Sasol’s share price plunge ups urgency for sale of stake in US project

Sasol’s more than 80{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} collapse this year on the back of low demand for oil because of the Covid-19 pandemic has shifted focus to the future of its troubled US Lake Charles project. Speculation is that the petroleum giant is looking for an equity partner to ease liquidity constraints.

The biggest challenge for the 70 year-old industrial giant is finding an investor to take up a stake in the chemicals project, given the crash in international oil prices.

Selling part of Lake Charles would be a good move to help to stabilise the company, but it the transaction would come down to the securing a good offer, according to Michael Treherne, Portfolio Manager at Vestact Asset Management.

“In the current environment, they will probably struggle to find people willing to buy into the oil industry,”  he said.

The company had earlier indicated that it would consider seeking a partner at its Lake Charles Chemicals Project, where it has incurred rising development costs to $13 billion, almost double the initial budgeted projections.

On Tuesday, Bloomberg reported that the company had hired the Bank of America to help find a buyer for a minority stake in the Lake Charles project.

In response to Fin24 queries, Sasol said it did not want to be drawn into speculation, insisting that any “divestment or similar activity would be in line with balance sheet objectives”.

The company would not be drawn on speculation that it is planning salary cuts to boost liquidity.

Debt headache

Sasol’s share performance this year has wiped billions off its market value, amid a worrisome R121 billion debt burden which is higher than the company’s market capitalisation of just over R37 billion.

A significant chunk of that debt was acquired to finance the construction of Lake Charles project, which will produce various chemicals including a plastic variant called polyethylene, used in various applications such as films, tubes, plastic parts and laminates.

“The problem for Sasol is that they took on a lot of debt to build their US operations, that debt needs to be repaid with interest,” said Treherne.

“Based on Sasol’s business model, they make more money when oil prices are high, and less money when oil prices are low. Lower profits mean that they will struggle to repay that debt.”

The price of Brent crude has dipped to levels last seen more than two decades ago, in the wake of the Covid-19 pandemic, which has slashed demand. Stoked by geopolitical tensions between the US and Iran, oil managed to claw back some of its losses to trade above $20 a barrel.

Sasol has hedged 80{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of its oil exposure at $32 per barrel for the next 12 months, something which will provide some relief in the short term. The challenge for the company, which employs over 30 000 people, will emerge if the oil price stays low longer than the hedges are in place.

The blue chip company has for the long time been held in high regard by investors locally and abroad. However, the current market conditions and the impact of Lake Charles has seen the business battle one its most difficult challenges in recent history.

In March, Moody’s downgraded the corporate rating to Ba2, the second notch of non-investment, following the downgrade of the country to junk status. The company is also planning to issue new shares to the tune of $2 billion, in what is expected to boost liquidity.

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