Sasol may need cash injection as shares tank
Sasol’s share price extended its stunning plunge to a fifth session running on Tuesday, slashing about R75bn off its market cap as investors looked past a rebound in crude oil prices amid talk that the petrochemical giant may be forced to tap shareholders for cash.
Investors have been dumping Sasol, the world’s biggest maker of fuel from coal and gas, on worries about cost overruns at its mega Lake Charles chemical plant in the US, which has jacked up its borrowings and prompted Moody’s Investors Service to assign junk status to the company’s debt.
The company’s woes have deepened since Monday, after an oil price war erupted between major Opec+ members Saudi Arabia and Russia, sparking a global sell-off in oil. Sasol sells its synthetic fuel at the same regulated prices as companies that import and refine crude oil.
Shares in Sasol, which have lost more than three-quarters of their value so far in 2020, tanked 16.03% to R71.67 on Tuesday after crashing nearly 50% in the previous session, bringing the losses of the past five sessions to
62.67% or close to R75bn. The slide bucked the rebounding trend in the JSE’s all share index, which ended 1.32% higher, while Brent crude bounced more than 12% to $37.10 a barrel.
However, analysts said, at these levels Sasol would battle to generate enough cash to fund day-to-day operations, let alone pay down debt.
“There is quite a bit of volatility in the oil price and at the current price a rights issue may happen as the cash flow they [Sasol] are generating may not be sufficient to cover the expenses as well as the debt repayment,” said Zaid Paruk, an analyst at Aeon Asset Management.
Sasol, rated a notch below investment grade at Ba1 by Moody’s Investor Services, is labouring under more than R121bn debt racked up to fund the construction of Lake Charles, which is 45% over budget. The project has been rocked by governance flaws and is behind completion schedule.
The company, which is about 24% owned by the Industrial Development Corporation and the Public Investment Corporation combined, did not respond to telephone requests for comment on market speculation about a rights issue.
In a statement issued cancelling an investor conference call to discuss the outcome of Moody’s rating review, Sasol said it continues to manage its balance sheet through, among other things, a hedging programme to protect itself against market swings.
“We have hedged our dollar/ rand exchange rate and ethane exposure, but oil price exposure is not hedged for the remainder of the 2020 financial year,” the company said, pushing back the conference call to next Tuesday. This will allow the company time to assess the effect of Monday’s oil price meltdown on its balance sheet, the firm said.
Paruk said Sasol might also be forced to step up the pace of its asset disposal programme, or even sell a portion of Lake Charles.
“I do not think they would willingly do a rights issue.”