Sasol mulls over hedge option

Johannesburg - Petrochemical giant Sasol is again toying with the idea of hedging a percentage of its synthetic fuel production as part of its annual risk management strategy. However, analysts think it's a bad idea.

Sasol spokesperson Noruwana Nothemba confirmed last week that Sasol is contemplating the hedge option, but that no final decision had been made.

"I definitely don't think that Sasol should hedge," said Peter Major of Cadiz Corporate Solutions. "Hedging is not a long-term solution and puts the whole company at risk."

Investec Asset Management investment analyst Grant Cloete was also against the company reimplementing its zero-cost collar hedge. Zero-cost collars have a upper and lower price limit. For instance, if the lower limit is $60/barrel and the actual price falls below this, you still have the right to sell at $60/barrel.

Likewise, if the upper limit is $70/barrel and the actual price rises above this, you will forego the opportunity to earn the premium.

Although the option is more expensive, Cloete said Sasol would be better served to negotiate a lower limit only, without an upper limit. "This will help limit the downside risk to a weaker oil price and not cap out the upside potential the way zero-cost collars do."

A gambling game

Analysts often compare hedging to gambling, without any benefit over the long term. "Why does Sasol think it can gamble without losing money?" said Major. "In my opinion, it's gross negligence."

Brent crude trades at about the same level ($70/barrel) as in 2007, when it put its previous zero-cost collar in place.

The upper and lower limit of this hedge was $62.40/barrel and $76.80/barrel respectively. As a result, Sasol lost R1.1bn in operating profit in the six months to end-December 2007.

According to an I-Net Bridge report, if the company had not been restricted by its hedge, the rocketing oil price at the time would have put an additional 181c/share in shareholders' pockets.

The US energy department's energy information administration forecast an average oil price of $61.3/barrel for 2009 and a low of $58.3/barrel to a high of $90.6/barrel for 2010.

South African Reserve Bank governor Tito Mboweni said the bank's Monetary Policy Committee in April worked on the assumption that oil would average $50/barrel for the remainder of 2009.

On Wednesday Brent crude was trading at $70.83/barrel, up 0.5% for the day. Over the last week, it rose on market sentiment that the worst of the economic downturn was over.

Commenting on the oil price, Cloete said: "Oil has definitely shown a steep upwards trend over recent months and could head higher if there are concrete signs of a global recovery."

- Fin24.com