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Oil and chemicals company Sasol's share price plummeted by almost 47% in a single day 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.
Brent crude oil was last trading 20% lower at $36 a barrel. Sasol closed at R85.35 - its weakest level in more than 15 years. Its market value plummeted to R53 billion from above R100 billion last week.
Its share price is now down 83% from April last year.
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 a from the lower oil price, which will probably leave it in breach of these debt covenants. This means that it's debt will become payable. 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."
