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The collapse of more than 80% of Sasol this year due to low oil demand due to the Covid-19 pandemic has shifted its focus to the future of its troubled Lake Charles project in the United States. There is speculation that the oil giant is looking for a capital partner to ease liquidity constraints.
The biggest challenge for the 70-year-old industrial giant is finding an investor to participate in the chemicals project, given the collapse in international oil prices.
Selling part of Lake Charles would be a good move to help stabilize the company, but the transaction would come down to securing a good deal, according to Michael Treherne, Portfolio Manager at Vestact Asset Management.
“In the current environment, they will probably have a hard time finding people willing to buy in the oil industry,” he said.
The company had previously indicated it would consider looking for a partner in its Lake Charles Chemicals Project, where it incurred an increase in development costs to $ 13 billion, almost double the initial budgeted projections.
On Tuesday, Bloomberg reported that the company had contracted with Bank of America to help find a buyer for a minority stake in the Lake Charles project.
In response to Fin24’s inquiries, Sasol said he did not want to be drawn into speculation, and insisted that any “divestment or similar activity would be in line with the balance sheet’s goals.”
The company would not rely on speculation that it is planning salary cuts to increase liquidity.
Debt headache
Sasol’s share performance this year has erased billions from its market value, amid a troubling debt load of R121 billion, which is greater than the company’s market capitalization of just over R37 billion. millions.
A significant portion of that debt was acquired to finance the construction of the Lake Charles project, which will produce various chemicals, including a plastic variant called polyethylene, used in various applications such as films, tubes, plastic parts, and laminates.
“The problem for Sasol is that they went into great debt to build their operations in the United States, that debt must be paid with interest,” said Treherne.
“According to Sasol’s business model, they make more money when oil prices are high and less money when oil prices are low. The lower profits mean they will fight to pay off that debt.”
The price of Brent crude has dropped to levels last seen more than two decades ago, in the wake of the Covid-19 pandemic, which has reduced demand. Fueled by geopolitical tensions between the United States and Iran, oil managed to recoup some of its losses to trade above $ 20 a barrel.
Sasol has covered 80% of its oil exposure at $ 32 a barrel over the next 12 months, something that will provide some short-term relief. The challenge for the company, which employs more than 30,000 people, will arise if the price of oil stays low for longer than the hedging price.
The front-line company has long been regarded with great respect by local and foreign investors. However, current market conditions and the impact of Lake Charles have seen the trade battle as one of the most difficult challenges in recent history.
In March, Moody’s downgraded the corporate rating to Ba2, the second level of non-investment, after the country’s downgrade to the trash category. The company also plans to issue new shares in the amount of $ 2 billion, in which liquidity is expected to increase.
