• A step down in oil prices:   Following Russia’s rejection of OPEC’s proposal to cut oil production the oil price dropped by 25% and has traded below $34/bbl.  The rand has also weakened significantly overnight, trading at R16.32/$.  The lower oil price will not only set Sasol’s fuel prices but also impact chemical prices (link).  Sasol has not put oil hedges in place at the time of their results and it is unlikely that meaningful hedges have been entered into since the results
  • What happens to earnings?  If oil and the currency remained at current levels estimate that the company will earn R5.67/share in FY20 and earn a loss of R6.71/share in FY21.  We assume all petrochemical prices (ex Organics in PC) trend lower with oil prices.
  • What happens to the balance sheet?  At these prices Sasol will end the FY20 year at gearing of 70.4% and net debt:EBITDA of 4.2x.  For FY21 the gearing ends at 76.9% and net debt:EBITDA at 6.1x.
  • What happens next?  If current oil prices persisted for longer than few weeks we believe a rights issue would be unavoidable.  Using the same price scenario as above, we estimate EBITDA of R28bn in FY21 which at a 3x multiple would allow for net debt of ZAR84bn, ZAR85bn lower than our estimate of the ending debt in FY20.
  • What about asset sales:  We believe Sasol is still in the process of divesting from assets.  The lower oil price will however compromise the values they can achieve for these assets.  Over and above the $2bn of assets identified for divestment Sasol could sell a stake in the LCCP.
  • The oil price holds the key:  The decline in oil price is significant and if low prices persisted it would place many companies’ and countries’ financial positions at risk.  Production cuts could still be implemented and the narrative from OPEC and Saudi Arabia in particular will be paramount in coming days and weeks.
  • Just too much risk:  We maintain our cautious view on Sasol and the risk remains significant.  We are reviewing our valuation and rating.