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

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 (i.e, the higher the future price, the higher the hedging gain)

For refined products hedge, it is about going SHORT, the higher the future price, the greater the hedging loss.

The net effect of both above is what reported by HY under their OCI.

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 (i.e, the higher the future price, the higher the hedging gain)

For refined products hedge, it is about going SHORT, the higher the future price, the greater the hedging 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

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

sad...hope the durian planted there cannot taste as great as our malaysian made musang king!..

omg... musang king is growing there? very sad...

What is refining margin Hedging?
.............................

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.

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging#:~:text=In%20order%20to%20mitigate%20their,or%20fix%20the%20refining%20margin.

2021 annual report page 132
............................

Cash flow hedge reserve and cost of hedging reserve:

The cash flow hedge reserve is used to record gains and losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.

The cost of hedging is seen as cost of achieving the risk mitigation inherent in the hedge. It is incurred to protect the Company against unfavourable changes in price. The changes in the cost of hedging is initially recognised in other comprehensive income and removed from equity and recognised in profit or loss in the same period that the hedged cash flows affect profit or loss.

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

yes, uncle Koon got fixated with gasoline crack spread and got spooked by its dive recently...

the fact is even in 2017, reason for spectacular EPS is mainly due to Diesel


Posted by UlarSawa > Sep 8, 2022 4:46 PM | Report Abuse

No matter how high the crackspread no one want to believe it anymore. After 2017 goreng until charchoal lah. History lah. Orang cannot forget the painful incident lah. Even Uncle Koon also dont believe it anymore leh. Haiyoh. Correct?

wah ular...where got tipu..Q2 EPS you no see meh?

Posted by UlarSawa > Sep 8, 2022 4:42 PM | Report Abuse

Crackspread pun cracked already leh. Dont use crackspread anymore lah. No one believe after 2017 lah. Tipu pun dont tipu twice lah. Suiyee pun panlai already lah. Haiyoh. Correct?

Big Frog masked by Gloves...thats why they cant see it! LOL...

the company is paying Dividend without anybody forcing them to do so...

they are surely not doing this to goreng the share price

it just simply means the future prospects of earnings is good

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 = Marked to 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

...

Now lets see what happens when say at end of Sept 22, Gasoline crack drops to its usual average of 5.7 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

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

as predicted, Diesel Crack exploded to 55 USD/brl...

https://www.tradingview.com/symbols/NYMEX-GZ1!/

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

Fair estimation:
...............

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 ineffectiveness / effectiveness of the hedging but the profit contribution remains the same.

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 in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.


For the balance refined products diesel, jet fuel and others (10.7 - 3.7 = 7 million barrels per qtr) , you have the following:

1. Diesel at 46% yield, cracks USD 50.36/bbl
2. Jet fuel at 7% yield, cracks USD 38.40/bb
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/bbl

Gross refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.12 x 7.77)
= (23.18 + 2.70 + 0.93)/ (0.65)
= US $ 41.2 / brl

Gross Profit :

= (7 million barrel sales per qtr) x ( US $41.2/brl) x (MYR 4.45/USD)
= 1.283 Billion MYR........(2)


Total gross profit after hedging gain / loss: (1) + (2)
= 1.483 Billion MYR

EPS will be exceeding RM 3 per QTR

The above is what we will obtain going forward if the Diesel & Jet Fuel margins are stable around there. The hedging losses reported on page 8 (438 million) are the effects of monthly hedging of Diesel & Jet fuel as all refinery does (refer my article on Q2 results prediction earlier) and this is expected to become zero as crack spread stabilizes from month to month.

Posted by Sslee > Sep 8, 2022 7:27 AM | Report Abuse

2021 annual report page 132

Cash flow hedge reserve and cost of hedging reserve:

The cash flow hedge reserve is used to record gains and losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.

The cost of hedging is seen as cost of achieving the risk mitigation inherent in the hedge. It is incurred to protect the Company against unfavourable changes in price. The changes in the cost of hedging is initially recognised in other comprehensive income and removed from equity and recognised in profit or loss in the same period that the hedged cash flows affect profit or loss.

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.

simple answer, cash flow'

it takes longer time for profit to be realized into cash due to hedging

Posted by UlarSawa > Sep 8, 2022 11:36 AM | Report Abuse

Why need to borrow more money leh. One simple question. Why need to issue 5bil notes if all arectaken care off. Why. Why. Why. Haiyoh. Correct?

@ular, check on cash flow hedging reserve....as potential risk mitigation plan, they need to take necessary measures

cash flow hedges needs to paid BEFORE money is collected from physical sales transactions...and cost of hedging reserve is high

who knows it can persist if gasoline crack spread shoot up above 31 USD/brl again

to protect themself from potential cash flow issues its good to keep more cash

Posted by UlarSawa > Sep 8, 2022 11:29 AM | Report Abuse

If everything is ok why need to raise 5bil notes leh. Haiyoh. Correct?

payable is taken care of receivables ma..

Posted by UlarSawa > Sep 8, 2022 11:28 AM | Report Abuse

Then trade payable almost 4bil how. Haiyoh. Correct?

I finalized realized MM is the man... just so in tune with Bursa investors

@ular, have you gone through this?

Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

pot calling the kettle black

Posted by Income > Sep 8, 2022 10:42 AM | Report Abuse

I hold my head high even if I am B40.
Useless to be Millionaires but keep your useless facts and figures and very cocky and kurang Asam attitude.

Post removed.Why?

the enlightened one...give us some light

Posted by Income > Sep 8, 2022 10:35 AM | Report Abuse

ProfB, you teach ajaran sesat kah by looking at what you want only while ignoring the rest of the factors?
Speechless

only need high margin...all that matters is the crack spread

it has no relation to oil price you can say

Posted by UlarSawa > Sep 8, 2022 10:28 AM | Report Abuse

HY need high vol and high oil price and high margin to earn explosive result but subjected to hedging gain or loss leh. Can all the factors just happen at the same time for HY to enjoy the best result. Think lah. Macam kena 4d ini macam lah. Kena 3 nombor pun takda get any prize lah. Haiyoh. Correct?

for the same demand, if supply is higher the oil price can be lower

however refinery can dictate high margin (crack spread) as they are the constraint for producing refined products

Posted by BobAxelrod > Sep 8, 2022 10:24 AM | Report Abuse

Then where is the demand for Oil and your Sales in quantity in finished products?

Posted by Sslee > 2 minutes ago | Report Abuse
I prefer oil price at USD50 and refining margin stay at double digits figure.
This will benefit refinery a lot in reducing their working vapital and at the same time earned a double digits refining margin.

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 = Marked to 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

...

Now lets see what happens when say at end of Sept 22, Gasoline crack drops to its usual average of 5.7 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

he he.. price up a little later also can...

you go through and comment ular pls

Posted by UlarSawa > Sep 8, 2022 10:13 AM | Report Abuse

Ya lah. 5 minutes after watch liao. HY price can rebound kah. Haiyoh. Correct?
Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

Jet fuel, crack spread jumped to 41 USD/brl..

https://www.tradingview.com/symbols/NYMEX-ASD1!/

as predicted, Diesel Crack exploded to 55 USD/brl...

https://www.tradingview.com/symbols/NYMEX-GZ1!/

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.

When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?

https://www.youtube.com/watch?v=arCSncmfB8k

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

you take out dividend, this stock is trading at 4.50 now

It has delivered EPS even better than what was estimated and yet, purely because of wrong perception on the meaning of the two clauses below, market is thinking it will revert back to its earlier earnings.

Cash flow hedge & Cost of hedging reserve

From what i have extracted and studied, these are nothing but the effects of the Refining margin swap contract.

Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated as of 30th June and awaiting 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 determined by the producer.

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 ineffectiveness / effectiveness of the hedging but the profit contribution remains the same. (SERIOUSLY, THINK ABOUT THIS)

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 in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.


For the balance refined products diesel, jet fuel and others (10.7 - 3.7 = 7 million barrels per qtr) , you have the following:

1. Diesel at 46% yield, cracks USD 50.36/bbl
2. Jet fuel at 7% yield, cracks USD 38.40/bb
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/bbl

Gross refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.12 x 7.77)
= (23.18 + 2.70 + 0.93)/ (0.65)
= US $ 41.2 / brl

Gross Profit :

= (7 million barrel sales per qtr) x ( US $41.2/brl) x (MYR 4.45/USD)
= 1.283 Billion MYR........(2)


Total gross profit after hedging gain / loss: (1) + (2)
= 1.483 Billion MYR

EPS will be exceeding RM 3 per QTR

The above is what we will obtain going forward if the Diesel & Jet Fuel margins are stable around there. The hedging losses reported on page 8 (438 million) are the effects of monthly hedging of Diesel & Jet fuel as all refinery does and this expected to become zero as crack spread stabilizes from month to month.

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

you take out dividend, this stock is trading at 4.50 now

It has delivered EPS even better than what was estimated and yet, purely because of wrong perception on the meaning of the two clauses below, market is thinking it will revert back to its earlier earnings.

Cash flow hedge & Cost of hedging reserve

From what i have extracted and studied, these are nothing but the effects of the Refining margin swap contract.

Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated as of 30th June and awaiting 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 determined by the producer.

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 ineffectiveness / effectiveness of the hedging but the profit contribution remains the same. (SERIOUSLY, THINK ABOUT THIS)

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 in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.


For the balance refined products diesel, jet fuel and others (10.7 - 3.7 = 7 million barrels per qtr) , you have the following:

1. Diesel at 46% yield, cracks USD 50.36/bbl
2. Jet fuel at 7% yield, cracks USD 38.40/bb
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/bbl

Gross refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.12 x 7.77)
= (23.18 + 2.70 + 0.93)/ (0.65)
= US $ 41.2 / brl

Gross Profit :

= (7 million barrel sales per qtr) x ( US $41.2/brl) x (MYR 4.45/USD)
= 1.283 Billion MYR........(2)


Total gross profit after hedging gain / loss: (1) + (2)
= 1.483 Billion MYR

EPS will be exceeding RM 3 per QTR

The above is what we will obtain going forward if the Diesel & Jet Fuel margins are stable around there. The hedging losses reported on page 8 (438 million) are the effects of monthly hedging of Diesel & Jet fuel as all refinery does and this expected to become zero as crack spread stabilizes from month to month.

What is a Cash Flow Hedge?

keyword - FORECASTED TRANSACTION (thats why its not placed into P&L).

A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk. It is possible to only hedge the risks associated with a portion of an asset, liability, or forecasted transaction, as long as the effectiveness of the related hedge can be measured.

Accounting for a Cash Flow Hedge

The accounting for a cash flow hedge for the hedging item is to recognize the effective portion of any gain or loss in other comprehensive income, and recognize the ineffective portion of any gain or loss in earnings. The accounting for a cash flow hedge for the hedged item is to initially recognize the effective portion of any gain or loss in other comprehensive income.

Reclassify these gains or losses into earnings when the forecasted transaction affects earnings.

https://www.accountingtools.com/articles/cash-flow-hedge

Cash flow hedge:

Settlement Risk

In an oil and gas transaction, settlement risk is the risk that a counterparty takes physical delivery of the producer's oil or gas and fails to pay for any or all of the delivered product. Settlement risk is, therefore, unique to physically settled contracts, including fixed-price and floating-price contracts. An oil and gas producer's exposure to settlement risk can be estimated in advance of delivery by multiplying the quantity of oil or gas to be delivered by the price to be paid by the purchaser.

Failure by a purchaser to pay under a physically settled oil and gas contract can impact the producer's ability to satisfy its obligations under a financially settled hedging contract. When a producer enters into an oil or gas swap contract it relies on its physical purchaser to take, and pay in a timely manner for, the oil or gas produced. When the oil or gas index price specified under the swap is greater than the fixed price under the swap for any specified period, the producer
owes the difference to the swap counterparty (see Swap Contracts). The producer often secures the funds to make payment under the financially settled hedging contract from funds received under the physically settled oil and gas contract.

The physical oil and gas transaction and the swap transaction are separate and distinct transactions. As a result, failure of a purchaser to perform under its contract does not excuse the oil and gas producer's obligation to make payment under the swap.

Cost of hedging reserve:

Mark-to-market risk is forward looking and is an 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 determined by the producer. Both counterparties to a fixed-price contract are exposed to mark-to-market exposure as spot prices fluctuate during the term of the contract

@BLee, FYI on core principle of hedging (how it works)

Posted by probability > Sep 4, 2022 4:56 PM | Report Abuse

@MM, i bet if you can squeeze your brain cells a bit after a strong cup of coffee and spend 10 minutes to understand the below concept, you will be quite confident HY makes money (secures) through hedging

try taking this challenge for you:

Extract from below article:
www.cmegroup.com/education/articles-and-reports/introduction-to-crack-...

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.

what a perfect description by i3lurker of himself

Posted by i3lurker > Sep 6, 2022 9:37 PM | Report Abuse

serial pill popping is a big problem in todays youth.

Serial Pill Popping dissolves brain
and does a hedge swap between brain neurons with testicular tissues straddled by prostate waste matter
and you get sperm ramblings as can be clearly discerned above

glad you are absorbing fast

in everything there is risk

seriously, if they can break down HY refinery into 100 smaller refinery , i would definitely buy out one mini refinery (take over the company).

where to find 2 qtr payback period?

Posted by PSAi3alert > Sep 6, 2022 8:49 PM | Report Abuse

Probability,

I rationalized it by imagining hedge positions that are being closed for previous positions and being opened for future positions, on a monthly basis.

The marked-to-market derivative losses were high because the crack spread margins were very high on 30th June, and were above the contracted price to sell.

So, come July, Aug, etc, they will just deliver the products at those contracted prices.

However, there are just to many variables to consider.

MM might drive into the refinery in a car full of explosives. Suddenly the options become naked.

(Rare events can happen. The Kobe earthquake on 17 January 1995, took Nick Leeson's short straddle positions into tailspin and total losses were £827 million.)

@Blee, FYI on risks..

Infact, hedging is to reduce risk (not the other way).
We have a paranoia in i3 where now hedging is viewed negatively as a form of gambling..

Posted by probability > Sep 6, 2022 8:24 PM | Report Abuse X

if they are hedging 18 million barrels distribute over 24 month that like 2 million barrel hedged every qtr for a plant that produce 10 million barrels...

Its calculated risk. If the plant got into fire and it has prolonged shutdown, they can always clear their hedge position on the market albeit with small loss or even gain.

risk is too low

Posted by BobAxelrod > Sep 6, 2022 8:18 PM | Report Abuse

Of course they know their production handling capacity. But to Hedge without goods and for futures that are uncertain....is pure Gambling.

@Blee, FYI on cash flow

Posted by probability > Sep 6, 2022 8:13 PM | Report Abuse X

FCF will blast up next qtr....

why? Hedging GAIN from gasoline.

Your futures market cash IN FLOW is higher than your physical market cash OUT FLOW...


Posted by Zhuge_Liang > Sep 6, 2022 7:51 PM | Report Abuse

The present market cap of Hengyuan = 1.458 billion.
PAT for the first half of FY2022 = 715 million.
I believe the PAT for second half of FY2022 = 1.3 billion.
I also believe total PAT for FY2022 = 2.0 billion which is 542 million more than the present market cap.
My sifu taught me the 5 most important FA criteria to assess the FA report for the first half of FY2022.
1.) Growth > 917% better than the previous first half year.
2.) Free cash flow = -16 million. However, Hengyuan is still able to make an operating profit before changes in working capital of RM 939.171 million in the first half of FY2022.
3.) PER = 1.73 very good.
4.) ROE = 45% which is very high.
5.) EV/EBIT = 2.13 very good.

I can see the free cash flow is = -16 million which is not a positive free cash flow.
The rest of criteria are excellent.
I will say the fundamental of Hengyuan is very good after the first half result of FY2022.
Is there any stock listed in KLSE has PER = 1.73 and EV/EBIT = 2.13 ?
The answer is no. You cannot find any stock with such low PER and EV/EBIT.
I still conclude the fundamental of Hengyuan is very good.