Sasol's ambitious plan to generate $6bn (the equivalent of about R105bn on Friday afternoon) in additional cash through cost savings, asset disposals and a possible "last resort" rights issue is going to be extraordinarily difficult to pull off in a market wrecked by the coronavirus pandemic.
"They had a perfect storm which got them into trouble and now they're talking about a perfect dawn to get them out of trouble," says Adrian Saville, founder and CEO of Cannon Asset Managers.
"They haven't showered themselves in glory going into the storm. Any investor would have to give them a substantial benefit of the doubt."
That Sasol has a monumental task ahead was not lost on CEO Fleetwood Grobler and CFO Paul Victor when, together with members of the company's group executive committee, they held a conference call with analysts this week to update the market on the steps being taken to turn the ship around.
Grobler said the Covid-19 pandemic and its repercussions are "unprecedented in modern times" and that the "economic impact is also unknown".
The price war between Russia and Saudi Arabia had exacerbated conditions in an oil sector that was already in a parlous state due to the drop in demand in China and other markets as they tried to get a handle on the health crisis.
All of these factors converged to "create a perfect storm and the fallout on Sasol has been dramatic", said Grobler.
"Taking these factors into account, it is essential we take decisive action to strengthen the balance sheet."
Grobler said Sasol expects to be within its debt-servicing covenants as at June 30, and that with its cash conservation plan and its accelerated asset sale programme gaining momentum, the option of a rights issue of up to $2bn is a "last resort".
None of this comforted the market much, with Sasol down 39.34% for the week, giving it - a R400bn company just six years ago - a paltry market capitalisation of under R17bn.
Saville says Sasol is lining up a couple of defences, the first of which includes its existing cash resources and credit lines.
"That's not speculative, that's a known. The second thing they point to is cost savings. Now those are feasible but harder to know, and then they walk into the world of asset sales, and there I would agree that if they are going to sell assets, they have a very diverse balance sheet. It stretches from plastics through to coal."
Saville says Sasol would likely be looking to dispose of peripheral assets, but they are trying to sell them into a global market where equity prices had "30% knocked off [them] in the past 10 days".
"They are also in an environment in which the world economy has slowed down sharply. That's going to cut valuation out from underneath them."
Saville says if Sasol gets everything right from a cash resources point of view, including savings and acceptable asset sales, it will "get to a balance sheet that looks reasonable".
He says one of the biggest risk factors facing the chemicals and synfuels giant is that it remains unhedged against the oil price, at under $30 a barrel.
Wade Napier, diversified resources analyst at Avior Capital, describes Sasol's announcement, specifically about its plan to reduce debt from $10bn to $4bn in 15 months, as "drastic".
"To play devil's advocate, oil prices crashed on March 9 and now Sasol looks to be making fundamental changes to its long-term assumptions and business model," he says.
"You manage a business on a 10- to 15- year horizon, not a week-and-a-half of weak pricing data."
Napier says Sasol didn't clear up whether it would be getting any leeway on its debt covenants. "If they get leeway on those covenants, then you have to question whether the entirety of Sasol's $6bn capital reset plan is necessary."
He says one reason Sasol's share price collapsed the way it did was that the market was expecting the group to breach its debt covenants.
"Pragmatically speaking, before announcing large proposed changes to the capital structure, I would have preferred more detail on managing debt covenants."
Sasfin Securities deputy chair David Shapiro predicts "a very challenging path out of trouble for Sasol" because it is the "worst possible time" to implement the rescue plan.
"The conditions are just stacked against them. You have an oil price that is continuing to slip, potential buyers for their noncore businesses reluctant to look ahead, and if they do they will take advantage of it and offer discounted prices."
Shapiro says restructuring debt is a viable option because interest rates have fallen. But Sasol is a credit risk and its "rating remains challenging". Moody's earlier this month downgraded Sasol's debt to junk status.
"The other thing is a rights issue. People are nervous to commit capital and they would only commit if they had very favourable terms for themselves."
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