What happened
Shares of energy and chemical company Sasol (SSL -2.74%) are down 23.9% as of 10:30 a.m. EDT today. The sharp drop comes after the company announced plans to issue equity to help pay down its debt load.
So what
Back when shale drilling was just taking off and oil prices were still high, companies started plowing billions into developing new chemical facilities in the U.S. Gulf Coast. Sasol was one of them. The South Africa-based company was looking for a way to transition from its origins as a coal-to-gas producer to chemical manufacturing. Part of that push was a multibillion-dollar chemical manufacturing plant. Spending big typically means taking on debt. As of this writing, Sasol has $9.8 billion in debt outstanding.
Image source: Getty Images.
As management has said, though, a lot of these investments were made with a higher oil price in its projections. What's more, the company has restrictive debt covenants that it appears it can't satisfy at today's oil prices.
As a result, it is issuing about $2 billion in shares as part of a larger plan to raise $6 billion in cash. With its stock already trading at depressed levels, this will mean significant shareholder dilution.
Now what
Dilution of shares is never a good thing, but a major equity issuance in the midst of a massive market sell-off and cratering oil and gas prices is even worse. As bad as this all is, though, dilution is better than not meeting debt covenants and defaulting on debt. So as bad as this sounds, it will likely allow the company to stay afloat and stave off an even worse outcome for investors.
Anyone looking to buy shares because this stock looks cheap should probably think twice, though. This is a company in a cyclical business that is trying to transition away from an old business model and has a shaky balance sheet. There are lots of other companies out there selling for cheap today with better balance sheets and more positive long-term outlooks.
