• Investment case compromised:   The Sasol investment case has been compromised by budget overruns and delays at Lake Charles, unmanageable debt levels, falling oil and chemical prices and an unwillingness to hedge oil prices at higher levels.
  • Market concerns everywhere:  The market is increasingly concerned that Sasol will significantly breach debt covenants and will not be able to commence with scheduled debt repayments.  This is evident from the falling share price but also rising debt yields and credit default swaps.  The decline in the share could see it excluded from the Top40 index.
  • Capital required:  We estimate that the company needs cash of around $5bn (R80bn) in order to secure the balance sheet.
  • Where to get the money?  Sasol needs to present lenders with plans to restructure, cut capex, and sell assets.  Sasol could also refinance debt using secured debt and/or convertible debt while a rights issue also seems inevitable.  Lenders could approve of  such a plan and waive debt covenants and extend repayment periods.
  • A rights issue imminent:  In order to manage the balance sheet prudently, the company needs to assume low oil prices persist for longer.  If debt holders do not accept restructuring plans, the company would have to raise in the order of $5bn to secure the balance sheet for the next 21 months. 
  • Price assumptions lowered:  We have lowered our assumptions for key profit drivers.  We assume oil prices will remain depressed at least until the next OPEC meeting in June before trending higher.  We assume petrochemical prices track oil prices lower in coming weeks.
  • Earnings cut:  We have lowered our FY20 earnings by 42% to R9.05/share and FY21 by 46% to R19.75/share.  We have not made material changes to later years’ estimates.
  • Rating suspended:  While the company is formulating plans to address the balance sheet, we are unsure what these are and cannot value the company.  We suspend our rating and target price until we have clarity on Sasol’s plans and more certainty on their ability to execute on these plans and lenders’ willingness to provide leeway to execute.