Hedging likely to hurt KenolKobil profits

A foreign exchange hedging contract that KenolKobil signed last year to guard itself against volatility of the shilling is likely to impact negatively on the oil marketing firm’s half-year results, the Standard Investment Bank has predicted in a note to investors.The company, which has already issued a profit warning, is expected to book a Sh1.5 billion foreign currency loss, which did not show in its income statement last year as it had not materialised.The company, which engages in huge foreign currency denominated transaction in its importation of oil, had taken the hedging contract after the shilling depreciated to an all-time-low of 107 units to the dollar last year.The shilling however, stabilised at the 84 units range early this year and has moved within a narrow margin since then.“The company made an additional exchange related loss of Sh1.5 billion on outstanding hedges by year end, an item which was dealt with separately under comprehensive income,” said Standard Investment Bank in a note on the company’s performance.The contract protected Kenol Kobil during periods of depreciation of the shilling but would have exposed it in times when the currency appreciated as it is an agreement to buy foreign currency at a pre-determined rate.In its full year reporting Kenol Kobil booked a relatively low foreign currency loss of Sh237 million, considering the bulk of its foreign currency trade and the shilling upheaval, which allowed it to declare a net profit of Sh3.27 billion. “The cumulative deferred gain or loss on the hedge is recognised in profit or loss when the underlying hedging instrument matures (usually within 6 months from inception), consistent with the relevant accounting policy,” said the company in its annual report.In the first six months of the year the shilling stabilised against major global currencies following an increase in interest rates by the Central Bank and its mopping out of excess liquidity in the market.By issuing a profit warning, the oil firm which is set to be acquired by Switzerland based Puma Energy in a Sh25 billion deal, acknowledges that its profits will drop by a margin of more than 25 per cent.

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Hedging likely to hurt KenolKobil profits