Oil and chemicals company Sasol's share price plummeted by 45% in the first few minutes of trading on Monday after the oil price all but collapsed.
Oil plunged over 30% overnight, this after Saudi Arabia on Sunday made the biggest cut in its prices in the past 20 years, Bloomberg News reported. The move came as talks between OPEC and its allies failed to reach an agreement to cut oil production on Friday. Russia in particular refused to cut its supplies, AFP reported.
This is the sharpest drop in oil in one-day since the 1991 Gulf war, said Nigel Green, CEO of financial advisory deVere Group. Green said the latest sell-off in global stock markets on coronavirus fears could "severely damage" economic growth. "With the combination of the implications of the oil stand-off and the outbreak, I now believe that it’s almost inevitable that there will be a global recession this year," said Green.
Brent crude oil was last trading at $33.95 a barrel. Sasol was last trading 40% weaker at R95.81 - its weakest level in more than 15 years.
Richard Cheesman, senior analyst at Protea Capital Management, says that the oil price decline comes at a "precarious" time for Sasol.
Following disastrous delays and overspending at a new chemicals project in the US, the company has a debt burden of more than R120 billion.
"If the current price persists, Sasol will probably breach its debt covenants," says Cheesman.
He explained that Sasol's loan conditions require that the ratio of its debt to EBITDA stays below 3.5 times, and 3 times; from July this year. Sasol's profits will take hit from the lower oil price, which will probably leave it in breach of these debt covenants. This means that it's debt will become callable. But Cheesman says that a debt call may not happen in the short term, as it is most likely that the banks and other funders will give Sasol six months to remedy the situation.
"If the oil price stays low, the only way this will happen is by Sasol selling assets or raising capital to reduce the debt."
"Sasol had not hedged the oil price when the company reported first half results earlier this year, but may have since then," he added.
On Friday, Moody's cut Sasol's bonds to "junk".
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