Sasol share surges despite more rating cuts
Positive market reaction is due to producer’s ability to secure oil hedging above current prices, analyst says
Sasol shares jumped after the synthetic fuel and chemicals producer said it has used hedges to lock in oil prices until end-June and that its operations are continuing in the wake of the Covid-19 pandemic and the government-imposed lockdown.
The company, which has lost about 90% of its market value in 2020 so far, said the hedging programme, which will reduce its exposure to any further oil price slides until June, will be set at about $32 (R568) per barrel. Brent crude fell to 18-year lows below $20 a barrel this week.
The news cheered investors, with Sasol jumping as much as 24% to its highest level since March 19, even after the group said it had been cut to junk status by credit ratings agencies. Sasol has total debt of R156.9bn, Bloomberg has reported.
Sasol has been among the hardest-hit companies in recent weeks as the spread of the virus has disrupted global markets and oil prices plunged after Saudi Arabia and Russia engaged in a price war. That added to severe investor angst over enormous cost overruns and delays at its Lake Charles Chemicals Project in the US.
The crisis has left the company seeking to raise $6bn in cash through cost cuts, asset sales and a possible rights issue to pay down its debt.
In the update, the group said Moody’s Investors Service on Tuesday cut it to Ba2, the second rung of non-investment grade, having reduced it to junk status earlier in March.
S&P Global Ratings also revised Sasol’s rating, to BB, which is also its sovereign credit rating for the country.
Sasol said the downgrades will add an additional $10m in finance costs annually.
Sasol’s rating downgrades comes just days after SA’s sovereign credit rating was also slashed to junk by Moody’s. The agency rated SA as Ba1, one step better than Sasol.
The group said it will continue to run its operations as an essential service during the 21-day lockdown in SA.
Sasol said its operations outside SA have also continued with minimal impact from the pandemic.
It will expedite the production of a special blend of alcohol it has formulated to address increased demand for hand sanitiser in SA, it said.
Wade Napier, analyst at Avior Capital Markets, said the positive market reaction is due to Sasol’s ability to secure oil hedging of $32, well above current prices.
Zaid Paruk, portfolio manager at Aeon Asset Management, said it is “peculiar” that the market responded so positively.
And while the response may well be about the oil hedging programme, investors may also be encouraged that Moody’s and S&P, in their ratings decisions, foresee future oil prices at much higher levels than currently.
“Investors may also take some comfort that Sasol for the most part is regarded as an essential service in SA, Asia, Europe and North America and most operations are unaffected thus far,” Paruk said.
“However, Sasol has highlighted that due to [the] Covid-19 [pandemic] it expects demand to be lower in the next 12 months.”
Abdul Davids, head of research at Kagiso Asset Management, said the ratings cuts were understandable given the current state of the markets and the oil price in particular.
“What is concerning is that S&P highlights the possibility of Sasol’s rights issue not succeeding and the need for more asset disposals as a consequence,” he added.
Sasol gained 17% to R36.93 on Tuesday, giving it a market value of R23bn.
• With Karl Gernetzky