Sasol’s potential massive rights issue will hinge on asset disposals and cash flows

Sasol updated the market on Tuesday 17 March about its plans to deal with the oil price collapse and the coronavirus (Covid-19) pandemic, which comes on top of the debacle of cost overruns at its mammoth US chemicals project. The pace of events could overtake these plans, but the company is at pains to note that it has available liquidity of “approximately $2.5 billion”. It also has “no significant debt maturities before May 2021 and it, therefore, believes it is positioned to withstand recent market volatility in the short term”.

Cash on hand is great, assuming it is not being burnt up. The company also believes it is cushioned to deal with oil at $25 a barrel — as of writing it was around $30 — for the next 12 to 18 months. That this is even a possibility was unthinkable a few weeks ago, but this is the world of Covid-19. 

The company’s batch of emergency measures, it said in a statement, include “a cash conservation programme focused on enhancing cash flow and cost competitiveness in a low oil price environment, with $2 billion cash delivery ahead of current plan targeted by 30 June 2021”.

So it is going to be slashing costs wherever it can. Its travel budget is probably going to be whacked anyway. 

Sasol also plans to dispose of assets, but this will be risky in such a distressed environment. On top of that, it is looking for US partners for its US chemical assets. On a conference call, company executives would not be drawn on who the potential partners would be, and it is hard to see anyone rushing into new investments like this now. But US companies have a lot of cash in the bank, and they will be ready to spend some of it when this crisis passes. Especially if they are bargain hunting. 

There is also a potential rights issue of up to $2-billion, but that is “subject to the progress made on cash conservation initiatives and asset disposals”. 

The rights issue is not set in stone and won’t take place until after a shareholder meeting around July and the release of the full-year results in August/September. CFO Paul Victor explained on a conference call that current market volatility ruled one out now, and that it was “a last resort”. The company’s market capitalisation is under $2-billion, so the company may be hoping its share price has rebounded by then after its crash. But its shares lost another 18% on Tuesday.

Collectively, its plan is a patchwork of desperate measures, but in fairness to Sasol, these are desperate times. A lot of other things could go wrong. It is not inconceivable that the company’s operations including mining and refineries could be shut as government scrambles to contain the spread of the virus.

That would be great for the environment — Sasol’s carbon emissions exceed those of many countries — but it would potentially blow a gaping hole in the company’s balance sheet. But Sasol is hardly alone. BM