Investors worried that debt-stricken Sasol may need to hold rights issue
The longer the oil price stays lower, the more pressure Sasol will face to review and restructure operations, one analyst says
Sasol’s record share plunge on Monday, coming as the oil price slumped and just days after the company credit rating was cut to junk by Moody’s Investors Service, is raising concern among investors that it may need to hold a rights offer as it struggles with a debt burden of about $8bn (about R127.6bn).
Fuel and chemicals producer, SA’s biggest company by sales, delayed an investor call scheduled for Tuesday to March 17, noting that its oil-price exposure for the rest of the financial year was not hedged. While the company had assumed oil would stay in the range of $50-$70 a barrel, Brent crude fell as low as $31 on Monday. Its stock plunged 47% by the close on the JSE, giving it a market value of R53bn.
“If oil prices stay close to current market levels for a long period of time, Sasol may have to consider a rights issue to fund cash shortfalls,” said Asief Mohamed, founder and chief investment officer at Aeon Investment Management, which holds stock in the company.
Sasol’s plan to expand its business abroad with the Lake Charles Chemicals Project in Louisiana, US has turned sentiment against the company, with costs for the facility surging about 50% to almost $13bn. The company has also disclosed mismanagement in the way the operation was run, leading to the departure of its co-CEOs in October.
“We will continue to keep all of our options under regular review in these challenging market conditions,” said Sasol spokesperson Alex Anderson when asked if there would be a rights offer.
The company’s borrowing costs have surged. The yield on $750m of notes due 2028 climbed for a fifth day on Tuesday to a record high 6.71%. The company’s net debt was R125.2bn as of June 30, more than twice the level two years earlier.
“For Sasol the oil-price collapse means that their already fragile balance sheet will come under even more pressure,” said Michele Santangelo, a money manager at Independent Securities in Johannesburg. “The longer the oil price stays suppressed the more pressure Sasol will have to review and restructure their operations.”
Rescheduling the conference call “allows more time to assess the impact of these latest developments on the market and Sasol in particular”, the company said on Monday in a statement. “Balance-sheet protection remains a key priority.”
Sasol’s biggest shareholders are linked to the government. As of June 30 2019, the Government Employees Pension Fund, which holds the retirement funds of public servants, owned 13.1% of Sasol’s stock and the Industrial Development Corporation, a state lender, owned 8.2%, according to a filing to the US Securities and Exchange Commission.
Sasol’s coal-to-fuel plants account for about 40% of South Africa’s motor-fuel consumption, lessening the need to import crude, and it employs about 31,000 people.
Troubled companies often use rights offers to pay down debt.
The covenant on Sasol’s loans for June 2020 is a ratio of 3.5 times earnings before interest, tax and depreciation to net debt, meaning that if it reaches that level it would have to pay the debt immediately or come to an agreement with the banks that lent it money. Its ratio as of November was 2.9 times ebitda (earnings before interest, taxation, depreciation and amortisation) compared with net debt. The company had earlier renegotiated its covenant to a ratio of 3 from 2.5.