Money and Markets

If Sasol can't raise its own money it may need state pension cash – if Gauteng wants petrol

Business Insider SA

News analysis

  • Sasol plans a rights issue bigger than its entire market valuation right now, which it says will help reshape its balance sheet.
  • If that doesn't work, it may have to be bailed out using the same government pension funds mooted to save Eskom.
  • Sasol makes only around 30% of South Africa's fuel – but all of that goes to inland provinces like Gauteng, which don't have many options.
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On Tuesday petrochemical giant Sasol announced a set of plans which it says will reshape its balance sheet and "provide the platform to deliver a globally competitive business with high cash yielding assets".

To do so it wants to issue $2 billion (R33 billion) worth of new shares, raising more money than its entire R28 billion market capitalisation.

If it fails to achieve that goal, it may be time to bring in the state employee pension funds, because Sasol could be too strategically important to the likes of Gauteng to be allowed to go under.

It was always unthinkable for South Africans that power utility Eskom could fail. But then, as its debt ratcheted up to unsustainable levels, the government told us it was too big to fail, with public pension funds being mooted by President Cyril Ramaphosa as a possible saviour.

While it provides a relatively modest 30% of national fuel needs from its synfuels plant at Secunda and Natref refinery at Sasolburg, these two facilities supply 100% of their output to meet inland fuel needs, including those of Gauteng, the country’s economic heartland.

In the last seven days alone Sasol has lost more than 70% of its value, closing at R36.69 per share on Tuesday. Oil fell to $28.54 by Tuesday night.

See also | Sasol should survive its 95% crash - but may have to sell its disastrous US project

The price of crude has fallen as a growing number of major economies, Italy, France, Spain, parts of Germany, Switzerland, Belgium, and Austria have announced lockdowns of various kinds. Demand for jet fuel will also be way down as countries have banned international flights to contain the spread of the coronavirus.

Sasol’s share price has plummeted in recent weeks from R322 at the beginning of the year, a combination of cost overruns on its pricey Lake Charles project and a fall in the oil price as the full impact of China closing its economy to contain the novel coronavirus was realised.

This in turn saw a price war break out between two of the largest producers, Russia and Saudi Arabia.

Executive director of the SA Petroleum Industry Association (Sapia) Avhapfani Tshifularo says even Sasol’s competitors see it as “very strategic and critical to the supply of the inland market of the country”.

Tshifularo says the country consumes about 27 billion litres of fuel annually, 60% of which goes to the inland provinces, including Gauteng. Sasol’s output, about 30% of national demand, goes entirely to this inland market.

A Transnet pipeline can move about 17-billion litres annually between the coast and Sasol’s Natref refinery and its Secunda plants. But, says Tshifularo, relying just on the pipeline to move fuel from the coast would bring additional potential problems and “possibly more frequent supply stoppages”.

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

This could be likened to Eskom’s wet coal problem; the loss of substantial inland fuel production would introduce more uncertainty into the market at greater risk of supply.

Sasol, inexplicably, no longer hedges the oil price. This has left it exposed to the plummeting oil price, from $65 a barrel at the beginning of the year to less than half of that now. Its share price fell by 45% at market opening on 9 March  after an attempt by Russia and Saudi Arabia to agree production cuts failed.

The low oil price has raised concerns that Sasol could trigger its debt covenants. Sasol said in its Sens announcement on March 12 that at the prevailing rand oil price of approximately R580 a barrel, it will be within the current covenant levels on June 30, 2020.

The rand price for Brent was at R475 a barrel on Tuesday night.

Sasol is in a precarious position with a stretched balance sheet that means it’s unlikely to be able to cope with sharply lower oil prices for long, JP Morgan Cazenove’s Alex Comer said, according to a Bloomberg report.

“There’s a high probability that Sasol will breach the covenants agreed with its lenders, but the most sensible option for banks would be to give the oil company six months to improve its situation, rather than call in their loans," Comer said.

“Sasol is too strategically important for the South African government as a source of liquid fuels, taxes and high-paying jobs to be allowed to collapse,” he added.

Sasol’s biggest shareholders include the Government Employees Pension Fund (GEPF) and the Industrial Development Corporation (IDC). It is clearly too strategically important to fail. Will state aligned funds again be eyed to provide support?

The GEPF did not respond to emailed questions.

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