• Price weakness:  Many of Sasol’s product prices are at multiyear lows, impacted by lower oil prices and broad demand destruction.
  • Fuel prices:  Sasol’s fuel prices in South Africa have declined to the lowest levels since 2005 as oil prices declined and refining margins moved negative.  We estimate that the South African Synfuels business currently consumes in the order of R500mn per month.  
  • Outlook still weak:  The near-term outlooks for fuels prices and chemicals remain negative as demand remains weak in oversupplied markets.  Inventories for some products are at historic highs.
  • Liquidity and cash burn:  We estimate that the company has around R22.5bn of availably liquidity.  After including the cost saving and cash preservation measures this should be sufficient for the next 12 months.  Asset sales of $1bn would extend the period to 25 months.
  • It is all about the oil price:  Cost and cash savings, asset sales and a large rights issue will not lower Sasol’s debt and balance sheet ratios to acceptable levels if product prices do not improve in the next 12-18 months.  Asset sales should only postpone the need for a rights issue, and it is only higher product prices that can save the balance sheet.
  • Near term earnings:  We have lowered our earnings estimates to reflect announced cost saving as well as update guidance for the LCCP.  If the rand remains at current levels the company will incur large losses (~R7bn) on its currency hedges, and we expect a HEPS loss for FY20. 
  • Spot earnings:  We expect the company could lose as much as R30bn in FY21 if spot prices remained.  Cash burn could be as high as R38bn.
  • Share price: Sasol offers value but only under a certain set of key assumptions:  (i) Lenders waive debt covenants until oil prices and refining margins recover, (ii) Sasol can execute on asset sales to extend the liquidity window, (iii) Sasol can successfully execute a large rights offer if required and the long run oil price assumption exceeds $40/bbl.  We remain cautious and on the sidelines for now.