Money and Markets

Why Sasol crashed: The oil collapse could trigger a debt emergency

Business Insider SA
Sasolburg. (Photo by Per-Anders Pettersson/Getty Images)
  • Sasol's share price collapsed on Monday, faring much worse than other major energy players.
  • Its fuel business breaks even at around $35 per barrel of oil, one analyst says – and oil is trading at around $36.
  • Meanwhile Sasol's chemical business is also expected to make a loss.
  • For more stories go to the Business Insider South Africa homepage.

If two of the world’s biggest oil superpowers went to war with one another – and you got in the way – you could well expect to become collateral damage.

Such is the story of South Africa’s home-grown petrochemical giant, Sasol, which saw its market capitalisation halve between Friday and Monday. Its share price is now down 80% from less than a year ago, and its market value of around R53 billion is now totally eclipsed by its debt burden of more than R120 billion.

Oil prices fell to $50 a barrel by the end of last week, as it became clear that China's measures, which had effectively contained the growth in Covid-19 cases, had come at a significant economic cost.

See also: Here’s what the shock oil crash could do for South African petrol prices

The weaker oil price led the Saudi Arabia-led Organisation of Petroleum Exporting Countries (Opec) to seek agreement for production cuts with Russia. When this failed Saudi Arabia announced price cuts on the weekend - to undercut Russia, leading to oil prices plummeting by up to 30%.

Global markets, which had been roiled by the potential economic costs of containing the novel coronavirus, now had to absorb the doubly bad news of the virus and a collapsing oil market.

Energy stocks absorbed a 17% single-day plunge, hitting their lowest level since 2004, Markets Insider reported.

Oil majors BP (-26%), Shell (-15%), Chevron (-14%), and ExxonMobil (-10%) all had a torrid day on Monday, but not nearly so bad as Sasol, which found itself in the crosshairs of the falling oil price and a weaker currency. The rand was last trading at R15.97/$, after spiking to almost R17 on Monday. 

Sasol breaks even at $35 a barrel – and oil is now at $36.

The lower oil price, which was down about 20% from Friday, would put Sasol’s balance sheet under pressure, analyst Seleho Tsatsi of Anchor Capital said.

“Investors are worried that the lower oil price means that Sasol will breach its debt covenants,” he said. 

Sasol's loan conditions require that its debt to profit remains above a certain level. Sasol's profits will take hit a from the lower oil price, which will probably leave it in breach of these debt covenants. This means that its loans could become payable immediately.

Tsatsi said that if there was not a swift recovery in the oil price, it would be likely that Sasol would have to address this balance sheet issue sooner than later.

If Sasol decides to raise capital on its present share price, this will be dilutive for shareholders, Tsatsi said.

"This is a big worry."

Sasol breaks even on its energy business, which accounted for about 68% of operating income in its last six months reporting period, at about $35 a barrel, Tsatsi said.

The benchmark Brent crude was trading at $36 on Monday.

See also: Analysts warn of 'utter carnage' as oil crashes and global stocks tumble

The rest of Sasol’s income is from chemicals. This part of the business is expected to be loss-making for the full year while Sasol gets its delayed Lake Charles project up to speed, Tstasi said.

Goldman Sachs meanwhile said on Monday that oil could fall another 43% – to near $20 a barrel – before recovering somewhat.

Ratings agency Moody’s late last week downgraded Sasol and changed its outlook from stable to negative, saying “Sasol's financial leverage will remain elevated over the next two years and that the pace of deleveraging is vulnerable to event risks and challenging market conditions globally and domestically, as demonstrated over time by the company's downward revisions of EBITDA forecast on the Lake Charles Chemicals Project (LCCP).”

Meanwhile, Sasol isn't talking about Moody's yet.

Sasol on Monday told shareholders that “as communicated during the interim financial results, we continue to actively manage the balance sheet and several steps have already been taken to mitigate market volatility. This includes our hedging programme to mitigate commodity price movements and exchange rate exposures.

“We have hedged our US$/ZAR exchange rate and ethane exposure, but oil price exposure is not hedged for the remainder of FY20.”

It delayed a conference call on the Moody’s decision, which had been due on Tuesday, by a week. It said in the statement that this allows more time to assess the impact of the latest developments on the market, and Sasol in particular.

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