Bouncy oil price prompts falling Sasol to hedge
STILL PROFITABLE: Sasol president Bongani Nqwababa OIL-PRICE volatility continues to weigh on Sasol, whose share price is almost 40% off its record high.
Oil prices fell below $50 a barrel this week, their lowest point since November.
Sasol joint CEO Stephen Cornell said in an interview that the petrochemical group expected oil prices to remain volatile in the medium term, ranging from $45 to $60 a barrel.
“It is going to have lots of movement given the different drivers in the market.”
Fellow CEO and Sasol president Bongani Nqwababa said the company remained profitable at $40 a barrel.
To deal with a volatile oil market, Sasol has taken out a hedge on its oil price to enable it to sell 30 million barrels at a floor price of $47.74 a barrel for financial 2017.
The company also took out options for 12.75 million barrels at a floor price of $49.75 a barrel for the next year.
Oil prices fell more than 15% this year, erasing most of the gains made since the 12 members of the Organisation of Petroleum Exporting Countries (Opec) agreed in November to curb production in an effort to boost prices.
Observer nations such as UPS AND DOWNS: Oil rigs south of Taft, California, extract crude for Chevron at sunrise in July 2008, when prices were booming and the town was hatching ambitious expansion plans. But demand has not fully recovered from the global financial crisis that year and now oil-price volatility — spurred by the growth of the US shale industry — is forcing Sasol to hedge its bets Russia began to cut their output only recently.
Oil prices have been hit by the growth of the US shale industry and a dearth of demand that has not recovered from the 2008 financial crisis.
Shale oil has made the world’s biggest economy an exporter.
US crude output increased for the 11th week running to its highest point since August 2015, according to the US Energy Information Administration.
Sasol’s shares normally move in correlation with international oil prices. Over the past two years, black gold has declined 24%, while Sasol’s shares have fallen 17%.
By hedging, “we are protecting the balance sheet . . . without giving away the upside”, said Cornell.
Sasol has also taken out hedges against the rand-dollar exchange rate for next year to the tune of $4-billion (R54.6-billion) but using a different approach.
Nqwababa said a 10c move in the rand-dollar exchange rate would affect profits by R740-million while a $1 move in the oil price would affect Sasol’s earnings by as much as R730-million.
For that reason, said Nqwababa, the company had implemented the hedges to ensure stability in Sasol’s cash flow as the Lake Charles chemicals project in Louisiana reached peak funding next year. Sasol’s US project is about 68% complete.
An analyst at Arqaam Capital said that several companies were hedging their oil prices for the next two years despite indications that oil prices were going to improve.
He said investors are locking in their margins, which leads to uncertainty in their price.
He said local investors putting money into Sasol were taking a view more on the oil price and rand-dollar exchange rate than on Sasol’s operations.
A 10c move in the exchange rate has a R740m effect on earnings
On oil prospects for the rest of the year, investment analyst Izak van Niekerk of Mergence Investment said that if Opec extends its cuts and the US onshore production reaches a level where it cannot add much more, “market balance could start being restored from the second half of the year”.
Opec is due to meet towards the end of May to decide whether to extend supply cuts.
Bloomberg indicated in a report that Russia’s energy minister said it would be necessary to extend the cut in oil output in conjunction with Opec beyond the June deadline, which would increase the likelihood of Opec cutting production.