhard Engelbrecht with Macquarie.

Maybe can you -- I've got a couple of questions. Maybe can you elaborate on the tax provision that you've taken and the outstanding litigation or legal action with SARS. The exposure of ZAR 11.6 billion that you -- the potential exposure that you guide to just seems excessively high in the context of your actual annual tax book. I believe that's for 2 years. Second question, same in notes of the financial statements that your weighted average cost of capital for the LCCP has gone down from 8% to 6.6%. What has changed in the calculation in the last year? And then maybe lastly, you talk about an entire plant shutdown scheduled in F '19. Is this for both sides of the plant? Why is this done? How long will it take? And what will the impact on production be if you have those numbers available?

All right. Thank you. Always good to hear from you. I think Paul will try to answer your questions. The last one, Paul, we can jump in to help.

Okay, good. Thanks, Gerhard. The fiscal effects actually started in the same as ongoing tax litigation results for the years 2004 and 2012. Now regarding -- and this is really regarding our international oil procurement activities through specifically procured oil from the Middle East, and then effectively sell it on to the South African Sasol oil entity as we know it. Now effectively, SARS is challenging the commercial substance of the structures, through which we effectively procure the oil over the past couple of years starting from 2004. Now the code has gone through the tax code, and the tax code has ruled in favor of SARS. However, we have appealed this decision. And based on the grounds that we provided to the court and the judge, they had granted us the allowance to actually appeal it to the Supreme Court. Now based on the fact that we have a tax code hearing in favor of SARS, we then had to provide ZAR 1.2 billion of taxes related to this matter. I think it's quite surprising to say that based on the support and interpretation of a very strong team of legal experts, we do believe that we had very strong prospects of success in pursuing this case through the appeal court. It will take us roundabout 12 to 18 months to get to the appeal court and to hear the case. And also, we have to bear in mind that in the appeal court, there's 5 judges listening to your case. So we believe that it's quite strong. Our case is quite strong, and we will follow that tax legal process. Now the ZAR 11 billion is effectively also looking at the current tax litigation, but it has different primary grounds. So basically, if you take the grounds for 2004 to 2012, only ZAR 250 million of the ZAR 11 billion effectively relates to the same grounds as what we currently are contesting with SARS. Now how do you get to the ZAR 11 billion? So effectively, SARS taxes the revenue, but they don't allow the expenses, meaning the procurement of oil as a deduction. A, it fails us to understand why. So we have received the assessment from SARS. And as I say, to separate basis, we have objected against this statement. We're still awaiting SARS' feedback on the grounds of the assessment. If they don't allow us our grounds, we will also need to go to the tax court, and then ultimately also going through the whole court process. We believe that the ZAR 11 billion is really at its infancy. We also believe that the grounds, specifically the primary grounds of not allowing the crude procurement as a deductible cost is flawed. And also, we will strongly contest this through the legal process, and it will take some time for us to get this. So at this stage, we believe that the ZAR 11 billion is a base contingent. That means we had to make also a proper disclosure of this fact in our financial statements. In terms of the WACC rate, in terms of the U.S., I wouldn't have to evaluate our e-payment. I thought it actually requires from us to look at the U.S. and use spot records in the U.S. And effectively, the spot WACC rates for the U.S. have actually decreased from 8%, which was normally our average WACC-rated use for the company, to 6.6% as spot rates. So in terms of IFRS, this is the contingent that we have to apply. And our order, this also requires that we do so. To the third question, in terms of what...

Your question about Secunda Synfuels. So the next shutdown, next total shutdown, is scheduled for September '18. So that's in actually our fiscal year '19. And this will be a shutdown on the west factory that you know, as we shut each side down on a cycle about every 8 years. For fiscal year '18, we're expecting the production from Synfuels to essentially be in line with what you're seeing for FY '17.

And next, we'll move to Chris Nicholson with Morgan Stanley.

Can we talk a little bit about balance sheet gearings, I mean, just in particular the headroom that you have around it? My question specifically relates to in context of this potential tax liability. I do understand your flare-ons on the ZAR 11 billion, which seems pretty ridiculous from SARS' side. But where are you to have to pay this additional ZAR 1.6 billion? And then also with the view to the Inzalo BEE scheme unwind, where there might be a further shortfall, how much headwind do we have on your internal models against that 44% debt-to-equity ceiling? And if you ran it close, how many are kind of one of the levers you think you can pull, if necessary?

Thanks, Chris. It's Bongani here, and I'll respond to that. As we have noted that our gearing at the end of this financial year was 27%, which is lower than the initial guidance that we have given. And then we have obviously internally done all our stress testing, including the ZAR 11 billion. No matter how out of line you might think it is, we have to build the sums. And we then arrive with our gearing typically more within we have spoken about to be just under the 44% previously given guidance. So even if you include the stress situation, we'll still be okay. You'll go with no intention of playing it in that direction. We'll keep playing and pushing back legally. So that's where we are in terms of the stress testing. And fortunately, our hedging activities are helping as well. And you'd have seen that in terms of liquidity, you are in the bank and the profit with facilities with just over ZAR 80 billion in liquidity headroom. So we are actually fine.

I guess, the only thing I can add, Chris, is given the time it will take to do the court processes, it's very unlikely that we'd come to some sort of understanding in FY '18, which is our peak gearing period. So we'll push it out into FY '19. Paul, anything else?

Yes. And levers, the latter question, besides, we still have self-help measures. I think the one thing that the institution allows is that we're continuously pushing on top of measures. So I believe our hedging program needs to continue. We have further cost and cash in capital conservation savings, which we're currently working on, which is in the form of digital improvement that we're making to the business, further business process improvements that we make, and we'll communicate those in due course. There's also some margin improvement that we are targeting, and that we've got some flexibility still in our capital portfolio to rebalance our capital portfolio in FY '18. So we believe in those measures. There's roundabout 1% to 2% additional gearing point if we push hard enough to get there, I think also provides us with some further flexibility in terms of managing our balance sheet to below the self-imposed gearing mode.

And next, we'll move on to Alex Comer with JPMorgan.

Yes, I've got a few questions. Just with regard to the -- to your chemicals businesses. You talk about margins being resilient in the form of chemicals business, but you also talked about expectations for providing the same prices, and I think weakening ethylene prices in the LCCP. So I guess, I just wonder how the margins can be resilient with that occurring. And maybe perhaps you can talk about the impact of the wax volumes on margins there. And then similarly, again, with the Base Chemicals business, you talked about expectations for recovering U.S. dollar prices. I just wondered specifically where that was occurring. And also, just on the volumes, I'm assuming that your 3% to 5% growth doesn't include the transfer of the ethylene volumes from the Performance Chemicals business into that division. And then just on your costs, you talked about staying within PPI. Could you just reconfirm the impact losing the Eskom electricity contracts has on your business? And then just one further one. In terms of gas, you talked about weak customer volumes or weaker customer demand for gas. And I'm just wondering, when I look at your gas volume expectations for this year, what effectively the line is doing. And also, are you confident about finding customers for new gas that you may bring down from Mozambique?

Okay. Thank you, Alex. I'm glad you had a question. So Fleetwood's going to take the first couple, Paul will take the Eskom contract, and I'll take the last one on gas production.

Okay. Alex, so just to start off with the Performance Chemicals in terms of Brazilian margins taken that we see. So in that business, the 2 main drivers that we foresee in the near term is volume growth, as we've indicated, primarily in the artifacts, which we communicated the number. Also, our co-monomers business is growing, and we see also marginal growth in volumes in some of the other product lines. Now most of that is not affected by oil price right now. So our performance at chemicals business with respect to wax margins as well as co-monomers is therefore quite resilient going forward. So from that perspective, that is where we're coming from near term. If I look at Base Chemicals, of course, they are a mixed bag. So with respect to polypropylene, we don't see any impact in the near term. Actually, we see polypropylene and propylene pricing firming in the near term. With respect to polyethylene, we don't in the current business export much polyethylene out of South Africa. We see pricing in the near term, in the next quarter or so firming a bit. But then, of course, we expect softening of prices in the next couple of quarters as more capacity and polyethylene comes off onstream, specifically in the U.S. Our Solvents business, we've seen price firming in the last quarter. We see that trend continuing into this new financial year. So therefore, that looks up. And then last, but not least, both in our fertilizers and explosive business, we see growth in terms of our volumes in this year ahead of us and a slow recovery. We've seen an increase in volumes in explosives over the past year modestly, but we see that trend continuing going forward in financial year '18. So I think that's maybe our overall view near term how we see the business playing out.

Alex, to your second question on electricity, and I can also shed to [modern wing coffee roundtable] a bit more detail with you. But effectively, as effect of not having a PPA this year, had a 3% increasing impact on our electricity bill if you compare our total electricity bill of financial year '17 to '16. So it's 3%. Looking forward to the year to come, we anticipate our electricity to follow inflation as the NERSA increases heavily that significant. But also in terms of seeing reliability in Secunda, it's actually much more compared to what we've seen before. Actually, that improves over the past couple of years, and that also allows you the ability to be actually more effectively efficient with regards to electricity generation needs. So yes, 3%, but we still feel that we will be able to manage our electricity cost on a unit basis with the inflation for the forthcoming year.

So you're saying the annualization of the loss of the Eskom contracts isn't going to impact you? Or that it will, but it will be within the inflation?

No, it has impacted this year by 3%.

All right, okay. But it won't impact '18?

Very limited. On a unit basis, we don't anticipate -- we actually anticipate that we'll manage our flow or electricity on a per unit basis towards inflation.

Alex, on the third question, if I understand it right, is around gas production in Mozambique and Loop Line 2 capacity, and then downstream customer demand, is that correct? Okay. So Loop Line 2, we completed earlier this year. And so it was an increase in the capacity of the line from about 170 billion standard cubic feet a year to 190 billion. So about a 12% increase in capacity. So that's complete and in operation. And so that gave us a little bit of incremental room. Now our PPA production is essentially flat, but it allows us the ability to be ready for the PSA gas as PSA gas starts to flow. In terms of demand, we have both demand internally within our own plants at Sasolburg and Secunda and strong demand externally with our commercial customers. I think you know we have quite a number of commercial customers and a -- if you will, a pent-up demand for additional gas as and when volumes are able to flow.

I mean, the statement says that gas sales volumes were down 2% due to lower market demand. So I'm just asking, are you still pretty confident that there is demand out there for additional volumes?

Oh, I guess, I thought you were talking about natural gas. I think you're talking about liquid petrol. Are you talking about...

Gas sales. I'm assuming that gas sales meets natural gas.

So basically, we have seen a reduction this year in terms of the ethane-rich gas, in terms of sales volumes by customers, and although we routed those volumes back into Synfuels. In terms of the NERSA agreements, we asked to offer those gas volumes to the market, and that's what we do in this instance. If the market is not robust in that, effectively, that should take the gas volumes. They will reap those back into Sasolburg and into Secunda, where margin actually add more value to it. But the way that we're unfortunately have to manage the system is to offer these volumes to the market. Either way, we can use the molecules either externally or internally in our facilities.

And next, we'll move on to Sean Ungerer with Arqaam Capital.

Just one question. Just in terms of the portfolio review, just could you maybe elaborate more on the sort of metrics or your sort of key considerations within that? And I'm just sort of tongue-in-cheek comparing the sort of run rate IRR for LCCP below at sort of WACC, and then how you sort of play out for other sort of thoughts.

Okay. Let me start, Sean, and then Bongani and Paul can jump in. So what we're doing is we're going through a rigorous process, a very structured process, where what we have asked the GC to do is let's evaluate versus a set of criteria, all of the assets we have, and make sure that they're all value-accretive, and that we feel comfortable with the fit in terms of strategy and going forward. And so we've spent a great deal of time in setting that up, so that we're comfortable with the process. And we've just started to walk through the first 1 or 2 assets to, if you will, cut our teeth on. And are we comfortable with how this is working? And the idea, again, is looking at our objective to increase return on invested capital and convince ourselves that we're holding the right portfolio and also probably provide some insight into should we want to acquire any additional portfolio where we might want to do so. So that's the process we're undergoing. It's not anything we're rushing to do. There's no balance sheet driver to do so. It's really more of a strategic choice in making sure that we are strategically doing the right thing to grow the company and increase the return on invested capital. Bongani, Paul, want to add anything?

If I can come in, I think it's important, as Steve says, that whilst we're looking at our strategy and also in our buildup to the Capital Markets Day at the end of the year to give you also flavor of how do we view our current asset base in terms of its geography and its contribution. But they're very much important in terms of the financial metrics, as we've also mentioned that most of the LCCP, we really need to look for opportunities at driving sustainable quality earnings. We need to look at improving our cash flows as well as ensuring that the ultimate result of this is sustainable and higher return on invested capital. I think it's quite important. Now in asset review, you have 2 choices. You can keep an asset and develop it further. And if it's not performing, you need to devise yourself what measures you will take to actually get it to top performance. If you come to the conclusion that the asset is something that you don't want to hold on to, it divides the process of effectively again disposing of the asset. And if it's significant enough, we'll then inform the market. It is important for you to know that we have embarked on this process. It's a very robust process. But ultimately, it's within the objective of driving ROICs, high cash flows and sustainable quality. And that's our objectives, and we believe that there is future value diligently guiding this process.

Thanks. It's Bongani here. In summary, let me just state what it is and what it is not. What it is, is to make sure that we are effectively allocating capital and getting the requisite return on a sustainable basis. What it is not is to do a review in order to grow a fire sale because we are not going to be doing a fire sale in our balance sheet. It's comfortable enough to carry us through. So in summary, what we look at is portfolio-feat, which means it's in line with our strategy. We then look at the financial analysis to make sure that it meets our financial metrics criteria. And last, but not least, we then look at execution. For example, we should do identify an asset for sale, you have to look at the higher universe. The higher universe. And we're able to realize here what we think the value is. So it's a 3-step process, which is very detailed that goes through our investment committee, which Paul chairs. And ultimately, it calls to the board investment committee as well. We'll be able to share more color on this at our Markets Day because it's very early days in the process because we've finalized what the criteria and process is, and then we'll finalize a handful of assets through this process. There's many more to go. So we'll be able to share much more at the Capital Markets Day.

And we'll hear from Adrian Hammond with Standard Bank SBG Securities.

A couple of questions. Firstly, on the Mozambique PSA, your buddy has -- make a large, sizable investment [there]. Could you perhaps expand a bit more on the details of those projects? You mentioned mid- to low-end range. Could you remind us what that is? Is there an indication of a reserve or a cost per barrel? And when do you expect this project to actually commence? And then on your assumptions around the LCCP, have your long-term price assumptions changed at all? And what are the forward-looking prices related to your calculation on the spot WACC, in particular oil and ethane? And then lastly, on the Gemini project, you indicate production volumes 80 to 110 for FY '18. Understand the capacity, there's 235 attributable. So could you expand how that is ramped up and what the implications are for the LCCP on a similar basis, please?

Thank you, Adrian. I'll take the first part on Mozambique PSA. Paul will take the second part on the LCCP economics, and Fleetwood will answer the question around Gemini volumes. So PSA, as you may remember, we were awarded a new license area which we call PSA in January 2016. And we have been working to develop that new license area with the Field Development Plan that was agreed with the government of Mozambique. The first phase of that project will be approximately USD 1.4 billion, and it entails drilling 12 hydrocarbon wells and 1 water well. We have drilled 6 hydrocarbon wells to date, 4 oil and 2 gas. And what we have discovered in the oil is that the proliferation of oil is not as high as we had expected based on our earlier analysis. We had hoped to get up to something around 15,000 barrels a day of oil production. And basis, what we found with the 4 wells that we've drilled, we'll probably be 10,000 barrels a day or lower. So that's the sort of reduction that we will expect. Now if you have the lower oil production, one of the things we're doing now is going back and looking at can we redesign the circus facilities, make some changes there and reduce the overall capital cost needed for the project? And if so, then the USD 1.4 billion may come down slightly because we will not need as extensive of liquid handling facilities above ground. Your last question in the PSA, I think, was when will this come on. 2020, give or take. The oil and the gas may come on just a little bit separated. But more or less, 2020 is a good target date to keep in mind.

And on your second question with regards to the LCCP assumptions, the long-term assumptions, I think it's safe to say that we do see lots of volatility. We see lots of diversities when it comes to the different interpretation of prospects. And in awaiting hopefully, we've also picked up on the wide range, on different potential outcomes that potentially can still play out in the global market. So in terms of our economics, we use basically IHS and Wood Mac extensively from a price deck perspective. We basically have seen that even in the long-term oil price assumptions, it's either the one is usually slightly below $80 a real long term, which we believe is a little bit on the high side, and then also as low as below $70 real on the long-term basis. Let's say our view is an oil price of slightly lower than $70 a barrel, long-term real. We are looking in terms of the ethane. And again, this is going to be more the price deck that affects economics more significantly, shall I say, compared to oil prices. And here we see between these 2 price decks, ranges of between 0.40, 4-0, CPG and 0.55 CPG on a real basis. Now as we've previously communicated that we have used a real price of ethane of 0.55 CPG. And we've slightly moved that a little bit lower. So just above 0.50 CPG, which still assumes that we use ethane from the Marcellus to actually provide feedstock to the project. If it's not the case, and it's going to be sourced from the premium, then focusing this color more yield base or even lower than that. From the spot earnings perspective, we've used a $50 oil, which is really to date spot prices. And now ethane is more in the range of 0.30 to 0.33 CPG.

And then, Sean -- Adrian, your last question in terms of Gemini, so it's Fleetwood here. So just to give you 3 items that plays into that. First is that we would be seeing 75% or 3 quarters of production coming through, pertaining to startup in October. In the first year, our rent-up plan is to go up to the 70%, 80%. Of course, that's the first factor. The second factor is that we need to target a minimum inventory to get a sustainable supply to your customers. So basically, 1 or 2 months that we will produce into inventory pulling up our supply chains, both in the U.S. and into our regions. And then the third aspect playing into is the cash cycle. So if you take all of that into account, you'd probably end up with about 6 months of production that you can see yourself coming through and, hence, that is down to 10,000 that we predicted ourselves in the first Q.

Operator, thank you so very much for your time. I think we'd like to close the call now.

Thank you. That will conclude today's call. We thank you for your participation.

Thank you.

Thank you all.