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