Johannesburg - Chemicals and energy group Sasol has introduced a hedge to mitigate against the financial risk posed by lower crude oil prices.
The company on Monday said it would also not rule out similar measures for the exchange rate as a stronger rand lowered the group’s earnings.
The company took the step to maintain its investment grade rating, pursuing growth opportunities in North America and Mozambique.
Sasol joint chief executive Bongani Nqwababa said although the company had a mandate to hedge crude oil and rand exposures, it had not done so because its balance sheet was largely ungeared.
“But currently, because we have big projects and we do not want to breach our gearing limits and our net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) and end up compromising our investment grade rating, we have gone conservative and (decided) to cap the downside in terms of our risk on the big financial exposures of the rand and crude oil,” Nqwababa said.
“We then did hedges on the oil price to make sure that we cap the bottom. On a net basis, it was not lower than $47 (R607.27) per barrel. The upside is not capped. We are just protecting the downside,” he said.
He said the company had not hedged on the rand yet because it had been volatile lately. “But we will consider those possibilities going forward.”
Nqwababa said remaining unhedged on the currency and the oil price could have negative impact on the company.
According to Sasol’s estimates, a 10cents change in the annual average rand/US dollar exchange rate would affect profit by approximately R740million, while a $1 dollar change in the crude oil price, would have an impact of approximately R730 million.
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Chief financial officer Paul Victor said the strength of the rand to levelling below R13.80 to the US dollar since November last year negatively impacted the half year earnings “and will continue to do so at its current levels.”
Recovery
Victor said there had been a steady recovery in global and product prices, especially in the second quarter of the 2017 financial year. “Oil prices have moved up to the mid-$50 per barrel range, following the December Opec decision to cut production. This will positively impact our second-half results. Unfortunately, refining margins were down 32 percent and despite the recovery in margins since November, it still had a significant impact on our earnings,” he said.
Meanwhile, Sasol is counting the costs of a three-month strike at its Secunda operations. “On a net basis, the cost was around R1 billion on the mining business. It is because we had to buy additional coal,” he said. Sasol bought 1.5 million tons of coal, at approximately R500 a ton, compared to R240 a ton if Sasol mined the coal for itself. He said the company bought the coal in order to increase its stockpiles “so that we do not put the company at risk”, said Nqwababa.
Approximately 2000 members of the Association of Mineworkers and Construction Union at Sasol coal mines in Secunda, Mpumalanga went on strike over higher minimum wages.
Nqwababa said the strike was also partly responsible for the 38 percent drop in headline earnings a share. In the six months, Sasol increased production at Secunda Synfuel by 1 percent, while it cut interim dividend from last year’s R5.70 a share to R4.80 a share.
Sasol shares rose 1.24 percent to close at R375.