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Sasol caught between the devil and the deep blue sea

But it has a plan.
Sasol president and CEO Fleetwood Grobler. Image: Moneyweb

Sasol says it is confident that it is capable of positive cash flow from operations amid the oil price cuts.

The fuel and chemicals producer says the unprecedented set of combined challenges driven by coronavirus global pandemic and decline in oil price have come at a time when it was at the peak of completing its troubled US Lake Charles Chemicals Project (LCCP). 

Sasol began the LCCP in Louisiana 10 years ago and it was anticipated that it would take three years to build it at the cost $6 billion, but now it has ballooned to $12.9 billion.

Battered

The once-strong company, which fell out of the JSE Top 40, has now found itself with an incurred debt of finance charges for LCCP. Over the years its debt and concerns of overrun have seen its share price battered.

The recent oil price war between Russia and Saudi Arabia, causing a slump in the oil price, escalated its problems.

Read: Sasol is this week’s worst emerging-market stock, so far

In the past year, its share price has dived by 87.54% to R37.24 by the close of the JSE on Thursday.

 

Sasol share price in the past year

 

In its Sens release on Thursday afternoon, it showed optimism amid the storm that its balance sheets will be strong in June.

“Sasol is confident that its foundation business is capable of positive cash flow from operations in a low oil price environment. At the prevailing rand oil price of approximately R580/bbl [barrel], Sasol will be within the current covenant levels at 30 June 2020,” it says.

It says it has contingency plans in place.

“In anticipation of a lower-for-longer rand per barrel oil price, a comprehensive package of actions is being finalised to deliver this and sustainably strengthen the balance sheet,” Sasol says.

It says it has current cash and available facilities of approximately $2.5 billion and no significant debt maturities before May 2021.

Outlook ‘significantly changed’

Sasol president and CEO Fleetwood Grobler says: “The disruption in the global oil market, coupled with the ongoing impact of Covid-19, has significantly changed the outlook in just a few weeks.

“It is critical that we keep matters within our control by acting quickly and decisively so that stakeholders don’t lose sight of the significant underlying value in this business. We are therefore working towards a package of measures to ensure that the business is profitable even at low oil prices and that we continue to have a strong balance sheet to support it,” Grobler says.

Market watchers are not moved as they say it has itself to blame for its current position.

Wayne McCurrie, senior portfolio manager at FNB Wealth and Investment, says Sasol is responsible for the share price drop from R600 to R200 but it can share the rest of the blame for the plunge in share price from R200 to R30 with Saudi Arabia.

“It doesn’t matter how they explain it, that is the reality.

“So it can explain it forever, but at the end of the day, Lake Charles went wrong and explaining it doesn’t help at all because the money is gone.

Lake Money Pit

“It should be called Lake Money Pit or Lake Black Hole rather than Lake Charles,” McCurrie says.

“Sasol put all its eggs in one basket, and they didn’t intend to because at $6 billion was okay, but at $12 billion dollars it was not okay,” McCurrie says.

McCurrie explains that, as it is, Sasol is not even breaking even, and prior to the oil cut on Sunday it had said that it would start making profits in 12 months.

The only operation that was making money was its fuel plant, Secunda, “and all of a sudden they are not making money”.

He says he does not see Sasol getting out of this hole.

“It needs money. How can you borrow when you have borrowed everything you can borrow, and you haven’t got positive cash flow? What can you do?” McCurrie says.

Market commentator David Shapiro of Sasfin shares the same sentiments.

“With debt restructuring and a capital raise. Its big problem is generating profits to sufficiently cover their interest payments – debt covenants. That’s their biggest worry,” Shapiro says.

Rights issue

McCurrie says investors’ worry is that the debt-ridden Sasol may need to hold a rights issue.

A rights issue usually occurs when a company may need extra capital to meet its current financial obligations. Troubled companies, such as Sasol, use their rights issues to pay down debt, especially when they are unable to borrow more money.

“That is what the market is worried about because to do a rights issue means the share price is catastrophically expensive. Because three years ago you would have gotten R600 for one share. And today you are getting R30 if you are lucky. So that is why Sasol is being hammered,” McCurrie says.

Sasol will update the market during a conference call at 15:00 on Tuesday, March 17, with detail on its comprehensive package of actions.

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So Shareholders must now bail them out after they have been ripped off by Fluor?

The previous COE of Sasol worked his whole life for Fluor who Designed and built Lake Charles? He pushed and pushed to have it approved. Convenient?

It was originally a fixed price contract? So how did it Double in price? Was it not this guy that approved the additional cost? WHY??

Corporate capture.

Wow sounds a bit like Eskom. Wonder if their customers are paying time?

Thank goodness, somene from Sasol finally came out to explain how they are handling the situation on their house which appears to be on fire. Its much better than leaving the rest of us out here worrying and stressing out. Of course their hands are tied with respect to Covid-19 (they can do only so much to ensure their stakeholders are okay), or about the Saudi and Russia or the unfolding and impending, and likely to worse recession coming in the US. But of course they can manage and control those that they can and ensure that the company comes out on the otherside okay. I don’t buy the idea that LCCP is not going to be profitable, that is an nonsensical assessment. They just have to tighten the belt and steer the ship and not leave it to be guided every which way by the vissitudes of the winds and the violent economic oceans.

You can take a previous SOE out through a listing but you can’t take the SOE mentality out.
Just the time and cost overruns on Lake Charles alone are inexcusable.

“Sasol began the LCCP in Louisiana 10 years ago and it was anticipated that it would take three years to build it at the cost $6 billion, but now it has ballooned to over 50% ($12.9 billion) more than initially planned.”
So which is it? $9 billion initially or 100% more than planned? Back to the calculator!

Perhaps the lady is not familiar with calculators. Such sloppiness does not instill confidence in the article.

Shew this is an easy one to sit on the sidelines and throw blame around post the events. Sasol doomed if they do and doomed if they dont. Sasol had no choice but to try and move their income /assets off shore for all the reasons we already know. The writing was on the wall years ago about the cost overruns at Lake Charles yet few if any of the institutional investors broke cover and recommended wide scale selling. Sasol was allowed to blunder along with little or no adverse effect on the company until it became the “order of the day” to begin the “i told you so” rhetoric. Few people are mentioning the staggering amount of money that was lost via their BEE investment transaction that Sasol was basically forced into.

I agree with David’s observation 600 to probably 350 is Sasol’s fault 200 to 35 is not in their immediate control. One would have expected the Lake Charles project to be better administrated seeing as it was being built by so called experts. (whatever we do lets not get these morons to build a power station in SA). An escalation from 6 billion to 12 billion is not a cost overrun, it requires a forensic investigation. No one can be that bad at their job unless it is on purpose. Having said that the asset is not worth 5 cents half built so one this project was undertaken and went past the 6 billion mark there was no choice but to complete it. Going forward the oil price will rebound Sasol will be sitting on an at least 6 billion dollar asset in a better place than here. Will it recover? Who knows but at 35 bucks it is not a true reflection of this business long term. Lake Charles, at 17 to 1 to the Dollar does not have to do a lot of business to make a significant impact in Rands.

Be careful when thinking about Sasol as a Rand Hedge. 90% of their considerable debt (USD8b) is in USD so a weakening Rand will not help with that.

To put it into context, equity value is $2.8b.

Timeous market communication is what prevents market hysteria. Grobler should know better.
That said, time to nibble, with a 2 year investment horizon.
Downside uncertain, upside huge.

That’s my kinda confidence!

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. The company could have hedged the oil price at between $55 and $60 a few months ago. The prudent thing would have been to hedge for example 30% to 50% of the energy business at these levels which would have locked in profit above $35. Greedy board, now paying the price.

Sasol certainly “Reaching New Frontiers”!

When LCCP was planned & initiated, one assumes that the project profitability would’ve been calculated with an intl oil price in the $55 – $70/pb estimated range.

Even when LCCP got the company into debt, it’s debt was still manageable at said oil prices. But then aware of this, surely Sasol SHOULD WELL KNOW the oil markets, it dumbfounds the mind that a large part of oil price wasn’t hedged.

That’s exactly how companies fail! (Sasol is thus technically bankrupt at current oil prices, right?)

Sasol’s only hope is to “play for time” by renegotiating credit lines/debt covenants, IN THE HOPE that intl oil prices will recover above S45/$50+ range rather sooner than later.

(Otherwise those friendly blue fillings stations, dotting the SA landscape, will one day be reflected upon like “movie drive-ins” of a past generation 🙁

Agreed. They have always hedged in the past. So 200 down to 35 IS their fault.

To the Author:
There is no price between Russia and Saudi Arabia, the rise in production levels is intended to hammer the USA for the sanctions that have been imposed on Russia.

Do some research and you will find that is Costs Russians $6 per barrel whilst it costs the US around $40 besides the money money they have borrowed…

Russia and the OPEC can sustain the cheap oil price a lot longer than what the Americans can.

End of comments.

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