MONEYWEB, Alec Hogg, 28 June 2006
Explaining the meaning of Sasol’s “hedging” of 45 000 barrels a day of its South African production.
MONEYWEB: Arthur Bucher joins us now. Arthur was with Nedbank Securities, the last time I looked. Still there, Arthur?
ARTHUR BUCHNER: That’s it, they can’t get rid of me, Alec.
MONEYWEB: Well, I don’t know if they’d like to. But we don’t want to get rid of you either, because when it comes to looking at these collars and cuffs and hedges and forwards and futures, you’re our man. Sasol today decided to hedge out 45 000 barrels of its South African [daily] production, which is about a third of the South African production by Sasol of its fuel. Now what exactly has it done? Could you explain it in real basic layman’s terms?
ARTHUR BUCHNER: Well what it’s basically done is that it said that if the oil price had to fall from current levels of $72 down to $63, they feel that anything below $63 would impact their earnings significantly, so what they would rather do is have protection that, should the oil price fall below $63, they would still return earnings to their shareholders. However, if you go out into the market and you go and purchase yourself a put option, which basically enables you to sell oil at $63 should it be lower than $63, that’s quite an expensive exercise. So what they do is they sell a call option. Now what a call option is, is the right to buy oil at $83. So now let’s put it into layman’s terms – if the oil price is at $90 in March 2007, Sasol will have to sell their oil to the person who has bought this call option at $83, so they are forced seller if the price is above $90.
MONEYWEB: They will lose if the oil price goes above $83?
ARTHUR BUCHNER: Well technically they won’t lose, they will lose the opportunity of making money from $83 to $90, but they won’t really lose money because they produce, and they are producing at $20 a barrel. They then take that money for that call option which they have now sold, and they then go and buy themselves a put option, and what that basically means is should oil fall to $50, Sasol will have the right to sell oil to someone else at $63. Now it’s a fantastic transaction for someone who is a producer and we find a lot of the producers getting involved in these types of transactions because it provides certainty. And if you look at what Sasol has done, they haven’t gone out and sold 100% of their future production, they’ve gone and sold 30% of their production. And if they are producing, if I understand it correctly, a barrel of oil at around $25, they have really gone and they have locked in all their costs for their total production by selling 30% at $63. So I’m just basically taking 30% at $63, divided by 3, comes to $20 – so they have really just locked in all their costs, and they now have only upside attached to the production that’s going to come to the fore.
MONEYWEB: Arthur, it makes a lot of sense, but why do people in this country, investors in this country – let’s just say they own Sasol shares and they’re sitting at R275 a share – why don’t people in South Africa sell or have a put option on those same shares at, say, R250 and then have a call option at R300? Because if a producer can do it, surely an individual can do it as well and also make money?
ARTHUR BUCHNER: An individual can do it, but there’s only one issue there – that an individual is not a producer of the share. They buy the share and they want the upside attached to it. However, what happens with Sasol is that they go and they actually take something out of the ground, it costs them a little bit of money to take it out of the ground, they are a natural producer and therefore they take no risk should there be major moves in the price. If you remember, SAA – they did all these hedgings on the rand, but they weren’t a producer of rands, and they got taken to the cleaners. And it’s very, very important for an individual out there – they can get involved in options, but they must get involved in options from the perspective of they would be happy to sell at a level or they would be happy to buy at a level, because they’re not producers or natural producers.
MONEYWEB: Arthur Buchner is from Nedbank Securities.