- Fuel prices higher: Oil prices as well
as refining margins have increased significantly since we published our review
of Sasol’s liquidity at the end of April (link). Sasol’s petrol and diesel prices in rands have
increased by 73.2% and 90.8%, respectively.
- Chemical prices under
pressure: Petrochemical
prices have not yet followed oil higher and remain at multi-year lows. Ethane cracking margins in the US have been
driven close to zero by higher ethane prices (+84% in May).
- Shifting profit dynamic: At current prices the Energy
segment should still incur a small operating loss in FY21. We expect larger losses in Base Chemicals and
the contribution from the LCCP should be reduced.
- Negative cash flow: We still expect negative
free cash flow in FY21 at current prices and estimate cash burn of R800mn per month
(R2bn at the end of April). At the
current exchange rate an oil price exceeding $40/bbl is required to achieve
free cash break even.
- Balance sheet still
distressed: At
spot prices, net debt should increase to R188bn by the end of FY21 excluding
asset sales and/or a rights issue. Sasol
should have sufficient liquidity for 28 months, but balance sheet ratios remain
high with net debt: EBITDA at 5.5x.
- Balance sheet scenarios: We have tested the balance
sheet under various scenarios and Sasol still needs to sell assets of more than
$1bn, divest from the LCCP and complete a rights issue to restore the balance
sheet to levels generally acceptable to lenders.
- Share rating: In our view the
investment case remains compromised until we have sight on the lenders waiving near-term
debt covenants as well as successful strategically sound divestments. Continued positive momentum in oil prices and
refining margins will mitigate the risks in the investment case, however. For now, we remain cautious.
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