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How hedging for refining margin causes derivative loss / gain: HENGYUAN

probability
Publish date: Thu, 02 Jun 2022, 08:27 PM
REFINERY POWER

Hope the below enlightens some on how Hedging caused the Q1 22' PAT we have seen for Hengyuan:

How hedging for refining margin causes derivative loss / gain:

NOTES:

A) Hedging is done monthly (every month) with forward Futures pricing and the balance closed on the following month:

B) Hedging Contract size for both crude & refined oil is its 1 month cost & revenue.

 

Key takeaway from above:

 
- When refined oil price rise faster than crude you get derivative losses (Q1) and when crude catches up a little, you get hedging gain as can be seen in Q2
 
- Once price stabilizes, we can see the Net Profit will match the Gross Profit as can be seen in Q3 22'.
 
- In the long run, all the gross margin not captured due to hedging will eventually be captured when price returns to the original pricing as can be seen for the year total figures..
 
 
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4 people like this. Showing 23 of 23 comments

probability

Kindly press CTRL and ENLARGE you page to view the Table details.

2 months ago

probability

If you get the mechanism presented, you would be able to estimate Q2 22' yourself.

You just need to put in the sales figure for refined oil and cost for crude looking at the crack spread chart and brent historical pricing.

Q2 22 its going to be explosive.

Posted by lai3bu > Jun 2, 2022 9:02 PM | Report Abuse

Probability- the fear is Q2 again they screw up with derivative loss despite good gross profit . What is your assessment ?

2 months ago

probability

If the spike in the refining margin we see now never comes down to Q1 level, then it will never get reversed.

But the moment the current spike in margin stabilizes, the PAT will match the expected gross margin from the already spiked crack spread we are seeing.

When the margin drops suddenly say in the future, then we have hedging gain to cushion the drop or even show higher margin than the reduced crack.

The maths are clearly shown on the table.

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-H...

We just look forward for stability now.


Posted by stockwin > Jun 2, 2022 9:20 PM | Report Abuse

probability

For everyone's reading pleasure:

How hedging for refining margin causes derivative loss / gain: HENGYUAN


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Thank you Probability.
Does that mean the RM432 M Fair value loss on derivatives in Q1 2022 just a book entry and will be reversed in future qtrs? tq

2 months ago

stockraider

What is the key diff in ownership & management between Petron V Hengyuan leh ?
Petron reward its shareholders by distributing reasonable dividend whereas Hengyuan siphoned cash & profit for its own profit mah!

In other words even if Hengyuan going to make good profits, they are not going to share any with u loh!

On the other hand, u can rely on Petron for its good corporate governance mah!
And right now Petron is actually making more monies than hengyuan loh!

Lu tau boh ?

2 months ago

qqq3333

No inside. Info don't do
........not so simple. $ 200 million loss charged to comprehensive income will be transfer to PL as soon as contract expires

2 months ago

qqq3333

So many timing differences..u take a simple approach will get u heart attacks

2 months ago

qqq3333

Post removed.Why?

2 months ago

qqq3333

Man make the environment or environment make the man

2 months ago

qqq3333

Post removed.Why?

2 months ago

qqq3333

Post removed.Why?

2 months ago

qqq3333

man make the environment or environment make the man?

2 months ago

probability

An Introduction to Crack Spread Hedging

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack...

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.). In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

The refiner is buying November crude oil and selling December ULSD as refiners generally purchase crude oil for processing in a given month, and subsequently refine and sell the refined products during the following month.

2 months ago

stockraider

Put it this way loh!

Not all derivative employed by these companies are for hedging purpose loh!

Sometime use it for speculation mah!

For msia refinery.....u no need bcos govt already have a formula for your products price...u no need to really hedge mah!....Bcos govt formula is a natural hedge mah!

2 months ago

stockraider

Remember during Shell & Esso time....none of them use derivative mah!

They do use derivative bcos....this may run the risk of gambling...if they over do it loh!

2 months ago

qqq3333

your objective, buy share now make a lot of money by selling the share soon is very different from their objective.

2 months ago

qqq3333

your objective, buy share now, make a lot of money soon is different from their objective.

2 months ago

stockraider

Do not be a trader loh!

Better be an investor or speculator mah!

2 months ago

qqq3333

Post removed.Why?

2 months ago

qqq3333

Post removed.Why?

2 months ago

qqq3333

rabbit or turtle? Nothing wrong bet on turtle.
world full of surprises.

2 months ago

stockraider

What is the use of high crack spread when major shareholder of HY sapu money all for themselves & not willing to share with minority leh ??

Better switch to Petron....which has a superior performance & better corp governance & pays a reasonable div mah

2 months ago

Raymond Tiruchelvam

How come HY Q report never make any announcement on derivative gain/loss but rather mention lower crack margin, which is not correct ? management also never mention about derivative positions?

2 months ago

stockraider

Stick to Petron our reliable corp governance that is willing to share with minority shareholders unlike Hengyuan mah!

Sifu Sslee,

Lu tau boh ??
Hengyuan already writedown its Russia Oil to USD 7 from USD 80 mah!
Thats why there is a writedown losses of more than Rm 130m loh!

Since the cost of Russian Oil to Hengyuan is USD 7m whereas the mkt price is USD 80....hengyuan can sell to its china parent at USD 7m at no losses loh!

This how cash can siphon from Hengyuan, quietly mah!

There goes our potential dividend mah!

2 months ago

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