Sasol should survive its 95% crash - but may have to sell its disastrous US project
- Sasol lost almost 93% of its value over the past year - and is now worth less than Foschini.
- The oil crash has left it bleeding - but one analyst believes it should survive.
- Sasol may have to sell its Lake Charles chemicals project to generate additional capital to pay back debts.
- For more stories go to www.BusinessInsider.co.za.
South African multinational chemicals and energy company Sasol lost another 30% of its share price on Thursday - it's now down almost 95% since last year.
Once one of SA's biggest companies, the market now values it at R23 billion - a fair size smaller than The Foschini Group (R27 billion).
On Thursday, Sasol share price briefly dipped below R30, before ending the day at R37 - compared to R470 a year ago.
Sasol’s share price has steadily declined due to cost overruns and operational problems at its R200 billion Lake Charles chemicals project in the United States. The project has left it with a debt burden of more than R120 billion.
Its share price started to collapse on Monday when the price of Brent crude oil fell to around $36. This was in reaction to Saudi Arabia's decision to unilaterally cut its own oil prices after it was unable to reach an agreement with Russia over the weekend.
Benguela Global Fund Managers portfolio manager Karl Gevers explained that due to the low oil price, Sasol will be unable to achieve the necessary profit ratios to meet its credit agreements and could therefore likely default on debt.
Some of Sasol's agreements with creditors - so-called debt covenants - require that its debt-to-profit levels remain above a certain level. Its profits will take a severe hit from the the lower oil price - and once they fall below the agreed levels, the loans could become payable immediately.
However, Gevers said it is highly unlikely that Sasol will be put out of business - as that would have a negative effect on creditors who would possibly not receive the full amount of credit they extended.
“Sasol is sitting with a massive liquidity problem so unless the oil price drastically improves in the short term, Sasol will have to issue additional shares to generate sufficient capital to repay debt and maintain operations,” Gevers told Business Insider South Africa.
He said Sasol may consider selling its disastrous Lake Charles chemicals project to generate additional capital to pay back portions of its debt.
“They may consider selling the plant, or find an equity partner, but they will unlikely find someone who would pay the $12.5 billion they’ve already spent on the plant,” Gevers said.
“I have always believed Sasol should enter into a partnership with another company to run its Lake Charles chemicals project to improve the operations.”
Petri Redelinghuys from Herenya Capital Advisors said it would make logical sense for Sasol to sell its Lake Charles chemicals project, which he believes is a "money pit".
“But this was supposed to be the future of the business, so they will have a hard time explaining it to shareholders.”
Gevers said if the oil price recovers to around $50 per barrel within the next few days, it will give Sasol breathing room.
“However, both Russia and Saudi Arabia will be able to survive with an oil price of around $35 to $40 in the short term,” he said.
“Sasol, on the other hand, has very little cash in the bank and will unfortunately have to find a solution soon.”
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