Sasol’s high-octane burnout

Sasol, one of SA's most successful and valuable companies, flirted with the financial undertakers this week, shedding 46% of its value in a single day that sent shivers through investors' veins.

A near-lethal cocktail of spiralling company debt, the coronavirus that roiled world markets and a raging oil price war between super producers Saudi Arabia and Russia brought the company to the brink.

The synfuels and chemicals giant, valued at more than R400bn just six years ago, lost 68.2% on the JSE this week after investors dumped the stock as oil prices plummeted, reducing it to a R31.8bn company smaller than Woolworths, Mr Price and Pepkor.

This week, the fuel producer with pretensions to becoming a global petrochemicals player was forced into some nifty footwork to salvage a sliver of pride.

For a moment it appeared that its directors were caught in the headlights, frozen and calling off a conference call - which only served to further rattle investors.

Belatedly, the company sprang into action, announcing it would accelerate asset sales, restructure debt, reduce costs and consider a rights issue to steady the ship.

Adrian Saville, CEO and founder of Cannon Asset Managers, said Sasol's shares on Friday were helped by "some of the clarity that has been brought by the announcement, and also the oil price is a bit better today".

The price of Brent crude oil was 1.22% higher at $33.30 a barrel at 5.30pm on Friday.

"I think you can take some comfort from the communication but there isn't detail or substance in that communication," said Saville.

The update arrested the freefall - its shares gained 36.36% to close at R50.78 on Friday, offering some comfort to investors - but still left long-term questions about its sustainability.

David Shapiro, deputy chair of Sasfin Securities, said Sasol is going to have to raise capital as it can't take the risk that oil and chemical prices are going to improve.

But Shapiro said he thinks the banks, and organisations such as the Public Investment Corporation (PIC), which holds shares in Sasol, will "come to the rescue in providing funding by supporting the rights offer".

"The underwriters of the rights issue will do it to a discount to where the shares are at the moment and it will keep the shares under pressure. After that you might see the recovery everyone is speculating about," said Shapiro.

In a statement on Friday, Deon Botha, head of corporate affairs at the PIC, said it was "aware of and concerned with the recent developments at Sasol and the company's share price".

You will see the greatest endeavour from the public and private sector to make sure this business survives

Asset managers agree it's in the country's national interest that Sasol survive as its failure would have wide implications for SA's economy, which has already jettisoned thousands of jobs. Sasol employs about 28,000 people in SA and is also one of the country's biggest corporate taxpayers, paying R39.5bn in direct and indirect taxes in the 2019 financial year.

Saville said if Sasol failed it "would be a massive disruptor to SA's economy" as it is not just a fuel company.

"It has a chemicals, plastics and mining business. It makes a material contribution to the South African industrial supply chain. I think you will see the greatest endeavour from the public and private sector to make sure this business survives," said Saville.

Sasol, though under pressure due to cost overruns and delays at its ambitious Lake Charles Chemicals Project in the US, has for many years been regarded as one of SA's corporate success stories and a stock most pensioners will have some exposure to through their retirement funds.

But it would seem its ambitions in the US have come back to bite it.

Saville said that as far as the Lake Charles project is concerned, Sasol "went a long way from home into a highly regulated market where they are a relatively small player".

"It's not unusual for projects of this nature to go into overrun and to have financial challenges. What hurt them is they just didn't have wiggle room."

Saville said the alarming part of it is that Sasol is "unhedged to oil".

"You've undertaken a massive capital programme which hinges on oil prices and you have a very explicit risk that if the oil price doesn't remain stable you go under water."

He said while it would have been difficult a year ago to predict the oil price halving this year, it's not unprecedented. "They had an explicit risk, which they ignored."

In the week before the dramatic sell-off, Moody's cut its rating on the company's debt to junk.

As at December 31 2019, Sasol's net debt was R143.5bn.

Rehan Akbar, vice-president and senior credit officer at Moody's, said: "The oil price crash and weakening global economic activity because of Covid-19 will create further downward pressure on Sasol's profitability and will negatively impact the company's credit profile should the operating environment remain challenging for a prolonged period."

Do Sasol's shares offer any value for investors willing to take a long-term view that it can bounce back?

Hannes van den Berg, portfolio manager in the South African equities and multi-asset business at Investec Asset Management, said Sasol is "caught between a rock and a hard place" because of tough supply and demand dynamics for its products globally and locally, and a balance sheet that is "quite stretched".

"We prefer to invest in companies where the future earnings expectations are being revised higher. We like companies with improving fundamentals and we try to avoid companies where fundamentals and expectations continue to deteriorate."

If Sasol does opt for a rights issue, it couldn't have come at a worse time considering where its share price is sitting.

"We think they should have done the rights issue a while ago when the share price was closer to R200, but hindsight is always easier," said Van den Berg. He said Sasol is going to have to optimise its balance sheet by selling local assets or forming a joint venture with an offshore partner at Lake Charles. If this can be done successfully, the actual need for a rights issue, and its size if it does go ahead, would decrease, he said.