Sasol signals potential rights issue in face of coronavirus and low oil prices

Sasol shareholders may be asked to fork out some cash next week.

The company will on Tuesday March 17 update the market on the measures it is formulating to stem a massive slide in its share price, triggered by the coronavirus pandemic and the resultant dive in oil prices. 

Its price at close on Thursday had tanked 77% since last Friday as an oil price war sparked by Saudi Arabia and Russia sent crude prices tumbling. Sasol issued what is called a “cautionary announcement”, meaning shareholders should exercise caution in dealing with its shares because something big is about to happen.

“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, Sasol will be within the current covenant levels at 30 June 2020,” the company said in a statement. This means it will be within parameters agreed with its creditors.

“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,” the company said.

It further said that it was prioritising a number of actions. Among those is an assessment of “... alternatives to manage Sasol’s near-term debt covenant constraints, including a potential equity issue”. This would effectively mean a rights issue, entailing issuing new shares at a certain price to existing shareholders to raise cash, because the company is going to need it to deliver on their investment in the long run.

It also said it was working on “reducing costs”, rescheduling some capital expenditure, which would mean delaying it, and “engaging our lending groups”. This could mean fresh borrowing or renegotiating the current payback time frames for debt owed, among other things.

Sasol is a big company and this is a big deal. And events and markets around the coronavirus are fast spinning out of control. By Tuesday next week, the company – and it is hardly alone in this regard – could face new challenges. We are all in uncharted waters with this one, and it remains to be seen if Sasol shareholders will take the bait. BM