Investors worry why battered Sasol shares are pricing in years of bad news

By Adelaide Changole

(Bloomberg) – Sasol’s shares, down more than 80% in 2020, are trading as if the market expects years of bad news around oil and that the South African fuel and chemicals giant will struggle to escape its balance sheet constraints.

Old Mutual Investment Group doesn’t share that pessimism, said Meryl Pick, a money manager who helps oversee the firm’s R10bn ($533m) Investors Fund.

“Our view is that the market is pricing Sasol as if the prevailing oil prices are going to continue for the next three to five years, and are pricing in that the balance sheet constraints will prevail for a very long time,” Pick said by phone from Cape Town on Monday. “We do not believe that oil prices will remain at these low prices into perpetuity.”

Sasol’s plunge has made it the worst-performing stock this year in Johannesburg and wiped more than R150bn from its market value. Spiraling costs at a US chemicals project have surged about 50% above projections to almost $13bn, while oil prices have crashed as the coronavirus pandemic destroys global energy demand.

A gradual revival as countries reopen their economies and reduced production from US shale oil companies will support the market for crude, said Pick.

“On a three to five-year view, it is unlikely that we will be in the extreme lockdown scenario that we are now seeing and oil demand will recover,” she said.

Sasol said last month it plans to raise $6bn by the end of its 2021 financial year, including a share sale of as much as $2bn, as it seeks to reduce net debt of about $10bn. It’s also in negotiations with lenders to arrange greater flexibility over its repayments.

“Most of the debt is in the US and it is quite low-interest-rate debt,” said Pick. “So there is room to take higher finance costs in exchange for more relaxed risk metrics on the debt.” Success in reducing costs, cutting capital spending and selling some non-core assets would help reduce the size of any rights issue, she said.

At worst, Pick estimates Sasol may need to raise as much as R140bn from a share sale. But she envisages that the amount could be as low as R20bn in a “last resort” option that won’t be carried out before August.

“The key thing will be what they agree with lenders,” Pick said. “If lenders give them a reprieve, then the rights issue will not be that urgently necessary.”

Sasol extended its decline on Tuesday, falling 15% in early trade in Johannesburg, taking the slump since the start of the year to 84%.

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