Sasol shares plunged over 8% on Monday as the oil price took a record tumble amid rising stockpiles prompted by a slump in demand due to the Covid-19 pandemic.
The local petrochemical giant’s stocks hit a low of R52.01 on the JSE shortly after 14:00, after opening at R56.71, as the international price of crude fell to a 21-year low.
By Monday night, Bloomberg reported that the oil price had dropped to below $5 a barrel as the coronavirus ground industrial and economic activity to a near-halt. The market is currently oversupplied amid an approximately one-third reduction in global demand.
Sasol has been one of the biggest causalities of volatile market conditions, as a price war between Saudi Arabia and Russia also wreaked havoc on the global markets.
Its share price fell to R21.88 in March – from R470 less than a year ago – as a result of a price fight between the two major producers, and is now nearly 90% lower than its 52-week high of R489.50.
The company previously announced that it hedged about 80% of its synthetic fuel production in the fourth quarter at about $32 a barrel. Sasol has a debt burden of more than R120 billion and its hedging programme will continue for the next 12 months.
According to Meryl Pick, Portfolio Manager and Analyst at Old Mutual Equities, the long-term implications for the company would be what “action they take to resolve their balance sheet issues”, in the face of the financial hit they have taken and stabilising debt.
Pick added that the company’s hedging programme would afford the company some protection to the downside, even if the price falls lower than the current level. However, the company might forego that upside if the oil price were to rebound to $40-$45 per barrel.
In addition to being hammered by oil price volatility, Sasol’s financial position has been further complicated by its controversial Lake Charles Chemicals Project, which has been hit by massive cost overruns. Its earnings for the six months ended in December 2019 plunged by 72%, largely due to the Lake Charles Project, which also led to the axing of its joint CEOs Bongani Nqwababa and Stephen Cornell, after a forensic investigation found mismanagement in the project.
The company has nonetheless indicated that it may still seek a partner for the Lake Charles Project. Sasol says it believes the project will start generating positive earnings before interest, tax, depreciation and amortisation in the second half of its 2020 financial year.
It also wants to sell assets worth $2 billion.
Earlier this month, Sasol announced that production would be suspended at its fuel refinery, Natref, due to an “unprecedented decline” in demand at the start of the lockdown.