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HENGYUAN - How to calculate its refinery margin? & Why share price hesitating to move up despite Q2 EPS of RM 2.2? ADDED ADDITIONAL EXPLANATION
probability
Publish date: Fri, 02 Sep 2022, 08:56 PM
1) HOW TO CALCULATE HENGYUAN REFINERY MARGIN?
HENGYUAN is a Complex Refinery where the typical refined products produced are as shown below (snapshot extract from 2020 annual report Pg 22.
We can see the typical yield of its refined products in terms of % :
The above simply means for every 100 barrels of crude oil processed, 7 barrels of LPG, 3 barrels of Propylene, 22 barrels Gasoline, 46 barrels of Diesel (Gasoil) etc will be produced.
To calculate the refining margin, one simply needs to know the price difference between Crude (cost of purchase) and the individual Products (selling price sales). The difference between the Product price and typical crude such as Brent are reported on mean of platts singapore as per below links:
1. Diesel (or Gasoil): https://www.tradingview.com/symbols/NYMEX-GOC1!/
Current crack: USD 46.5/brl
2. Jet fuel (or Kerosene): https://www.tradingview.com/symbols/NYMEX-ASD1!/
Current crack: USD 36.0/brl
3. Gasoline:
Gasoline Mogas 92: https://www.tradingview.com/symbols/NYMEX-D1N1%21/
Gasoline Mogas 95 premium: https://www.tradingview.com/symbols/NYMEX-SMU1!/
Current crack: USD 4.5/brl
Summary from above:
1. Diesel at 46% yield, cracks USD 46.5/bbl
2. Jet fuel at 7% yield, cracks USD 36.0/bb
3. Gasoline Mogas 95 at 35% yield, cracks USD (0.79 + 3.71) / bbl
4. Rest of product yield at 12%, conservatively we use Mogas 95 cracks USD 4.50/bbl
Gross refining margin:
= (0.46 x 46.5 ) + (0.07 x 36.0) + (0.35 x 4.5)+ (0.12 x 4.5)
= 21.39 + 2.52 + 1.57 + 0.54
= US $ 26.02 / brl
.................
Gross Profit at above derived present refining margin
= (10.7 million barrel sales per qtr) x ( US $26.0/brl) x (MYR 4.45/USD)
= 1.238 Billion MYR
...................
If there is still derivative loss for Diesel above, we can expect derivative gain for Gasoline. It would be certainly fair to assume that it can only be gain (as HY hedged at USD 12/brl for gasoline) and at the minimum it would be fair to assume zero hedging loss/gain.
Using worst scenario,
the PBT would be:
= 1.138 Billion MYR
PAT would be: = 853 Million MYR, EPS = 2.84 for Q3
..................
accounting cash flow hedge loss of Q2 at 244 million
the PBT would be:
= 894 Million MYR
PAT would be: = 670 Million MYR, EPS = 2.23 for Q3 ( still exceeding Q2)
2) WHY SHARE PRICE HESITATING FROM MOVING UP DESPITE DELIVERING Q2 2022 EPS OF RM2.2?
Its because of the below figure highlighted yellow on its Income Statement and majority of investors are spooked by its meaning and worried if it will fall into P&L statement later affecting EPS of Q3 results:
The below are comments from some of the experts on accounting we can find in i3:
Comments by Mr. Rabbit2 on Cash flow hedge and Cost Of hedging :
..............
The reason why all these movements in reserves were recognized in other comprehensive income instead of pnl are to reduce volatility in pnl since they are non-operational in nature, and it serves the purpose as intended.
...
Cash flow hedge reserves will be recycled to profit to match it hedging purpose when transactions ended, translation reserves will be recycled to profit only when you dispose of a subsidiary with reporting currency denominated in foreign currency. Cost of hedging reserves which is the movement in the basis swap spread will unlikely recycle to profit unless it is terminated. That amount of losses will slowly write down to eventually become zero on the contract maturity date. This is mark to market I.e. when matured, no more forward element, only spot element.
...
Losses recognized on derivatives held for hedging is not a concern. Do not expect the losses on cost of hedging to recycle to pnl unless the contract is terminated. Losses on cash flow hedge will be recycle to pnl to offset the gain on the spot market whereas losses on cost of hedging will be gradually reset to zero when near to the contract maturity dates.
....
The marked to market loss on spot element is reflected in the cash flow hedge reserve. However the marked to market loss on forward point element (i.e. basis swap spread) is reflected in cost of hedging reserve which I explained to your friend OTB 3 months ago.
HRC is applying MFRS 9 hedge accounting rule i.e. the noise created in basis swap spread is reflected in other comprehensive income.
Whatever mark to market derivative loss/gain at quarter closing date spot price when mature at the maturity date will become realised derivaties loss/gain at maturity spot price against hedge price. This realised derivatives loss/gain will then result in physical gain/loss in gross profit. (Revenue - purchased) the net result actually cancel each other.
This is unlike speculation where you do not have physical goods to sale and purchase
Comments from Mr. Sslee with reference to the below to explain reason Q2 Cost of hedging was 834 million reported as unrealized loss:
....
Posted by Sslee > Sep 2, 2022 8:59 AM | Report Abuse
Dear probability,
The outstanding Refining margin swap contract as on 30/06/2022
Notional amount: USD 226,945,000
Assets: RM 261,065,000
Liabilities: RM 1,751,332,000
Hence unrealized loss RM (1,751,332,000-261,065,000) = RM 1,490,267,000
On 30/06/2022:
Mogas92 crack spread: USD 31.578
Diesel crack spread: USD 56.125
Average of the two USD (31.578+56.125)/2= USD43.85
USD to MYR: 4.397
V: Volume of outstanding refining margin swap contract (Barrels)
A: Average outstanding margin per barrel hedged (USD)
Equation:
from notional amount: V x A=226,945,000 or V=226,945,000/A
from unrealized loss: V x (43.85 – A) = 1,490,267,000/4.397
226,945,000 x (43.85 – A) = 338,928,133 x A
9,951,538,250= (338,928,113 + 226,945,000) x A
A= 9,951,538,250/565,873,133
A= 17.586
V=226,945,000/17.586
V=12,904,746
If you use only Mogas92 crack spread: USD 31.58
Equation:
V x A=226,945,000 or V=226,945,000/A
V x (31.58 – A) = 1,490,267,000/4.397
226,945,000 x (31.58 – A) = 338,928,133 x A
7,166,923,100= (338,928,113 + 226,945,000) x A
A= 7,166,923,100/565,873,133
A= 12.665
V=226,945,000/12.665
V= 17,918,718
Using above logic, Q3 commodity crack which had almost reverted to end of Q1 crack (or lower as for the case of gasoline), will no longer result with such huge Cost of Hedging as reported 834 million unrealized loss in Q2.
This will likely revert to zero, positive or at worst back to Q1 level of 110 million loss earlier.
Refer crack spread chart below to verífy it yourself on the crack spread figures now compared to end of Q1 22:
ADDITIONAL EXPLANATION BY PROBABILITY:
The reason why HY shows large unrealized loss on Cost of hedging reserve (COHR) is because it has around 18 million barrels of refined products, e.g Gasoline crack spread that is hedged for next 24 months at 12.7 USD/brl margin.
This is the Refining Margin Swap Contract (RMSC) shown as USD 227 million (USD 12.7 crack x 18 million barrels hedged).
As per accounting rules, this hedged contract (RMSC) has to show the opportunity lost / gained presuming the current crack spread of these refined products at the end of reporting Q2 22' (30 June) persist indefinitely till all hedging contract matures (more than 24 months).
Unrealized Cost of Hedging Reserve (COHR) , loss / gain: (A-M) x V
A = hedged crack spread value, 12.7 USD/brl
V = barrels volume of refined products hedged, 18 million
M = Market pricing of the hedged refined product at end of reporting period (mark to market)
Since at the end of June 22', the avg crack spread of the refined products, e.g gasoline at 31.6 USD/brl, the opportunity lost for the period of hedging is
Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 31.6) USD/brl x 18 million barrels
= - 338 million USD or MYR 1,490,267,000
The above is what reported as (Asset 261,065,000 - Liabilities 1,751,332,000)
The above after taxation is placed into 'Other comprehensive
(expense)/income' , reported as Cost of hedging reserve (net of tax).
...
Now lets see what happens, when Gasoline crack drops to its usual average of 5.7 USD/brl (currently its about 7.8 USD/brl)
Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 5.7) USD/brl x 18 million barrels
= 90 million USD or gain of MYR 395,000,000
When its a loss, COHR only shows the 'greater opportunity lost' compared to smaller opportunity gained by hedging - by locking down the margin.
When its a gain, COHR only shows the 'benefit of opportunity locked' compared to if you had not locked the opportunity available earlier.
As such, we can see why the above is not reported in P&L statement. It really does not matter - as what Rabbit2 said it becomes zero on maturity.
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Discussions
3 people like this. Showing 50 of 181 comments
When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?
https://www.youtube.com/watch?v=arCSncmfB8k
2022-09-08 00:15
HY delivered the best ever EPS (at almost half of its market cap)....
and yet, purely due to GROSS MISPERCEPTION on the meaning of the below two clauses, it has market thinking HY earnings will revert back to its earlier earnings.
1. Cash flow hedge reserve (CFH), &
2. Cost of hedging reserve (COHR)
...............
The figures of the above reported in OCI of HY Q2 results, was purely to do with the effects of the Refining Margin Swap Contract (RMSC) that HY had entered.
Cash flow hedge (CFH) are simply ineffective (loss/gain) hedge portions of the RMSC which has been liquidated (settled) as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.
Only when physical sales & purchase of the commodity takes place it can be reflected on P&L statement.
Reference:
'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'
https://www.youtube.com/watch?v=arCSncmfB8k
Whereas, Cost of hedging reserve (COHR) is simply the following:
Forward looking Mark-to-market estimate of the difference between the fixed price (hedged) and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate determined by the producer.
If one understands the above, it shall be perfectly clear why both (CFH & COHR) are not reported in P&L statement.
Think about it - if its a real loss they will surely reflect it as and when its known on P&L instantly.
2022-09-08 01:09
Probability and Sslee, both of you have done a good job in educating us on HY financial derivatives. My many thanks to both of you.
Just hold on to your shares, there are greater forces at play in this counter.
2022-09-08 11:20
Do not know the reasons why there are many sellers.
I hope the program selling should be over soon.
Otherwise, it is very difficult for the share price to move up.
Many investors have poor knowledge on refinery stocks, they thought the crude oil price drops will affect refinery profit.
The crude oil price drops is a good news to refinery stock.
2022-09-08 14:42
HEDGE ACCOUNTING & how it is reported on OTHER COMPREHENSIVE INCOME (OCI)
https://www.youtube.com/watch?v=w5P_M9fWqGg
The above simple example for ORANGES can be viewed as CRUDE OIL for HY where the hedge is going LONG (the higher the future price, the higher the gain)
For refined products hedge, it is about going SHORT, the higher the future price, the greater the loss.
The net effect of both above is what reported by HY under their OCI.
Now that the refined oil products price (gasoline) had significantly retreated from the peak of 30th June, if it remains the same till end of Sept, Q3 will report huge gain on OCI
2022-09-09 02:15
If u invest in Petrol Refinery, u are talking about a lifespan of 12 to 15 yrs b4 it is render obsolete with EV loh!
Thus strategically there should no more big capex spend on refinery mah!
Naturally Refinery will be need to be high, bcos of no more new capacity, as no one willing to invest loh!
Thus valuation of Refinery should not be on PE loh....it should be based on discounted cashflow over 15 yrs loh!
Lu tau boh ??
2022-09-09 10:42
Truth cannot be suppressed very long, the earlier one investigates and verify what is the truth the more upper hand one will have
the longer one waits the higher the odds are for others to find out ahead of you..
....
HEDGE ACCOUNTING & how it is reported on OTHER COMPREHENSIVE INCOME (OCI)
https://www.youtube.com/watch?v=w5P_M9fWqGg
The above simple example for ORANGES can be viewed as CRUDE OIL for HY where the hedging is done with the intention of going LONG (the higher the future price, the higher the gain)
For refined products hedge, it is for going SHORT, the higher the future price, the greater the loss.
The net effect of the above two is what reported by HY under their OCI.
The Cash Flow Hedge (CFH) in OCI shows the hedging gain / loss for the hedged position which are closed, but the corresponding physical market transaction (change in ownership of the goods) is yet to take place to deliver the available market gross profit which is then offset by this hedging gain / loss on CFH to give the P&L exactly as it has been hedged initially.
The Cost of Hedging Reserve (COHR) on the other hand shows the hedging gain / loss for all the balance hedged position (yet to be closed) from the notional amount (refining margin swap contract RMSC), where the corresponding physical market transaction will take place within the maturity period (next 24 months) assuming the hedging positions are closed as per current spot rate.
As such, COHR is a highly hypothetical figure that changes significantly as per the market spot price of the commodity (mark-to-market) when the financial reporting period is closed.
............
Now that the refined oil products price (gasoline) had significantly retreated from the peak of 30th June, if it remains the same till end of Sept, Q3 will report huge gain on OCI
If prices of refined products relative to crude (the crack spread) are back to Q1 22, 30th Mar level, cost of hedging reserve shall be exactly back to the figure reported in Q1 22 results for Q3 22.
2022-09-09 19:23
Understanding why Prominent Previous Refinery Owner in Msia like Shell & Esso do not do hedging ?
1.The traditional business model of hardcore refinery are simple loh!
They buy physical crude & refine it to physical petrol & diesel and sell at price base on formula with reference to Crude Price, Exchange Rate & Crack Spread fixed by Msia Govt and make money mah!
They do not do fwd hedging n their natural hedge is the inventory they have in hand & their refinery to quickly efficiently process the crude to mainly Petrol & Diesel & quickly sell base on the fixed formula the msia Govt had set loh!
Now with the introduction of Hengyuan, it has modified the refinery model as follows loh!
1. Traditional Refinery Business Model as highlighted above.
2. Virtual Refinery Business Model using Paper Derivative as an investment & hedge to generate profit to be discussed below loh:
2.Virtual Refinery Business model thru pure hedging & derivative loh!
Do u notice that Hengyuan lose alot of monies consistently most of the time despite, mathematical computation on paper the derivative & hedge is highly profitable as per feedback of SSLEE and Probability leh ?
This is bcos the paper computation derivative & hedge shows profit do not reflect the reality situation & business dynamics of the trade loh! Reasons are as follows loh:
The Virtual Refinery Purchase its future crude by purchasing from NYMEX & compute it sells on Nymex sell price of Petrol & Diesel which showed a good profit when doing its hedge but how come this trade fail & registered big losses at the end leh ?
1. The mkt is very dynamic loh! On paper u may see big virtual profit by hedging future crude purchase & future sell of petrol & diesel end products....but when time come for settlement in turnout to be a loss loh!
Why leh the complete hedge trade of buying & selling here cannot convert to a easy profit, like paper indicated leh ?
a. This is bcos the movement of future crude purchase price, do not completely correlate to the selling future price of petrol & diesel price due to huge mkt volatility mah! Just within a day the business dynamic may change loh! Like within 1 day the Crude Price go up 10% whereas the Petrol & Diesel selling future price did not move at all or vice versa loh!
b. The trade initiated are pure paper swap with no delivery of physical goods, thats why it may not reflect the real dynamic of a real physical refinery mah!
c. Even it involve actual delivery of the commodities, there are extra cost & logistic to bring this commodities for processing to convert it to a profit mah!
d. Thus the virtual refinery of Hengyuan business model has shown consistent losses bcos of this challenges discussed above loh!
2022-09-10 08:54
If the virtual refinery of buying crude future & hedging it buy selling future petrol & diesel with a good paper profit computed by SSLEE & Probability really work, then General Raider will make billions just with Rm 10 million....by just doing repeating regular hedge base on the formula advocated by Probability & SSLEE mah!
If that is highly successful....Raider will become a billionaire, bcos it is risk free....bcos everything is hedge......with good reasonable paper profit, when the hedge is done mah!
Then why we need a refinery leh ??
The truth it is not true mah!
The deal done ....is actual speculative & unsustainable... despite fully hedge loh!
The situation & dynamics.. does not applies only to CRUDE & Petroleum mkt...but will apply to every commodity like Palmoil, Soyabean Oil, Metal etc loh!
U can do it on paper & completely hedge on paper with a reasonable profit....but the end still did not make money loh!
Thats is the reasons why....NOBLE....a large listed company in singapore dealing with trading of commodities go bankrupt despite having all the software & resources to support its trade loh!
I think sifu like SSLEE & Probability are just naive....by claiming a fully hedge position will make monies loh!
That is the reasons why ESSO & Shell refuse to do hedging loh!
Also that is the reasons why hengyuan registered a huge unrealised hedging losses on its derivative loh!
And this is beside the risk of raider fear of hengyuan intention of siphoning money loh!
2022-09-10 08:54
Why Gasoline margin came down but its not so easy for Diesel?
............................................................
EU refinery are 90% simple type, asians like HY are mainly complex type
for simplicity they product yields are as per below:
keyword note - this output ratio cannot be altered
Simple refinery:
...............
40% Gasoline (crack spread : 7 USD/brl)
20% Diesel (crack spread: 50 USD/brl
10% Jet Fuel and other (crack spread at: 20 USD/brl)
30% Fuel Oil ( crack spread : - 25 USD.brl)
avg margin: 7.3 USD/brl
Complex refinery:
.................
30% Gasoline (crack spread : 7 USD/brl)
50% Diesel (crack spread: 50 USD/brl
18% Jet Fuel and other (crack spread at: 20 USD/brl)
2% Fuel Oil ( crack spread : - 25 USD.brl)
avg margin: 30 USD/brl
Due to good margin in refining in Q2 for all refined products including gasoline, everywhere refinery had increased their output by maximizing utilization rate at 99%..
by July gasoline supply had risen more than demand (user of gasoline have the choice to limit their consumption by say working from home)
but despite refineries squeezing all they can on output, the diesel supply still cannot meet demand (diesel mainly used for transportation and manufacturing industry)
Now at this limit of refining output (intentionally delaying maintenance), the diesel is still short...
results is lower crack spread for gasoline and still high crack spread for diesel...
keypoint:
.........
now, at the above low avg refining margin due to fuel oil, its likely that EU refinery will reduce output if gasoline crack is too low, further reducing diesel availablity
Its like natural mechanism in place to sustain Diesel & Jet fuel margin
unless logistics industry, airlines and manufacturing itself slows down due to high price..its unlikely diesel & Jet fuel crack to come down
thats why its actually good for oil price to come down to sustain business and thus demand for benefit of refineries
2022-09-10 10:46
Both Gasoline & diesel future price came down, thats why the future crack spread for Mogas 92 is so low mah!
Lu tau boh ?
Posted by probability > 29 seconds ago | Report Abuse
Why Gasoline margin came down but its not so easy for Diesel?
............................................................
EU refinery are 90% simple type, asians like HY are mainly complex type
for simplicity they product yields are as per below:
keyword note - this output ratio cannot be altered
Simple refinery:
2022-09-10 10:48
One more thing...people need to take note loh...!!
Even if Nymex....has high future Gasoline & Diesel Price...it does not translate to high margin for hengyuan mah, bcos the govt do not use USA & Europe nymex future price for gasoline & diesel....in fixing the selling price of the refinery mah!
The Govt use Crude oil price, exchange rate and MOGAS 92 crack spread to fix the refinery fix selling price mah!
Do not let Probability spin U loh!
2022-09-10 10:55
Thus what is the relevant of the nymex high future Gasoline & Diesel Price leh?
It is for those who theoritically want to make money from hedging by buying....crude oil nymex future & hedge the position by selling the future price of gasoline & diesel in nymex loh!
As i says....although on paper ....this look attractive....but it is not always....end up profitable loh!
The REASONS why ?
2.Virtual Refinery Business model thru pure hedging & derivative loh!
Do u notice that Hengyuan lose alot of monies consistently most of the time despite, mathematical computation on paper the derivative & hedge is highly profitable as per feedback of SSLEE and Probability leh ?
This is bcos the paper computation derivative & hedge shows profit do not reflect the reality situation & business dynamics of the trade loh! Reasons are as follows loh:
The Virtual Refinery Purchase its future crude by purchasing from NYMEX & compute it sells on Nymex sell price of Petrol & Diesel which showed a good profit when doing its hedge but how come this trade fail & registered big losses at the end leh ?
1. The mkt is very dynamic loh! On paper u may see big virtual profit by hedging future crude purchase & future sell of petrol & diesel end products....but when time come for settlement in turnout to be a loss loh!
Why leh the complete hedge trade of buying & selling here cannot convert to a easy profit, like paper indicated leh ?
a. This is bcos the movement of future crude purchase price, do not completely correlate to the selling future price of petrol & diesel price due to huge mkt volatility mah! Just within a day the business dynamic may change loh! Like within 1 day the Crude Price go up 10% whereas the Petrol & Diesel selling future price did not move at all or vice versa loh!
b. The trade initiated are pure paper swap with no delivery of physical goods, thats why it may not reflect the real dynamic of a real physical refinery mah!
c. Even it involve actual delivery of the commodities, there are extra cost & logistic to bring this commodities for processing to convert it to a profit mah!
d. Thus the virtual refinery of Hengyuan business model has shown consistent losses bcos of this challenges discussed above loh!
2022-09-10 11:05
Thats why Raider split the business of Hengyuan into 2 parts loh!
1. Physical Refinery....where u deal with the physical products like crude & petroleum products like physical gasoline & diesel.
2. Virtual Refinery....that deal with virtual business....like speculative derivative & hedging business mah!
Usually hedges....u match with all the derivatives in order to try to make....swap trading profit loh!
2022-09-10 11:11
Do not get kon loh!
Remember even if there is any hedging gain due to the hedge will be use to covered more than Rm 1.3b hengyuan unrealized hedging losses mah!
Thus with current physical low crack spread MOGAS 92.....the low margin will unlikely to translate into any good operating profit for hengyuan in q3 loh!
2022-09-10 11:23
Sustainability?
...............
what a state of chronic paranoia due to past volatility on earnings of refinery
one shall talk about sustainability of earnings when stocks are trading above PE 20 may be..or the least PE 10
panicking now for a stock that barely moved up from its historic avg low?
refinery stock like HY only needs 13 USD/brl avg refining margin to deliver EPS above RM 1 consistently
now its averaging above 26 USD/brl
and we dont need RM 1 EPS per qtr to justify current price, even 40 cents consistently would do...
there are too many structural changes GLOBALLY that indicates constraints will remain due to shortage in global refining capacity and takes years (more than 5 years to build a refinery and investors are not keen despite high margin currently) unlike gloves for supply to catch up with demand...
its earnings can certainly be volatile, but the mean avg of the crack is expected to be significantly higher than previous years as intermittent shortage due to refinery maintenance, break down etc is high....
as such the odds of margin spiking intermittently is just too high going forward
this especially so considering russian sanction (which is the core of the structural changes that we are basing here)
keyword: sanctions are expected to last years
............................................
there are no such thing as a business being inherently sustainable without such structural factors...any business including tech stocks can have its margin eroded significantly within a short a time
2022-09-10 11:25
Remember i have mentioned....the Net Present Value of Petron at DCF 8% pa for 12 years is Rm 11.00 per share.
Thus the Petrol station should worth Rm 6.00 & the refinery is Rm 5.00 loh!
The Petrol station command higher valuation for its more stability in earnings just like Prtdag mah!
2022-09-10 11:29
Cash flow hedge & Cost of hedging reserve
Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated (effective portion) as of 30th June and awaiting (highly probable) respective physical market transaction to take place to offset these hedging losses.
Whereas, Cost of hedging reserve (COHR) is simply the following:
Forward looking Mark-to-market estimate of the difference between the fixed price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate.
Even if we assume the RMSC covers complete Gasoline production capacity of 35% yield x 10.6 million, 3.7 million barrels, you are securing the below gross profit after hedging losses or gain.
= 3.7 million x 12.7 USD/brl x 4.45 ex
= 209 million MYR.....(1)
No matter what the figures are reported on CFH & COHR, they are purely trying to show the greater opportunity lost / gained due to the hedging but the profit contribution remains the same as initially wanted when the hedging was done.
The CFH shows how much 'opportunity for greater profit than 209 million / per qtr' is confirmed loss while COHR shows potential loss if the scenario prolongs indefinitely for the balance notional value.
For every negative value on CFH & COHR that will take place, there will be equally higher gross profit (precise reason for the hedging loss forecasted in the first place) in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.
2022-09-10 19:21
@Aseng,
the below is simplified description for your current reading, i will try to put in even more simpler wordings and post later.
These losses you are seeing in simple terms are just like fair value gain or losses of an asset but it purely shows the change in its value without considering the value of the asset.
These asset HY deals with is not like ordinary property but, hedged margin in futures (with distributed maturity) which is utilized along with physical market sales & purchase transaction in parallel.
Hengyuan had hedged 18 million barrels at avg 12.7 USD/brl refining margin to be effected as it matures at the rate of 0.8 million barrels per month. This is mainly for gasoline.
This is indicated by the Refining margin Swap contract (RMSC) of USS 226 million as can be seen on their financial report.
USD 226 million = USD 18 million x USD 12.7/brl
The fair value changes with respect to the hedged value are reflected under Other Comprehensive Income (OCI) using Cash flow Hedge and Cost of hedging reserve as per IFRS 9:
These are basically forecasted derivative loss against mark-to-market margin in future as of 30th June.
....................
Since the market margin (in futures) as of 30 June 22 was extraordinarily high at $ 32/brl. The expected hedging losses for gasoline going forward was high and reported accordingly.
Hedging loss:
(hedged margin - spot margin) x hedged barrels
= (12.7 USD/brl - avg 32 USD/brl) x 18 million barrels
= - USD 347 million
= - 1.5 Billion MYR
This is not a real loss, but expected 'ópportunity loss' due to hedging and thats why it is not reported in P&L.
The above forecasted losses when occurs in future, it is accompanied by greater gross margin where after offsetting these losses, it will deliver the profit margin in P&L as per the original hedge value of 12.7 USD/brl
As such, these forecasted loss done at end of each financial report would over-turn completely when gasoline margin dives down..
Refer below link which is presently showing $ 5.2/brl in Sep 2022 to $ 4.3 /brl in Dec 2023.
At end of June it was showing avg $ 32/brl
link:
.....
www.cmegroup.com/markets/energy/refined-products/singapore-mogas-92-unleaded-platts-brent-crack-spread-swap-futures.html
At end of Sept 22' (for Q3), if the spot margin value above maintains, you have
Hedging gain:
= (12.7 USD/brl - avg 4.5 USD/brl) x 18 million barrels
= USD 147 million
= 650 million MYR
Posted by Aseng > Sep 10, 2022 3:14 PM | Report Abuse
Probability, I do not what is going on here . I was attracted by the calculated earning 222 per share, but I am perlexed by the unrealized hedging loss of 360 sen per share. can you kindly clarify in a layman language how is the hedging gain/loss can be ignored totally to evaluate the earning potential of hengyuan. it is unfair for the readers to be mislead or misinformed by a good earning with a big paper loss . thank you
2022-09-10 19:21
Cash flow hedge & Cost of hedging reserve
Cash flow hedge (CFH) are basically hedged portions of the RMSC which are effective as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.
https://www.youtube.com/watch?v=Drn7hZEPOCc&t=3s
Whereas, Cost of hedging reserve (COHR) is a forecast for the balance hedged portion that is yet to be effective (forward portion):
https://www.youtube.com/watch?v=Psy21ZJlCoI
Forward looking Mark-to-market estimate of the difference between the hedged price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate.
No matter what the figures are reported on CFH & COHR, they are purely trying to show the greater opportunity lost / gained due to the hedging but the profit contribution remains the same as initially wanted when the hedging was done.
The CFH shows how much 'opportunity for greater profit than the hedged profit' is confirmed loss while COHR shows potential loss if the scenario prolongs indefinitely for the balance notional value.
For every negative value on CFH & COHR that will take place, there will be equally higher gross profit in future physical market transaction where after deducting the hedging loss anticipated, you will report the same hedged margin for gasoline.
2022-09-10 20:44
Column: U.S. diesel stocks critically low after failing to recover over
https://www.reuters.com/markets/commodities/us-diesel-stocks-critically-low-after-failing-recover-over-summer-kemp-2022-09-09/
LONDON, Sept 9 (Reuters) - U.S. inventories of diesel and other distillate fuel oils are now critically low after failing to recover during the summer driving season.
The shortage will keep upward pressure on diesel refining margins and prices unless and until the global economy and distillate consumption slows significantly.
Distillate inventories amounted to just 112 million barrels on Sept. 2, according to high-frequency data published by the U.S. Energy Information Administration (EIA).
Stocks are down from 134 million barrels at the same point in 2021 and at the lowest level for the time of year since 1996 ("Weekly petroleum status report", EIA, Sept. 8).
Stocks have barely recovered from a low of 104 million barrels in early May despite large volumes of crude processing over the summer as refiners met seasonal demand from motorists for gasoline.
The seasonal accumulation of distillate inventories since the end of June has been one of the smallest in the last 30 years, pointing to a persistent underlying shortage (https://tmsnrt.rs/3B26Xbm).
Domestic consumption is muted and running around 200,000 barrels per day (bpd) below the pre-pandemic five-year seasonal average.
But exports remain high as refiners respond to shortages around the world caused by the rapid rebound from the pandemic, disruptions caused by Russia's invasion of Ukraine, and China's coronavirus lockdowns.
Net exports were almost 1.3 million bpd in the five weeks ending on Sept. 2 compared with around 0.8 million bpd at the same point in 2021.
U.S. refiners have a window to boost inventories over the next few weeks by prolonging high crude processing rates for longer after the summer than normal and switching units from max-gasoline to max-distillate mode.
But the shortage of distillate fuel oils is worldwide with stocks at their lowest level for more than a decade in Europe and Asia.
Europe's distillate inventories are down 68 million barrels compared with 2021 at the lowest seasonal level since 2002.
Only a global slowdown in manufacturing and freight transportation will rebuild stocks to more comfortable levels and abate the upward pressure on refinery margins and oil prices.
.......
Keyword - ONLY A 'GLOBAL' SLOWDOWN
2022-09-11 13:12
Diesel prices are likely to climb again soon
September 8, 2022
https://www.shiplilly.com/blog/sorry-diesel-prices-are-likely-to-climb-again-soon/
2022-09-11 13:16
@not so pandai raider...
Understanding the Cost of Hedging
https://www.treasuryandrisk.com/2021/10/13/understanding-the-cost-of-hedging/?slreturn=20220811021228
Why Hedge Performance Is Not the Right Measure of Cost
.......................
Individuals less familiar with hedging may think that the cost of a hedge is equal to the monetary gain or loss upon settlement of the derivative. This is not an accurate assessment, as it ignores the fact that hedging is ultimately meant to reduce risk and uncertainty.
Consider a company that is planning a bond transaction. In one month, the organization will issue a $1 billion, 10-year bond at 3.5 percent. The treasurer is worried that interest rates may rise over the next month, making the bond more expensive than expected, so she decides to partially hedge that risk using $500 million worth of 10-year treasury locks. If rates rise, the derivative will be an asset that offsets the increased interest rate at issuance, reducing the financial impact that market shift has on the company’s new debt.
By contrast, if rates fall, the derivative will become a liability; the bond will be priced better than expected, and the derivative will look like an unnecessary cost. Suppose rates fall by 50 basis points (bps) from the time the hedge is executed until the time the bond is issued. The bond issuance will be executed at 3.0 percent, and the derivative will be a liability of roughly $2.5 million. However, that is only half the story. Amortizing the termination value of the hedge over the life of the financing results in an effective cost of debt of roughly 3.25 percent, which is still better than the original expectation of 3.5 percent.
Some executives facing such a scenario will view the hedge as costly because it ultimately was not needed. This is not the right perspective. The purpose of the hedge was to reduce risk in future outcomes, giving the company greater certainty around cost of capital planning. Think about the opposite scenario: If rates had risen 50 bps instead of falling, the hedge would have been an asset worth roughly $2.5 million, and the effective cost of debt would have been roughly 3.75 percent—higher than the original expectation because only half of the issuance was hedged. In this case, would the treasurer be happy that the hedge was an asset, even if the cost of financing was higher than anticipated?
In both scenarios, the hedge serves its purpose by reducing the potential volatility of future issuance outcomes and narrowing the band of possible issuance rates. By keeping in mind that derivatives are meant to reduce risk, companies can move away from measuring the costs of their hedging programs using gains and losses.
2022-09-11 14:26
Cost of hedging only shows the potential loss / gain on the 'hedged instruments' in the future in OCI, but it does not show the reverse gain / loss on 'hedged items' that negates this as it takes place in parallel in the future....
hedged instruments and hedged items always goes on opposite direction to offset each other - that is the basic fundamentals of hedging.
2022-09-11 14:41
Lets play dumb & assume naively SSLEE & PROBABILITY use their computation is going to work & Raider can be billionaire if can use their hedging model disciplinary and steadily below loh!
If the virtual refinery of buying crude future & hedging it buy selling future petrol & diesel with a good paper profit computed by SSLEE & Probability really work, then General Raider will make billions just with Rm 10 million....by just doing repeating regular hedge base on the formula advocated by Probability & SSLEE mah!
If that is highly successful....Raider will become a billionaire, bcos it is risk free....bcos everything is hedge......with good reasonable paper profit, when the hedge is done mah!
The Virtual Refinery own by raider will Purchase its future crude by purchasing from NYMEX & compute it...& sells on Nymex sell price of Petrol & Diesel which showed a good profit on paper when doing its hedge...the same hedge can be done...vice versa when crude is selling at a premium to Diesel & Petrol loh!
With this model Raider effectively do not really need a refinery mah!
Just by using the hedging....Raider can do the trick of making money without any need of any refinery mah!
BUT LETS FACE IT LOH....IT IS NOT SO SIMPLE IN REAL LIFE LOH!
The truth it is not true mah!
The deal done ....is actual speculative & unsustainable... despite fully hedge loh!
The situation & dynamics.. does not applies only to CRUDE & Petroleum mkt...but will apply to every commodity like Palmoil, Soyabean Oil, Metal etc loh!
U can do it on paper & completely hedge on paper with a reasonable profit....but the end, it still did not make money loh!
Thats is the reasons why....NOBLE & Hin Leong....2 large listed company in singapore dealing with trading of commodities go bankrupt despite having all the capital, software & resources to support its trade loh!
I think sifu like SSLEE & Probability are just naive....by claiming a fully hedge position will make monies loh!
That is the reasons why ESSO & Shell refuse to do hedging loh!
Also that is the reasons why hengyuan registered a huge unrealised hedging losses on its derivative loh!
Beside this risk of raider fear of siphoning money loh!
HEDGING....RAIDER NEED TO UPDATE U LOH!
THE HEDGING TRADE THAT HENGYUAN HAS DONE IS NOT REALLY DONE PROFESSIONALLY & SAFELY LIKE WHAT RAIDER HAD DONE FOLLOWING THRU REPUTABLE MKT LIKE NYMEX or CME LOH!
THE HENGYUAN REFINING MARGIN SWAP IS FLOW THRU ONE COUNTER PARTY AGENT IN SINGAPORE LOH!
ACTUALLY THERE IS NO REFINING MARGIN SWAP AVAILABLE IN THE REPUTABLE MKT LIKE IN NYMEX OR CME MAH!
IT IS JUST AN ARRANGEMENT BETWEEN HENGYUAN WITH A PRIVATE PARTY LOH!
THUS THIS TYPE OF DEALS WILL HAVE MUCH LESS ASSURANCE & IT CAN BE AN EASY DEVICE FOR SIPHONING CASH- THIS TYPE OF DEAL CAN BE EASILY STRUCTURED MAH!
THUS WE SHOULD BE VERY CAREFUL WITH THIS TYPE UNCONVENTIONAL PRIVATE REFINING MARGIN SWAP LOH!
ACCORDING RAIDER SIFU SENIOR ANALYST & CONFIRMED BY 009 INVESTIGATION TEAM, THEY HAVE INFO TO SUSPECT , THAT THE COUNTER PARTY IS A PRIVATE CHINESE PARTY OPERATING IN SPORE WHO HAVE A VERY CLOSE RELATIONSHIP WITH THE HENGYUAN CHINA OWNER LOH!
JUST BE VERY CAREFUL WITH REFINING MARGIN SWAP LOH!
2022-09-11 15:00
aiyo @raider...why u so not so pandai?
..think you drinking too much Baijiu leh..
how to make money using hedging instruments alone?
you really need to meditate...take a deep breath liao...
understand how refining margin hedging works first
go through the below and check yourself can you make money just buy playing with the hedging instrument consistently - both on the refined product gasoline and crude without a physical refinery?
..............
Extract from below article:
www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html
Fixing Refiner Margins Through a Simple 1:1 Crack Spread
In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.
In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.
The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.
Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).
Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.
The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.
2022-09-11 15:11
Just becareful loh!
The Hedging is done thru a Private Refining Margin Swap....thru a chinese counter party in SPORE loh!
It is one to one bets loh!
Be very careful mah!
2022-09-11 15:14
Why need to be very careful with "Private Refining Margin Swap" ?
Even in the event, we are highly successful with the trade and make billions- The Private Counter Party....can simply just default and nothing we can do loh!
The huge sum of money, that Hengyuan is betting...to tune of Rm 1.3 billion losses, is just ridiculous mah!
Posted by stockraider > 2 minutes ago | Report Abuse
Just becareful loh!
The Hedging is done thru a Private Refining Margin Swap....thru a chinese counter party in SPORE loh!
It is one to one bets loh!
Be very careful mah!
2022-09-11 15:27
Ya how do u handle the high risk highlighted below leh ?
Why need to be very careful with "Private Refining Margin Swap" ?
Even in the event, we are highly successful with the trade and make billions- The Private Counter Party....can simply just default and nothing we can do loh!
The huge sum of money, that Hengyuan is betting...to tune of Rm 1.3 billion losses, is just ridiculous mah!
Posted by stockraider > 2 minutes ago | Report Abuse
Just becareful loh!
The Hedging is done thru a Private Refining Margin Swap....thru a chinese counter party in SPORE loh!
It is one to one bets loh!
Be very careful mah!
Posted by probability > 2 seconds ago | Report Abuse
ALREADY EXPLAINED how the derivative loss figure in OCI comes about mah!!
NEED A FUNCTIONING BRAIN TO UNDERSTAND Lorrr!!!
..................
Hengyuan had hedged 18 million barrels at avg 12.7 USD/brl refining margin to be effected as it matures at the rate of 0.8 million barrels per month. This is mainly for gasoline.
This is indicated by the Refining margin Swap contract (RMSC) of USS 226 million as can be seen on their financial report.
USD 226 million = USD 18 million x USD 12.7/brl
The fair value changes with respect to the hedged value are reflected under Other Comprehensive Income (OCI) using Cash flow Hedge and Cost of hedging reserve as per IFRS 9:
These are basically forecasted derivative loss against mark-to-market margin in future as of 30th June.
....................
Since the market margin (in futures) as of 30 June 22 was extraordinarily high at $ 32/brl. The expected hedging losses for gasoline going forward was high and reported accordingly.
Hedging loss:
(hedged margin - spot margin) x hedged barrels
= (12.7 USD/brl - avg 32 USD/brl) x 18 million barrels
= - USD 347 million
= - 1.5 Billion MYR
This is not a real loss, but expected 'ópportunity loss' due to hedging and thats why it is not reported in P&L.
The above forecasted losses when occurs in future, it is accompanied by greater gross margin where after offsetting these losses, it will deliver the profit margin in P&L as per the original hedge value of 12.7 USD/brl
As such, these forecasted loss done at end of each financial report would over-turn completely when gasoline margin dives down..
Refer below link which is presently showing $ 5.2/brl in Sep 2022 to $ 4.3 /brl in Dec 2023.
At end of June it was showing avg $ 32/brl
2022-09-11 15:32
REMEMBER THE COUNTER PARTY CAN JUST WALK OUT, IF LOSE THE HEDGING BACK AGAINST HENGYUAN MAH!
PAKAI OTAK LAH! NO RISK MEH ?
NO RISK MEH ?
Why need to be very careful with "Private Refining Margin Swap" ?
Even in the event, we are highly successful with the trade and make billions- The Private Counter Party....can simply just default and nothing we can do loh!
The huge sum of money, that Hengyuan is betting...to tune of Rm 1.3 billion losses, is just ridiculous mah!
Posted by probability > 59 seconds ago | Report Abuse
what risk leh?..that was FORECASTED loss end of June 22 mah!!
now the risk already disappear lorr...
now FORECASTED GAIN liao...
2022-09-11 15:38
PAKAI OTAK LAH!
THE COUNTER PARTY....DO NOT WANT TO HONOR....THE PRIVATE REFINING SWAP CONTRACT...IF IT LOSE ALOT OF MONIES TO HENGYUAN MAH!
THIS IS THE RISK MAH!
LU TAU BOH ?
2022-09-11 15:42
U ALA DENGAR BAIK BAIK KA ?
HENGYUAN MENANG MANYAK MANYAK...ON HEDGING....TAPI OLANG TAK BAYAR ...HOW ?
2022-09-11 15:47
Ini Info baru mah!
Lu tau boh ?
ACCORDING RAIDER SIFU SENIOR ANALYST & CONFIRMED BY 009 INVESTIGATION TEAM, THEY HAVE INFO TO SUSPECT , THAT THE COUNTER PARTY IS A PRIVATE CHINESE PARTY OPERATING IN SPORE WHO HAVE A VERY CLOSE RELATIONSHIP WITH THE HENGYUAN CHINA OWNER LOH!
2022-09-11 15:50
moral of the story....suspect veli penting mah!
Cautious very important mah!
Dulu Serba....olang pun suspect only meh ?
Apa macam sekarang ??
2022-09-11 15:56
U should not attack Raider mah!
Go & investigate the Private Refining Margin Swap Contract Dulu mah!
Go & find out more 1st loh!
For your own good mah!
2022-09-11 16:01
Correctloh!
"one more thing.............u don't know what prices those contracts and whether long or short were struck, the weightage and volumes for each month also not known. .........how can u calculate here and there....they say rubbish in rubbish out applies here."!
QQQ talk alot of sense below loh:
Posted by qqq3333 > 11 hours ago | Report Abuse
So my layman question.
If you hedge the refining margin at USD 12 - 20 per barrel from month july onward till maybe beyond 2022 up to 2023.
And current crack spread is only from usd 2 to 5 leh then how much money your refining magin swap contracts maturity on Sept will earned?
_≠==============
Sslee.....that is a silly question...u can as easily and as correctly stated your question as how much money u would have lost...
....no kidding....don't use the word hedging without any understanding what happened
one more thing.............u don't know what prices those contracts and whether long or short were struck, the weightage and volumes for each month also not known. .........how can u calculate here and there....they say rubbish in rubbish out applies here.
2022-09-12 08:18
Simple mah!
If U take all derivative valuation mark to mkt in June & flow thru P&L....base on the same high standard as Petron...then Hengyuan will make Q2 losses of Rm 412m or EPS loss of Rm 1.37 per share & Half year losses of Rm 475m or EPS loss of Rm 1.58 per share mah!
No need to bluff mah!
It is all back up by facts & figure mah!
2022-09-12 11:54
Value destruction happening in hengyuan summarise below
31-12-2020.....Nta per share Rm 7.22
31-3-2021.................................. Rm Rm 7.14
30-6-2021................................ Rm 6.75
30-9-2021............................ Rm 6.07
31-12-2021......................... Rm 6.83
31-3-2022..........................Rm 6.62
30-6-2022......................... Rm 5.25
Actually 30-6-2022 is the highest value of wealth destruction in Hengyuan despite reporting record operating qtrly profit eps of Rm 2.22 loh!
Why leh ??
Something is not right mah!
2022-09-12 12:41
Very important Question if u can answer then u will solve the mystery loh!
Btw...it is not an exchange....it is an individual counter party....having a private deal with Hengyuan mah!
Who is the sooohaaiiii counter party dare to bet one to one... with a refinery like HRC, on Refining margin on one to one bet leh ??
What is there for them, what is counter party their competitive edge over hengyuan leh ?
The huge sum of money, that Hengyuan is betting...to tune of Rm 1.3 billion losses, is just ridiculous mah!
2022-09-12 13:13
Why today Petron goes up but hengyuan do not leh ??
1. Petron with its refinery & petrol stations has better value than hengyuan loh! Just Petron Petrol station alone already worth Rm 6.50 per share & its refinery worth Rm 4.50 mah!.
2. Petron had paid higher & consistent dividend than hengyuan at 20 sen per share mah!.
3. Petron Qtr2 31-6-2022 result still reported a commendable net profit of 68 sen per share despite netting of hedging losses whrereas HRC reported a loss of eps Rm 1.37 per share after netting off hedging losses loh!
4. Petron are more well manage & less complicated compare to hengyuan, thus easy to understand & investor is more confident on Petron loh!
5. On hedging Petron adopt a more acceptable universal standard of forward exchange contract & commodity swaps route thru the banks base on over the counter arrangement (OTC} whereas Hengyuan has also Forward exchange contract & commodity swap route thru OTC with banks but it has this dubious Refinery Profit Margin swap done as private arrangement individual counter party loh! This Refinery Profit Margin Swap has generated a staggering more than Rm 1 billion losses at hengyuan loh!
2022-09-12 17:38
https://home.kpmg/de/en/home/insights/2020/10/super-contange-crude-oil.html
COST OF HEDGING RESERVE - IFRS9 (WHY IT CAME ABOUT)
Fair value hedge accounting and volatilities from inventory valuation. Price volatility on the commodity markets creates both opportunities and risks when trading or procuring commodities.
For companies in industries that are commodity-intensive or in commodity trading that according to IAS 2 are defined as "broker-traders" and that measure their inventories at fair value, price volatility causes the consolidated net income to become highly volatile. These volatilities arise from the fact that both inventories and derivative financial instruments (e.g. futures, forward contracts) must be recognized at fair value.
Inventories are measured at spot prices, whereas the fair value of derivative financial instruments is determined by the respective forward rate.
Even if a company procured its inventory at a "moderate" price, the market situation in the wake of Covid led to MASSIVE VALUE CHANGES DUE TO THE SHARP DROP IN SPOT PRICES in the inventory. As a result of the "broker-trader" rule, the inventory valuation resulted in a significant expense entry in the income statement.
Given the LARGE DIFFERENCES between the SPORT and FORWARD rates, the desired compensatory effect of existing financial hedging with futures or forward contracts mitigated volatility on the income statement only so much.
This begs the question of whether companies subject to the "broker-trader" rule could have mitigated their income statement volatility better by using fair value hedge accounting.
Employing fair value hedge accounting with a spot designation and simultaneously applying the cost-of-hedging approach means that the value changes of the spot component of the hedged item and the hedging instrument offset each other (ceteris paribus) for the duration of the inventory hedge.
In contrast, changes in the forward component are recognized in Other Comprehensive Income II under the cost of hedging approach and reclassified to the income statement over the duration of the hedging relationship (so-called cost-of-hedging approach; see IFRS 9.B6.5.29 et seq.)
This leads to a "smoothing" of the income statement over the term of the hedge, particularly for long-term hedging relationships, while significant changes in the forward component's value are not directly reflected in the income statement.
This has proven to increase the predictability of the company's earnings per reporting period.
2022-09-12 21:07
Rock bottom EPS analysis - update 13/09/22
.........................
let us assume as extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at extra low 10 USD/brl, with the balance free to capture market margin
1. Diesel at 46% yield, cracks USD 53/brl
www.tradingview.com/symbols/NYMEX-GZ1!/
2. Jet fuel at 7% yield, cracks USD 39/brl
www.tradingview.com/symbols/NYMEX-ASD1!/
3. Gasoline at 35% yield, cracks USD 9.7/brl
www.tradingview.com/symbols/NYMEX-D1N1%21/
www.tradingview.com/symbols/NYMEX-SMU1!/
3. Rest of product yield at 12%, using Mogas 95 cracks USD 9.7/brl
Gross profit from (Hedged) portion:
..............................
= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.5/USD)
= 240 million MYR .....(1)
Gross profit (UN-HEDGED) portion:
............................
Refining margin/brl:
= (0.46 x 53 ) + (0.07 x 39) + (0.35 x 9.7) + (0.12 x 9.7)
= (24.4 + 2.7 + 3.4 + 1.2)
= US $ 31.7 / brl
Gross profit:
= (10.7 million x 50%) x (31.7 USD/brl) x (MYR 4.5/USD)
= 763 million MYR ......(2)
Total gross profit (1) + (2)
= 240 + 763
= 1003 million MYR
PBT = 900 million
PAT = 684 million
EPS = 2.28
2022-09-13 13:53
Cash flow hedge (CFH) figures (544 million):
...........................................
Is the loss for the hedging instrument that has matured awaiting recognition along with the hedged item (once sales transaction takes place in future) to realize this amount as derivative loss to deliver the hedged margin (after derivative loss) of USD 12.7/brl on P&L statement.
Cost of hedging reserve (COHR) figures (786 million):
...................................................
Is a hypothetical - forecasted loss if the balance - remaining portion of hedging instrument that has not matured as of 30th June (currently has maturity till 2024) , matures as per the mark-to-market spot rate figure of 30th June within next 12 months.
Considering that, Gasoline Mogas 95 had its spot price the highest ever on 30th June (31.7 + 4 = 35.7 USD/brl), the COHR value mark-to-market was extremely high as per below number: 786 million (or 1,034 million before tax)
= 9 million barrels balance not matured x ( hedged crack of 10 USD/brl - Spot figure 35.7 USD/brl as of 30th June) x 4.5 MYR/USD
= 1040 MYR
From the above we can conclude that about 9 million barrels of Gasoline Mogas 95 will mature in 12 months at average rate of 0.75 million barrels per month. At sales volume of 3.5 million barrels per month, thats at 21% level.
Even with the assumption of 'front loading', i.e more hedged instruments are expiring earlier than being evenly distributed over the 12 months period, we can expect max maturity as per the gasoline yield of 35%.
As such the rock bottom EPS estimation with 50% hedging is extremely conservative.
........
Further, the above forecasted COHR loss figure will change at the end of Sept when the gasoline Mogas 95 crack spread is hovering 10 USD/brl, i.e COHR will register almost zero figure (but this does not matter at all for the overall EPS).
Important take away from above is how much opportunity is lost due to hedging - and we can see its likely max 35%.
2022-09-13 13:53
Q3 - Rock bottom EPS analysis
(using lowest possible average crack spread during the period - as if it was this level every single day of 90 days in a quarter)
.........................
Using extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at extra low 10 USD/brl, with the balance free to capture market margin
1. Diesel at 46% yield, cracks USD 39/brl
www.tradingview.com/symbols/NYMEX-GZ1!/
2. Jet fuel at 7% yield, cracks USD 29/brl
www.tradingview.com/symbols/NYMEX-ASD1!/
3. Gasoline at 35% yield, cracks USD 7/brl
www.tradingview.com/symbols/NYMEX-D1N1%21/
www.tradingview.com/symbols/NYMEX-SMU1!/
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7/brl
Gross profit from (Hedged) portion:
..............................
= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.5/USD)
= 240 million MYR .....(1)
Gross profit (UN-HEDGED) portion:
............................
Refining margin/brl:
= (0.46 x 39) + (0.07 x 29) + (0.35 x 7) + (0.12 x 7)
= (17.9 + 2.0 + 2.5 + 0.8)
= US $ 23.2 / brl
Gross profit:
= (10.7 million x 50%) x (23.2 USD/brl) x (MYR 4.5/USD)
= 558 million MYR ......(2)
Total gross profit (1) + (2)
= 240 + 558
= 798 million MYR
PBT = 718 million
PAT = 545 million
EPS = 1.81
2022-09-15 18:43
using the below figures, one can determine that 90% of the hedging is done on gasoline.
HY was simply brilliant to capture the excellent margin of Diesel from market while had protected them self from downside slide on gasoline margin
...........
say x is the fraction gasoline that is hedged out of total barrels y , and ( 1 - x) is the faction of diesel hedged being the two major refined products
the change in liabilities between 31/12/2021 and 31/03/2022 is (339 - 187) = 152 million must be contributed by:
x* (14.84 - 11.21)*y + (1-x)*(33.17-11.70)*y = 152 million...(1)
same way, the change in liabilities between 31/12/2021 and 30/06/2022 is (1751 - 187) = 1564 million must be contributed by:
x* (31.57 - 11.21)*y + (1-x)*(56.12-11.70)*y = 1564 million...(2)
Using Equation (1) & (2), you can determine x, and it comes to 0.90, i.e 90% of the barrels hedged are gasoline.
..........
31/12/2021
Gasoil crack spread: USD 11.703
Mogas92 crack spread: USD 11.210
Jet-fuel crack spread: USD 10.456
Refining margin swap contracts Notional value: USD 280,487,000
Assets: RM 19,663,000
Liabilities: RM (187,074,000)
31/03/2022
Gasoil crack spread: USD 33.169
Mogas92 crack spread: USD 14.845
Jet-fuel crack spread: USD 22.131
Refining margin swap contracts Notional value: USD 291,009,000
Assets: RM 45,186,000
Liabilities: RM (339,510,000)
30/0620/22
Gasoil crack spread: USD 56.125
Mogas92 crack spread: USD 31.578
Jet-fuel crack spread: USD 41.964
Refining margin swap contracts Notional value: USD 226,945,000
Assets: RM 261,065,000
Liabilities: RM (1,751,332,000)
2022-09-25 18:47
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
probability
Rock bottom EPS analysis
.........................
let us assume as extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at 10 USD/brl, with the balance free to capture market margin
1. Diesel at 46% yield, cracks USD 50.36/brl
2. Jet fuel at 7% yield, cracks USD 38.40/brl
3. Gasoline at 35% yield, cracks USD 7.77/brl
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/brl
Gross profit from (Hedged) portion:
..............................
= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.45/USD)
= 238 million MYR .....(1)
Gross profit (UN-HEDGED) portion:
............................
Refining margin/brl:
= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.35 x 7.77) + (0.12 x 7.77)
= (23.18 + 2.70 + 2.72 + 0.93)
= US $ 29.5 / brl
Gross profit:
= (10.7 million x 50%) x (29.5 USD/brl) x (MYR 4.45/USD)
= 702 million MYR ......(2)
Total gross profit (1) + (2)
= 238 + 702
= 940 million MYR
PBT = 840 million
PAT = 638 million
EPS = 2.12
2022-09-07 21:56