The Sasol Hedge fund

Reviewing Sasol's annual report I was impressed that they have grown revenue while increasing their operating margins, but something else stood out to me.


According to the report, for every $1 increase in the price of a barrel of oil, Sasol's operating profit will increase by $67 million. When it comes to the exchange rate, for every 10c that the rand weakens, their operating profit increases by R 939 million under the assumption of $108 a barrel, and at the exchange rate of R 9.05. So if exchange rates stay where they are and oil stays above $108/b, Sasol will make an extra R84.5 billion operating profit (200% increase) just from the exchange rate! With figures like that, it means that Sasol is a very successful hedge fund, with daily operations to help them pass the time while the money roles in as the rand weakens.


Having said that, I doubt Sasol will make the extra R 84 Billion in operating profits, due to them having some form of hedging in place. Hedging limits the downside from negative moves in the oil price and exchange rate, but at the same time also caps the upside from those moves, which is fine because having a stable cash flow is more important than having super profits/losses due to volatility. Even with the hedging, I think that they will still make a substantial profit from the Rand's weakness; where they made over R10 billion in the last financial year directly due to exchange rate moves.


So how does Sasol make so much money from rand and oil price moves? It is due to their synfuel division, who produce fuel from coal and natural gas and then sell it based on the oil price in rand terms. Having a look at a pie chart comparison between turnover and profit contribution per division. On the turnover contribution I can hardly see the synfules sliver on the pie chart, but on the operating profits section, synfules makes up more than 50%. Based on those stats, Sasol is essentially a South African synfuels company that has a couple of other divisions locally and internationally, but that is changing with their investment in North America. The investment in North America is approximately 60% of Sasol's market cap (so not small), changing substantially Sasol's future structure.


A cool stat; Sasol produces 69% of its' own electricity for it's South African operations. For a more detailed look at the rest of their annual report and our view on their valuation have a look at Sasol FY numbers, a piece we wrote at their year end.