Fuels and chemicals group Sasol has cautioned that ongoing rand/dollar volatility could pose an earnings risk for the second half its 2017 financial year, but reports that hedges are already in place to protect it from any downward oil price pressures.
The JSE-listed group reported a 38% fall in headline earnings a share to R15.12 for the interim period to December 31, 2016, despite a stronger operating performance across most business segments.
The results were negatively affected by a strengthening of the rand against the US dollar to R13.74 at the end of the interim period, which negatively impacted earnings by about R1.46 a share. Performance during the period was also hurt by strike action by workers affiliated to the Association of Mineworkers and Construction Union at its Secunda coal-mining operations, which resulted in an additional net cost of R1-billion, or R1.06 a share.
The group’s operating profit of R13.6-billion was 8% lower period-on-period and an interim dividend of R4.80 was declared, which was 16% lower than the R5.70 a share declared for the first half of 2016.
Joint president and CEO Bongani Nqwababa said a 10c move in the rand/dollar exchange rate would have a R740-million impact on annualised earnings, while a $1/bl change in the crude oil price could swing earnings by as much as R730-million.
The South African rand has been in a period of recovery for a number of months and has performed strongly during the first two months of 2017, recently trading at levels of better than R13 to the dollar.
For the rest of the current financial year to June 30, Sasol had hedged 75% of its crude oil at a floor price of $47/bl and had paid a premium to ensure that it did not forfeit any price upside. “But we are still open to the risks of the rand at the moment, which is quite significant,” Nqwababa said.
CFO Paul Victor said the expectation was for a “solid” second half business performance. “However, I need to stress that the strong rand/dollar exchange rate may negate the improved fundamental performances of the company during this period.”
The stronger rand would, however, help moderate Sasol’s capital expenditure (capex) for 2017, which was now forecast at R66-billion rather than R75-billion, with the bulk of the expenditure being directed towards the Lake Charles Chemicals project, in Louisiana, in the US. The revised estimate is based on an exchange rate of R14.15 to the US dollar, while the R60-billion capex estimate for 2018 was premised on a rand/dollar exchange rate of R14.50.
The group was working on its hedging strategy for the 2018 financial year and was considering protection against both currency and oil price volatility. Victor reported that, in 2017, its hedging costs would be $53-million, which translated to $1.70/bl for oil hedges covering 30-million barrels.
Further oil-related hedges would be implemented for both the 2018 and 2019 financial years, but the precise composition of these were yet to be finalised.
Victor said hedging the currency posed even greater difficulties for Sasol, particularly in light of “quite immense” volatility. Any protection it did seek against the stronger rand would be designed to sustain earnings liquidity. “We are looking at various instruments – put options, zero-cost collars and others instruments – that will enable us, from a cost/benefit perspective to effectively manage that risk.”