@hng33, what do you understand by the 'refining margin swap'?

indeed verified and true

Posted by valueguru > Jun 6, 2022 9:44 PM | Report Abuse

I see a lot of wrong crack spread applied in analysing refiner's margin. If the company ONLY sells gasoline, then yes just use the gasoline crack spread but HY sells more than that. For example diesel, most people are not even aware that diesel crack spread has been a lot higher than gasoline; last week reached a high of USD56.55 in asia; way higher than gasoline; diesel is 35.1% from crude processing (annual report pg22) and is adjustable for complex refinery. Same goes for jet fuel (7.1%). It's possible that overall refining could be higher than the gasoline margin most people used. This never happens before but same goes for the war.

hng33, pls enlighten a little more on this..

thks

Posted by hng33 > Jun 6, 2022 9:41 PM | Report Abuse

Refinary margin swap is because hengyuan only produce some euro5 dissel to meet shell demand. Hengyuan source part of dissel end product from other refiner.

By end Q2, hengyuan dissel plant should have capacity to product all euro5 dissel to meet Malaysia policy

The Biden administration has appealed to OPEC and the US shale producers to pump more crude to help lower gasoline prices this year. But even if oil prices were to fall, the US may not have enough refining capacity to the meet petroleum product demand. Refining margins have exploded to historically high levels in recent weeks amid lower product supplies from Russia and China and surging demand for gasoline and diesel.

And adding refining capacity is not easy, especially in the current environment, Wirth said.

“You’re looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying: we don’t want these products,” he said. “We’re receiving mixed signals in these policy discussions.”

....

Even with high prices, Wirth is seeing no signs of consumers pulling back.

“We’re still seeing real strength in demand” despite international air travel and Chinese consumption not yet back to their pre-pandemic levels, Wirth said.

US May Never Build New Refinery Even With Surging Gas Prices, Chevron CEO Says

3 June 2022

https://www.bloomberg.com/news/articles/2022-06-03/chevron-ceo-warns-not-to-count-on-new-us-oil-refinery

@rabbit2, my messages no longer going to have any effect- whatever needs to be said and done is over.


I cant give a damn with the forum - as i no longer care on short terms price movement. I can only wait for the results.

HY is conman management - they syphoned all the profit to their parent company

Exactly, i also support PetronM now

welcome cactus81

truth will eventually prevail

Posted by cactus81 > Jun 3, 2022 7:07 PM | Report Abuse

@Probability, those with lower crack, high profit is not layman. They just want cheap entry by misleading true layman investors. Thank for sharing all the information and analysis.

HY basically buys refined oil and converts to crude oil

i think after all the lengthy discussions here, the layman conclusion is: the lower the crack spread the better HY will make profit

so - let us pray for the crack spread to drop to 1.7 USD/brl like in 2020 and oil price to crash to below 10 USD/brl, then HY price will shoot up to RM 17

Its sad & unfortunate that the crack spread is at such depressing state of about 30 USD/brl

Thank you

when you said above 'speculative contract' , i thought its the same as speculative hedging

Posted by Rabbit2 > Jun 3, 2022 4:48 PM | Report Abuse

@Probability
Hedging means hedging, speculating means speculating. I've never seen speculative hedging unless you are saying that the company is switching the % of hedging from time to time, to me it is still hedging.

@Rabbit2, thanks. Good to know there is no element of speculative hedging.

An Introduction to Crack Spread Hedging

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

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

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

An Introduction to Crack Spread Hedging

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

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

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

An Introduction to Crack Spread Hedging

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

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

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

@valueguru, yup i am not aware what tools they use (not familiar on these), but the logic of the loss / gain expected based on the crack spread and monthly hedging (as per the article table published) is correct i suppose

Posted by valueguru > Jun 3, 2022 12:43 PM | Report Abuse

@probability. I don't think HY uses futures contract to hedge but rather the option and swap contracts as stated in the financial statements. On the commodity options contracts, HY likely sold a naked call on its refined products and prices went up, losses increase. On the refining margin swap contracts, HY took a fixed against floating margin and as margin went up, the contracts incur net losses. The overall position made has a consistent view of weak commodity prices coupled with weak margins (due to covid weak outlook and before the war). I recommend a useful book Energy Trading
and Risk Management by Iris Mack 2014. You need some basic understanding in derivatives which I think you have. Hope this helps.

to answer why HY do this rolling 1 month hedging..

I think its purely to protect itself from wild oil price fluctuation

imagine it does not hedge to secure margin, say it buys crude at 100 $/brl and within a 1 week it drops to $80/brl (while refined oil follows the same trend and magnitude change), it will be making a loss...

they may as well become an oil trader than doing refinery business without hedging

nicely worded by John.

Now its important to realize & stress that its not the TREND of crack spread that matters for HY....its the ABSOLUTE value of the crack spread that matters as it is for any REFINERY in the world.

There is no need to focus on the Hedging loss or again due to the trend. HY is not making money from the trend.




Posted by Johnzhang > Jun 3, 2022 11:04 AM | Report Abuse

@OTB,
Thanks for your inputs. I think probability yesterday's posting on the hedging effect indicates that HY adopt a rolling one month hedging. As they square off previous month contracts new contracts are entered into. That means they continue to hedge one month forward. If crack spread on the uptrend from April to June qtr (which seem to be the case), isn't HY chasing the tail ?
I agree that HY shall make explosive profit from hedging gain when crack spread stay plateau or dropping over any particular qtr. Those robust qtr(s) will come on assumption that the hedging policy stay the same throughout.

yup, this never happenéd before

i think they did not foresee Ukraine issue that had caused oil price to spike, perhaps they thought odds of downside is more at end of Q4 21

Posted by CharlesT > Jun 3, 2022 10:57 AM | Report Abuse

The catch is in their inventory loss..

@Johnzang, crack spread has gone higher from a high value (end of Q1 -Mar) that was not reflected in Q1 22'

This higher value will start reflecting in Q2.

Just create a table a do the maths John. If you do it yourself, you can see..

The PAT is lagging by 1 month.

Sudden rise in crack spread becomes not fully reflected due to hedging loss - this 'loss' is is a representation of opportunity they were unable to capture as it happened suddenly.


Posted by Johnzhang > Jun 3, 2022 10:42 AM | Report Abuse

@Probability,
In latest QR note A18 , It is declared as below :
Financial instruments that were outstanding as at reporting date as as below :
Refining margin Swap Contracts ; Notional amount USD291mil (about RM1.22 billion) with nett liabilities of RM294.3mil (RM339.5 - 45.2). I suppose this is a one month rolling balance as your advocated.
Can you comment on this position and what is the implication to Q2 results as crack spread has gone higher compare to reporting date?
Thanks in advance.

Q1 22 PAT was poorer vs Q4 21' PAT as their hedging on INVENTORY ( NOT CRACK SPREAD or refining margin) which was not on the right direction, and exacerbated by oil loss written down

as per the Table represented, they hedge 1 month's supply and sales contract and close the balance the following month

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

hedging only DAMPENS the reflection of Gross margin on Net margin, it DOES NOT ERODE

do go through the table and see yourself how rise in crack spread (selling price vs purchase price) effects the hedging gain/loss



Posted by Johnzhang > Jun 3, 2022 9:56 AM | Report Abuse

The main hedging loss in Q1 2022 is in Refining Margin Swap Contracts which is tied to rising crack spread from about USD11 early Jan 2022 to about USD15 as at 31/3/2022. (pls refer to note A18 in QR for the breakdown of the various types of hedges and their respective position)
As at today, crack spread has surged passed USd32 . If it continue to stay high or go higher , I suppose Refining Margion swap contracts will suffer huge hedging losses that will offset the operating margin like we see in Q1. Can any financial accountant comment ?




Posted by Rabbit2 > Jun 3, 2022 10:07 AM | Report Abuse

Yes. what we know is the duration of the derivatives. How much % of locked in/hedged over total output is not being disclosed. just hope it's not extensive, else hrc will not fully enjoy the crack spread spike.

Improved version to see the table much easily:

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

Improved version to see the table much easily:

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

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

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

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

The maths are clearly shown on the table.

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

We just look forward for stability now.


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

probability

For everyone's reading pleasure:

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


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

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

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

Q2 22 its going to be explosive.

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

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

@Johnzhang, i had provided the links to articles made by FutureEyes and Davistslim who had independently derived these information and also substantiated their claims by referencing to annual reports and news, including AGM queries.

I have no interest to further convince you otherwise as it neither brings benefit to the stock (PetronM) nor myself.

You can maintain your stance & beliefs - i have absolutely no issues.

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

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

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

The maths are clearly shown on the table.

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

We just look forward for stability now.


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

probability

For everyone's reading pleasure:

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


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

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

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

Q2 22 its going to be explosive.

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

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

For everyone's reading pleasure:

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

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

You need to ENLARGE the page to see the details. TQ

For everyone's reading pleasure:

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

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

You need to ENLARGE the page to see the details. TQ

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

EU Russia sanctions could ‘paralyze’ Lukoil refinery: Sicily president
Crude Oil Refined Products

1h ago

The EU’s pledge to phase out most Russian crude oil imports by the end of this year could paralyse the Italian Lukoil-owned ISAB refinery and cause a job crisis in Sicily, the region’s president said this week.

While the EU has exempted Hungary and other landlocked countries from its embargo, the economic bloc will cut off all seaborne Russian crudes, cutting off the main feedstock of the island’s 355,000-bpd site.

“There is a deafening silence on the occupational catastrophe that could overwhelm part of the Priolo petrochemical, with the embargo and the consequent paralysis of ISAB,” Nello Musumeci, President of Sicily, said in a post on Facebook this week.

......

355,000 bpd is not a joke - all these only shows that it will take a long time for refining margin to come down globally

@Johnzang, when petronM reports barrels sold, it includes outsourced (70%) refined oil from their parent company to directly sell at their petrol kiosks

snake bite or bitten by the Hurricane that went off as soon as it came?

those clueless can't differentiate

stick to where you are more knowledgeable & competent (forgot the name that makes culverts - OKA or somethin)..

if you dont understand avoid commenting

Posted by gohkimhock > Jun 1, 2022 9:11 PM | Report Abuse

all the volatile figures are enough to tell you that nothing is sustainable in this company. I have no idea how some people like to be bitten by the same snake twice.

@sslee, there were technical reasons why the could not go higher than 60%. I can't remember the exact details now. Are they not publishing their throughput on recent annual reports?

(I have not checked on their recent reports)

When it can only run at 60% throughput and the yield of Fuel Oil is high, the effective profitable throughput becomes even lesser:

88kbpd x 60% = 52.8 kbpd

If 30% fuel oil, it will wipe out (offset) at least another 20% of positive crack from gasoline. This means only 50% of the throughput results in positive crack.

The effective positive throughput then becomes:
= 52.8 kbpd x 0.50
= 26.4 kpbd

per qtr then becomes:
= 26.4 kbpd x 90 days/qtr
= 2.37 million barrels per qtr

I seldom lie

See the chart in 2016 annual report:

2) Refinery margin in a quarter (based on its regular throughput per day of 48k although its max daily capacity is 88k). Management also told us in AGM that its refinery currently running at around 60% (I use AR report throughput which is more conservative).
https://klse.i3investor.com/web/blog/detail/david_petronm/127344

Post removed.Why?

I doubt PetronM can make low sulfur Fuel Oil unless they use ultra low sulfur crude (which is at a premium against Brent)...since the sulfur will be enriched at the bottom distillate (higher vaporization point)

thanks mate..

Posted by Silemak > Jun 1, 2022 3:45 PM | Report Abuse

Tks probability , OTB for the info keep it up. We are not fools we can judge who are genuine!!!

Once bitten - twice shy phenomenon

Posted by gladiator > Jun 1, 2022 11:25 AM | Report Abuse

Wah Stockraider call buy HY in 2017 give TP=RM44 this year no support d.

For PetronM next qtr results do not expect more than 30 cents EPS - if you are happy with it - go for it - thats all i can say

For PetronM next qtr results do not expect more than 30 cents EPS - if you are happy with it - go for it - thats all i can say

it appears as a conman - coz you dont understand its business model and financial tools

TWO IMPORTANT information concerning PetronM for the chicken hearted who does not want to invest in HY but PetronM instead:

1) PetronM is a simple refinery that produces more than 30% Fuel Oil while HY (complex refinery) with about 2.6% Fuel Oil yield.

https://klse.i3investor.com/web/blog/detail/Insight1/2018-02-03-story146257-DIFFERENCE_between_PETRONM_and_HENGYUAN?_gl=1*19l8mrr*_ga*MTA3NDE2NTcwNi4xNjA4NTU5NDY5*_ga_MNBHX2J50S*MTY1NDA0Nzg1NC4yMDYuMS4xNjU0MDUyNjgyLjA.


2) The Fuel Oil crack spread is NEGATIVE against feed crude Brent

https://www.tradingview.com/symbols/NYMEX-SF31!/

@stockraider, quite disappointing to see your worthless comments (likely confusing newbies) despite being an old experienced investor in HY in 2017.

As i had detailed many times you must see HY as a refinery processing 10.7 million barrels per quarter whereas PetronM refinery at less than 1/4 of HY capacity, i.e about 2.5 m barrels. Reason being PetronM is a simple refinery which produces more than 30% Fuel Oil with crack spread hitting negative - 15 USD/brl .

Without Hengyuan (the HEAD) share price rising, do not expect PetronM ( the TAIL) to perform, unless if PetronM had raised it retails sales volume significantly.

As a matured investor you should know this better

the spike we see on diesel crack from 18$/brl early march to 38$/brl by end of Mar 22' could also explain the derivative loss in Q1 which wont repeat in Q2 as long as it does not shoot up further by 20$/brl suddenly by end of June

the gross profit will reflect the margin without the derivative effects

on the other hand if it reverts to 18$/brl there will be a derivative gain

i see gross margin appears to be lagging by at least a month period on their financial report vs crack spread chart


Posted by probability > Jun 1, 2022 10:05 AM | Report Abuse X

You need to copy paste below on your browser to view.

DIESEL CRACK SPREAD:

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!

yeah - very true

Posted by Sslee > Jun 1, 2022 9:00 AM | Report Abuse

High energy cost will destroy economy recovery and without economy recovery people will have less money to spend, travel, invest and etc.
The good balance is for crude oil at USD75 - 100 per barrel and crack spread between USD 15 -25 per barrel.