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Sasol bond showing strain of plunge in oil

The price of brent crude oil has dropped 38% since the end of June to a five-year low this month.

Sasol Ltd.’s bonds are signaling investor concern that debt levels of the world’s biggest maker of motor fuel-from-coal are coming under pressure amid a 38 percent plunge in oil this year.

The premium investors demand to hold Sasol dollar debt due November 2022 instead of equivalent maturity U.S. Treasuries has risen 46 basis points since June 20, when oil began to decline. The yield on the notes has climbed 44 basis points from a 15- month low on Sept. 4, compared with the average 27 basis-point increase in dollar bonds of emerging-market oil and gas companies, JPMorgan Chase & Co. indexes show.

Sasol’s debt levels are set to climb following the completion of plans to build an $8.1 billion plant in Lake Charles, Louisiana, that will convert natural gas into chemicals including plastics. The Johannesburg-based company, which needs to raise as much as $7 billion to build the ethane cracker, has received offers from international banks for a dollar-based loan, with sign-off scheduled for this month.

“They are going to be very close to the debt limits and gearing limits they’ve indicated to investors,” Rashaad Tayob, who helps manage the equivalent of about $6.9 billion at Abax Investments Pty Ltd. including Sasol bonds, said by phone from Cape Town on Dec. 5. “At these oil-price levels,” cash flow will come under pressure, he said.

Gearing Level

Sasol is seeking to keep its debt to equity ratio at between 20 percent and 0 percent, it said in its latest annual report. The ratio was minus 6.3 percent at the end of June. Sasol projects it will rise by about 0.6 percentage point for each additional 1 billion rand ($90 million) of debt it raises.

“Our gearing level takes cognizance of our substantial capital investments and susceptibility to external market factors, such as crude-oil prices,” Sasol said in the report. “Over the medium term, in anticipation of our large capital investment program and progressive dividend policy, we expect our gearing level to move to within our targeted range.”

The price of brent crude oil has dropped 38 percent since the end of June to a five-year low this month because of surging production in the U.S. and waning demand. A decision last month by the Organization of Petroleum Exporting Countries to maintain its output target at 30 million barrels a day to TRY AND force U.S. shale producers to cut supply added to the downward pressure on prices.

More Debt

“At current oil prices the company’s ability to fund these projects from existing cash and operating cash flow would be adversely affected and Sasol would require more debt funding,” Abdul Davids, head of research at Kagiso Asset Management in Cape Town, said in an e-mailed response to questions on Dec. 5. “The potential returns from these projects would be substantially lower if current oil prices are sustained for a prolonged period.”

Sasol estimates a $1 move in the average annual oil price translates to a 746 million rand change in its operating profit, which was 41.7 billion rand in the year through June.

“Sasol is able to repay its debt at the current oil price levels,” spokesman Alex Anderson said in an e-mailed response to questions on Dec. 5. “Sasol has substantial surplus cash and there is no risk of breaching our gearing targets in the foreseeable future.”

The average price of Brent crude is forecast at $73.38 a barrel next year compared with $102.19 in 2014, according to the median estimate of 30 analysts surveyed by Bloomberg.

“If the price of your core product has fallen so dramatically, you are obviously going to be impacted,” Abax’s Tayob said. “The gearing will peak at a higher level.”

©2014 Bloomberg News


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