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

closing the shorting done on the refined products. They have to buy the refined oil (their own at high price) which they had sold forward.

This means automatically their next hedging batch will go to a higher margin level. The exact detail mechanism i must admit i dont really know


Posted by GrowthCapitalist > May 30, 2022 9:50 PM | Report Abuse

Just one clarification, when you said buy at higher price is crude or refined oil?

@GrowthCapitalist,

1) On Inventory gain or loss - its straight forward. They need certain minimum inventory in their plant at all time. The valuation difference between reporting periods simply gets reported as inventory gain / loss.
(a portion of their inventory is hedged as i understand - as such the inventory gain or loss effects is dampened).

2) On shorting of the refined products, its like sell forward and have to buyback within a certain period. Imagine they sell at cheap price and later it shot up high...they are forced to buy at a higher price. The refined products shorting and going long for crude is done at the same time to neutralize. So when crude did not rise at the same magnitude the gain from going long on crude is way smaller than the loss in shorting refined products. This is how i roughly understand.

This Israel refinery loss on the first qtr sounds like that.

Refined Oil Exports by Country
..............................

United States: US$60.7 billion (13.9% of refined oil exports)
Russia: $45.4 billion (10.4%)
Netherlands: $34.7 billion (8%)
Singapore: $27.4 billion (6.3%)
India: $26.2 billion (6%)
China: $25.5 billion (5.9%)
South Korea: $23.2 billion (5.3%)
United Arab Emirates: $19.6 billion (4.5%)
Malaysia: $12.8 billion (2.9%)
Belgium: $10.5 billion (2.4%)
Spain: $9.6 billion (2.2%)
Germany: $9.5 billion (2.2%)
Italy: $8.3 billion (1.9%)
United Kingdom: $7.4 billion (1.7%)
Canada: $7.2 billion (1.7%)

....

Imagine you take out Russia from the above supply, its just not possible to simply replace the 10% gap even if both China & India double their exports

In the future at most Russia can only sell its crude to India & China, but NOT REFINED OIL...

and India & China cannot simply double their refining capacity'

This is a long term phenomenon

Very simple:

If hengyuan cannot make money in line with crack spread in the future, then there is no reason for the crack spread chart to exist.

welcome subwayzz, its unfortunate that they did not have inventory gain (this is something i am unable to explain), else everything as per my gut estimate

for Q2, we dont need any inventory gain...just crack spread sustaining above 13 USD/brl will do..thats all we need going forward

In far future when crack spread suddenly reverse to a big drop, the hedging will result as gain during the qtr (reverse of what we see in Q1 now)

now we know HY can consistently sell around 10.7 million barrels per qtr

Q1 its only managed to capture crack spread at 11 USD/brl (hedging done in dec 21')

Q2 they will catch up with at least 22 USD/brl...

It its inevitable

all they need is 13 USD/brl...they will keep hitting EPS above RM 1 every quarter

Interesting to know - moment HY share price turns green all will be whacking.

Posted by Investing_Bursa > May 30, 2022 8:50 PM | Report Abuse

@ probability

Share price of Israel’s Oil Refineries (ORL) (ORL.TA) also rebounded to higher levels in matter of 2-3 days

@cactus81, yes...no doubt about crack spread directly benefitting its margin

hengyuan refinery is no different than any other refinery in the world

The Israeli Oil Refineries posts Q1 loss Refinery margins increase, and refining profits rise

https://astraherald.com/the-israeli-oil-refineries-posts-q1-loss-refinery-margins-increase-and-refining-profits-rise-reuters/

Israel’s Oil Refineries (ORL) (ORL.TA) swung to a loss in the first quarter, as a revaluation of futures contracts offset a jump in revenue amid a steep rise in global oil prices.

ORL, Israel’s largest refining and petrochemicals group also known as Bazan, said on Sunday it lost $18 million in the January-March period compared with a $55 million net profit a year earlier. Revenue rose 77% to $2.26 billion.

Its adjusted refining margin was $9.3 a barrel in the first quarter, compared with $4.3 a year earlier but below Reuters’ quoted Mediterranean Ural Cracking Margin of $10.1.

“The war in Ukraine, which exacerbated the energy crisis in Europe, illustrates for us all the importance of local production for national energy independence,” said Chairman Moshe Kaplinsky.

Chief executive Malachi Alper said that since mid-March ORL has seen “unprecedented refining margins” that are expected to give a significant boost to the firm’s performance later in 2022.

those who sell now instead of waiting a few more weeks or better still till Q2 results come out will really miss out the cheapest stock in Bursa

HY management is not cheating you anything. Its just how refinery business works.

all i can say is Hengyuan not doing any creative accounting - its purely on the way the hedging is done.

When the spread widens, risk due to hedging will disappear

Below is another example of refinery reporting loss on the first quarter 22'' due to the way they hedge:


..........

Israel’s Oil Refineries posts Q1 loss, refining margins rise

https://todaynews.upexampaper.com/israels-oil-refineries-posts-q1-loss-refining-margins-rise-more-trending-news-today/

Israel’s Oil Refineries (ORL) (ORL.TA) swung to a loss in the first quarter, as a revaluation of futures contracts offset a jump in revenue amid a steep rise in global oil prices.

Chief executive Malachi Alper said that since mid-March ORL has seen “unprecedented refining margins” that are expected to give a significant boost to the firm’s performance later in 2022.

what happens if tomorrow red and Wednesday it reverts back to current price looking forward for Q2 22'results?

2 possible reasons...

1) Kerosene has life span. The aviation industry did not took off as expected and was not consumed in time.

2) The Russian crude they bought from russia say in Jan 22'could be the one blocked by Malaysian govn from loading in Mar 22 - resulting in cancellation charges or loss in down payment paid



Posted by OTB > May 30, 2022 7:54 PM | Report Abuse

Posted by ngjack1991 > 2 minutes ago | Report Abuse

Really a creative accounting. Hibiscus is accounting to make profit look much better but hengyuan is opposite. Inventories increase 1.1 billion compared to last quarter and 2 times of last year same quarter. Typical China man company press down profit to avoid tax
------------------
Agreed.
I expect inventory gain and end up show 131 million inventory loss.
Really cannot understand.
Thank you.

hedging is not betting..

Posted by Johnzhang > 1 minute ago | Report Abuse


We don’t know what are their positions in commodity swap and Crack Spread Swap for Q2. Huge hedging losses in Q2 is still possible if bet on the wrong direction.

when your margin expanded, new hedging will be done with expanded crack
their hedging contract size is always 25% of their qtrly revenue

RM 2 plus EPS on coming QTR - just another 3 months away... payback of market capital in 7 months (as i said before). To those who are patient..they will reap

no one can predict the future, but now the future is seen - exploding crack, they will capitalize
Posted by investmalaysia618 > 24 seconds ago | Report Abuse

loss on derivatives meaning their skills not up to standard yet. overvalued

As predicted, they were too aggressive on hedging, and they must have stored quite a bit of accumulated fuel oil. Q2 onwards will definitely be explosive - but market has to be patient.

Posted by ValueInvestor888 > 6 minutes ago | Report Abuse

Lower profit qoq due to fair value loss on derivatives RM 432 million, inventories written down RM 131m.

sure OTB, lets hope for the best. Lets look at Q1 22'as an appetizer, Q2 22 as the main course...

good luck

For Q1 22'i meant

@OTB, just my 2 cents: your previous derivation would be more likely to be accurate.

Despite the sales volume potentially higher say 10.7m the crack spread could be a little lower than your estimate as they will be lagging behind (for simplicity assume 3 weeks) to capture the spread and report in the same period.

precisely the two wrong judgement (prejudice) of market now where if you could somehow see through, you have an edge that will potentially give multi bagger return


we can see the difference between US investors market perception of refinery stocks (from valero share price) and local market who had unique experience of gloves euphoria


Posted by CharlesT > May 29, 2022 10:00 AM | Report Abuse

After glove saga n sad endings for many so called long term value investors during 2021/2022, i doubt Heng Yuan 2.0 will be that sexy like Heng Yuan 1.0

Anyway still hv trading opportunity

Noted OTB..

I just want investors here to still stick to HY despite the worst possible outcome near term (despite the odds being extremely slim), knowing mid & long term performance will be simply outstanding with high certainty than any of the stocks in Bursa.

still have pay back period 7 months

nope, it can still be all right

expect loss making in Q1, but i assure you that Q2 onwards will be spectacular as predicted above

suggest only those who can handle above stay invested in HY

i want traders to be out

@Johnzhang, for PetronM there are two growth drivers to its PAT:

1) The expanding retail sales volume. Here, however my understanding is the margin is fixed. It does not gets affected by crack spread but agreed terms with government and their parent company petron on supply of refined products

2) Its malaysian refinery. As mentioned above, since fuel oil has negative crack spread exceeding - 12 $/brl, the effective capacity of its 88bpd plant is likely below 40%. This portion of its sales volume will benefit from crack spread expansion.

From the above, you can make your judgement on its PAT growth on its next qtr and allocate your weightage on stakes accordingly

understood..thanks

Posted by subwayzzz > May 28, 2022 5:22 PM | Report Abuse

You see?
Triggered

someone, pls help to calculate for stockwin with the following variables

1) Refining margin 26 USD/brl
2) HY sales volume per qtr, 10.7m barrels
3) USD - MYR exchange rate: 4.38

opportunity of a lifetime here where at current margin - it makes its entire market cap in just 7 months

why fear to go in heavily before Q1 results - just because of a potential hedging loss?

just imagine you have money to buy out this company, would you miss such a golden opportunity - payback at half a year?

so what if Q1 22' is a loss

do you not believe Hengyuan can capitalize current refining margin for Q2 and Q3?

Do you not believe how the refinery makes profit from crack spread?


Posted by onlyinvestment > May 28, 2022 3:45 PM | Report Abuse

For me is very simple, I still got some gain in currently price and I don't have too much share. So even though HY back to RM 5 , I will lost money but not too much. So I just wait and see what QR benefit will bring to me once QR announced....

and Hengyuan market cap RM 1.9 billion only compared to Harta at 14.9 billion

Hengyuan will make the cash Harta had made by end of 2022, and its margin will never revert to 2021 level...definitely not like gloves margin erosion due to instant competition

as a hydrotreater with 30% Fuel Oil output, the negative crack spread would have wiped out whatever positive spread from gasoline and diesel (another 30%)

https://klse.i3investor.com/web/blog/detail/Insight1/2018-02-03-story146257-DIFFERENCE_between_PETRONM_and_HENGYUAN?_gl=1*1ytqwcz*_ga*MTA3NDE2NTcwNi4xNjA4NTU5NDY5*_ga_MNBHX2J50S*MTY1MzcxMTI4NC4xODguMS4xNjUzNzE4OTE1LjA.

effectively you can assume its Malaysian refinery capacity of products with positive crack is only about 40%.

Between Q3 21 to Q4 21' PetronM PAT margin barely rose from 1.5% to 2.04%

whilst, Hengyuan had expansion from -1.7% to 4.4%

PetronM could not benefit from crack spread expansion and does not intend to...as its more of a retail player

it must hedge in small batches as it receives from its parent company at such thin margin

you can see their net profit margin has barely changed from previous qtr...at such thin margin between outsourced refined products from parent company and retail price (pre-agreed terms with Petron Philippines), they cannot capitalize the rise in refined products price at the end of Mar 22'

the crack expansion was solely benefitted by the refinery (parent company) with fat margin

makes sense and possible

on the other hand, i also wonder could they have hedge on the refined products side more as they outsource these (from parent company petron) with a certain fixed margin and the explosion on the refined products price at the end of Mar 22'' would have reflected as lost opportunity on capitalizing these margin expansion due to hedging

if they had not hedged, the profit would have been explosive basically


Posted by Johnzhang > May 28, 2022 1:35 PM | Report Abuse

@Sslee, the derivative loss is certainly in commodity swap. I think Petronm hedged too aggressively the crude (raw material) they need for refining. Bear in mind that crude Brent price swung wildly in the qtr. It started (3rd Jan) at around USD78 and increased all the way to around USD124 (8th Mar) and plunged to USD96 (16th Mac) and it ended at USD103 on 31 Mac. When the Ukraine war broke out, oil traders in PetronM might have taken big position at high end of the price (eg USD124) thinking that Brent could scaled beyond USD124. Unfortunately, Brent came off drastically after peaking at USD124 around 8th march.

Its inventory also expanded really big end of Q4 21' to support sales in excess of production in Q1 22'...lets see

The Company recorded higher year-on-year revenue for the fourth quarter (“4Q 2021”) and financial year ended 31 December 2021 (“FY2021”) as a result of a surge in market oil product price and higher sales volume due to increased oil demand from local customers after the relaxation of Movement Control Order in September 2021. The market price during 4Q 2021 and FY2021 spiked up to an average of USD92 per barrel and USD79 per barrel respectively, as compared to the average price of USD49 per barrel and USD48 per barrel in the comparative periods in 2020.

Sales volumes for 4Q 2021 and FY2021 were 10.7 million barrels and 36.3 million barrels respectively, compared with 9.0 million barrels and 35.1 million barrels recorded in the corresponding periods in 2020.

.....

Looking at Petron Q1 22' boost in sales volume, perhaps its possible for Hengyuan to repeat Q4 21'sales volume of 10.7 m barrels in Q1 22'

https://www.businesstoday.in/markets/company-stock/story/mangalore-refinery-stock-rises-multibagger-net-profit-q4-sales-sensex-335388-2022-05-27

Post removed.Why?

Crack spread for Diesel again shot up!

since mid Mar 22' till to date end of May 22', the average refining margin (considering exploding diesel crack) is more than $ 24/brl.

That means April and May alone already contributed EPS of almost RM 2 (each month RM 1). I am using 10.7m barrels per qtr as per Q4 21' sales volume.

As such....

EVEN IF Q1 22' has ZERO profit (due to some blatant judgement for hedging or production breakdown), Q2 ALREADY contributed RM 1 on behalf of Q1 and it has also contributed RM 1 for Q2....this is for sure.

and yet we have not accounted June sales yet....

It means RM 2 EPS as a minimum already in Hengyuan's pocket now - NTA almost RM 9.


Hengyuan trading at current price is grossly undervalued.

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/052422-saudi-arabia-sees-no-crude-oil-shortage-blames-lack-of-refinery-investment-for-fuel-squeeze

Column: Hurricane season menaces already stretched U.S Diesel supply

https://www.reuters.com/markets/commodities/hurricane-season-menaces-already-stretched-us-diesel-supply-2022-05-26/

no matter how much they raise oil output - only absolute price will come down, but refinery bottle neck and margin will always be there


Posted by petramaises > May 27, 2022 10:17 AM | Report Abuse

energy demand is rising and yet no new refinery is being built. A bottle neck which will take years to resolve

'in order to mitigate the risks of margin erosion to an acceptable level'

Its logical that you hedge only for those product where the margin is thin

@abc333, From Q4 21' financial statement

A17 Commodity prices and foreign currency exchange exposures
......

The Company’s margins and financial performance are exposed to the risk of crude and refined product price fluctuations, driven by geopolitical forces and global economic changes. The Company aims to match the average price of its crude oil intake to the planned production of refined oil products in order to mitigate the risks of margin erosion to an acceptable level.

The Company may enter into futures, swaps and option derivatives to mitigate margin risks, but only whilst achieving an adequate balance between paper and physical positions

Those who want to compare GLOVES with Refinery margin rise phenomenon are TOTALLY BLIND - no way margin will dip like it happened for gloves

simple reason - no one investing in new refinery & takes half a decade to built

Another 1 more possible explanation for the depressed price is that foreign investors who bought and pushed up the price earlier may have changed their mind and started disposing - reason could be due to the fact that EU recently announced that its planning to stop consuming even refined oil produced with russian crude.

These foreign investors will have issues investing on Hengyuan as part of above policy.



Posted by probability > May 27, 2022 9:32 AM | Report Abuse X

what do you need worry on Hengyuan Q1? - only hedging / derivatives loss

but why so concern about derivatives loss now? Hedging is only done when margin is thin, Q2 onwards expect no more hedging loss...

The gain in Q2 will offset whatever loss may be reported in Q1...

the rise in margin is a long term phenomenon which will last

all you need $13/brl and it will keep delivering more than RM 1 EPS per qtr...