Posted by stockraider > 2022-09-04 13:32 | Report Abuse

Raider asklah....how could embargo on Russia....help Hengyuan & Petron....to make more money leh ??

The impact is remote mah!

Also Msia is not exporting diesel & gasoline to Europe mah!

This probability very panlai spin mah!

Posted by probability > 2022-09-04 13:37 | Report Abuse

u forgot how hurrcane harvey in US helped looks like

Posted by stockraider > 2022-09-04 13:38 | Report Abuse

I suspect the derivative trader is done between the owner macai & hengyuan mah!
Not thru an official exchange lah!

Do not be silly loh!

Posted by i3lurker > 1 minute ago | Report Abuse

silly feller NYSE start 9:30 and do oil trading NYSE

Posted by i3lurker > 26 minutes ago | Report Abuse

Crude Oil can be traded via 3 main channels,
[still got others its called dll, not a bad word its => dan lain lain]

1) Oil Physicals & Futures
2) NYSE ETFs
3) OTC swaps

Posted by probability > 2022-09-04 14:02 | Report Abuse

@raider for you query above:
Among the two possibility below derived by sslee, only gasoline fits the hedged crack value as found in 2021 annual report page 130 where the max margin was around 12 USD/brl.

The lowest crack spread closing on 30 June 2022 is only for gasoline around 31USD/brl (others like Diesel & Jet Fuel is way higher).
Only using the lowest mark to market crack spread end of June 22, you can derived the low value hedged crack spread as per annual report of about 12 USD/brl.
Using gasoline the hedged barrels is 18 millions as derived by sslee.
As such, you need to be good in maths to understand how these are deduced.

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

Posted by probability > 2022-09-04 16:03 | Report Abuse

Just want to inform all readers,

For HY refinery its actually good if the gasoline margin stays low, as the lower it is the higher the Diesel & Jet fuel crack will go since refinery try to compensate their loss in gasoline with higher margins on other refined products.

Further, this will discourage simple refiners who produce mainly gasoline and fuel oil from increasing output and even shutting down their operation - reducing further diesel availability on the market.

HY which had hedged significant amount of gasoline (at about 20% of their sales volume - basically all their gasoline yield ) will be the greatest beneficiary among all regional refineries.

All the information are there, research carefully to gain an edge to make fantastic investment decision of a lifetime.
Good luck..

Posted by probability > 2022-09-05 16:09 | Report Abuse

@Zhuge,

Among the two possibility below derived by sslee, only gasoline fits the hedged crack value as found in 2021 annual report page 130 where the max margin was around 12 USD/brl.

The lowest crack spread closing on 30 June 2022 is only for gasoline around 31USD/brl (others like Diesel & Jet Fuel is way higher).
Only using the lowest mark to market crack spread end of June 22, you can derived the low value hedged crack spread as per annual report of about 12 USD/brl.

Using gasoline the hedged barrels is 18 millions as derived by sslee below.


Since we have passed 2 qtrs in 2022, the average crack spread hedged on the latest notional amount of USD 226 million is much higher than what was reported at end of 2021 (on annual report). It has been displaced by maturing hedged contract of gasoline at 0.75 million barrels/month x 6 = 4.5 million, with fresh ones as per market crack spread in future for gasoline in Q1 and Q2.


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



Posted by Zhuge_Liang > Sep 5, 2022 10:57 AM | Report Abuse

Post 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).
-------------------
@probability,
I have 2 questions on your posting here.
1.) 18 million of refined products hedged at USD12.70/brl.
Is it all gasoline only ? No diesel and jet fuel or mixture.

2.) 18 million of refined products hedged at USD12.70/brl.
Is this hedging for 1 year or 2 years ?

Please advise.

Posted by probability > 2022-09-05 16:10 | Report Abuse

@Zhuge,

Gasoline should be the most abundantly available in the futures for hedging far into the future and diesel & jet fuel had been having strong crack even under covid environment (less concerned) unlike gasoline demand affected by lockdown.

Thats why we can see in 2020 and 2021, HY still can deliver good earnings.

Further we can see in Q1 22 results the hedging losses under COHR is very low (even positive, as the futures maturing in 24 months could be well below 12.7).

Posted by probability > 2022-09-05 16:10 | Report Abuse

@Zhuge,

prove on the effects of hedging when crack spread drop below hedging level for balance hedged contract is here

Posted by Sslee > Sep 3, 2022 6:17 PM | Report Abuse

If you look into HRC quarterly report.
On 31/12/19. NAPS is RM 6.7045.
Q1 end 31/03/20 EPS negative 41.37 cents but NAPS is now RM 7.4418

Posted by Sslee > Sep 3, 2022 6:32 PM | Report Abuse

You can check what is the mogas92 crack spread on 31/03/2020.
www.tradingview.com/symbols/NYMEX-D1N1%21/

Posted by probability > 2022-09-05 16:10 | Report Abuse

If they had hedged large portion of Diesel / Jet fuel, the COHR would have easily shown huge loss like we saw at end of Q2 22', by end of Q1 22 itself.

Posted by probability > Sep 5, 2022 11:24 AM | Report Abuse X

@Zhuge,

Gasoline should be the most abundantly available in the futures for hedging far into the future and diesel & jet fuel had been having strong crack even under covid environment (less concerned) unlike gasoline demand affected by lockdown.

Thats why we can see in 2020 and 2021, HY still can deliver good earnings.

Further we can see in Q1 22 results the hedging losses under COHR is very low (even positive, as the futures maturing in 24 months could be well below 12.7).

Posted by probability > 2022-09-05 16:11 | Report Abuse

sslee, my thoughts are each hedged barrels are marked to market based on futures prices corresponding to their respective maturity date, at the end of the reporting period.

we can assume the 'A' we had used here as 'reflective' of their composite effects

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

Posted by Sslee > Sep 5, 2022 11:31 AM | Report Abuse

If i will to attend the next HRC AGM, I will prepare the following questions on refining margin swap contract.
Refer refining margin swap contracts.
Is contact notional amt is sum of contracts (volume in barrel X hedged refining margin)?
What is refining margin swap contracts assets and liabilities and how it is computed?

Posted by probability > 2022-09-05 16:53 | Report Abuse

The IFRS9 itself was spurred by Cost of hedging reserve

Interest rate swap is a good example

https://www.bloomberg.com/professional/blog/ifrs-9-adoption-spurred-cost-hedging-approach/

Posted by probability > 2022-09-05 18:19 | Report Abuse

some useful reading on IFRS9 - airline:

www.iata.org/contentassets/4a4b100c43794398baf73dcea6b5ad42/airline-disclosure-guide-hedge-accounting.pdf

Posted by tehka > 2022-09-05 21:37 | Report Abuse

Quantum Commodity Intelligence – Middle East crude prices Monday was cautiously higher after Russia’s closure of the Nord Stream 1 pipeline helped underpin global energy prices, while diesel cracks spiked, tracking European swaps higher.

Gasoline cracks jumped a dollar and are now near a one-week high as the market corrected from negative territory and the backwardation firmed significantly.

Diesel paper cracks jumped with Q4 at $41/b, up $3/b from Friday

www.qcintel.com/article/asia-oil-products-crude-price-higher-diesel-cracks-jump-8259.html

Posted by speakup > 2022-09-06 07:49 | Report Abuse

reminds me of gloves
when fantastic results out , price drop instead of up
cos insider all sell sell sell

Posted by Michael Kwok > 2022-09-06 08:45 | Report Abuse

The trend already over(bullish).tht y.

Posted by probability > 2022-09-06 13:42 | Report Abuse

Guys take note of the following:

For every amount lost under 'cash flow hedge' due to their 'refining margin swap contract (RMSC)', they are entering into a higher margin fresh contract (RMSC) by the same amount.

The fantastic margins opportunities are never really lost by HY, but only deferred to a later date. HY can always do this as they have unlimited physical product to hedge along with new opportunities (just that it will take place at a later date).

Posted by BLee > 2022-09-06 15:16 | Report Abuse

@probability: Guys take note of the following: .."HY can always do this as they have unlimited physical product"..

BLee: Hi @probability, I doubt the "unlimited physical product" as the Manufacturing Expenses for the period JuneQ22 of value RM43,293k was less than JuneQ21 of value RM55,521k, most likely decrease in physical product generated despite consumption should pick up on economy recovery.
The tankage also could be a bottleneck comparing 11 crude tanks vs 78 product tanks (link: http://hrc.com.my/operations-products.html
,each tank size is not defined??) for feedstock and storage..
Happy Trading and TradeAtYourOwnRisk

Posted by probability > 2022-09-06 19:13 | Report Abuse

@Blee, what i meant was HY can always hedge at longer maturity, along with physical stock they can produce at a later point in time.

Meaning, the current high margin 'opportunity' is not lost due to hedging completely, but deferred due to hedging. This is not related to their refining capacity or storage tanks

Posted by BobAxelrod > 2022-09-06 20:06 |

Post removed.Why?

Posted by BLee > 2022-09-06 20:48 | Report Abuse

@probability, noted. If product hedging based on projected output capacity, maybe the risk is moderated? Looking at the increased revenue vs the decrease in Manufacturing Expenses, will it be a concern? Your guess is as good as mine? Maybe as a refiner of petroleum products, HY has an added advantage to "gamble" with hedging wrt crack spread? Concerning my few questions above and others billion$ Trade receivables/Trade and other payables/Derivative financial liabilities/Borrowings (current liabilities more than current assets),  I will await the answers in due course..Tq

Posted by probability > 2022-09-06 20:50 | Report Abuse

@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.

Posted by probability > 2022-09-06 20:52 | Report Abuse

@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.

Posted by BobAxelrod > 2022-09-06 21:07 |

Post removed.Why?

Posted by BLee > 2022-09-06 22:23 | Report Abuse

@probability: @Blee, FYI on risks..
Infact, hedging is to reduce risk (not the other way).

BLee: @probability, agreed hedging is to reduce risk if for input/feedstock as it will control production cost. Likewise, petroleum products shall only be hedged by consumers. Non-consumer hedging shall upset supply and demand, and finally will affect the products prices. Is this "gambling"? I might be wrong as I am more Engineering incline and have some experience in procurement/material prices. Tq

Posted by probability > 2022-09-06 22:41 | Report Abuse

@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.

Posted by BLee > 2022-09-06 23:37 | Report Abuse

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

BLee: @probability, thanks for sharing. There are too many parameters which can affect the crack spread!! I believe we are still "guessing HY hedging position". "If" still can go from positive/negative "if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future" is correct/wrong. I hope HY makes the "right gamble" and the majority will benefit..We shall learn from all this discussion, Happy Trading and TradeAtYourOwnRisk.

Posted by probability > 2022-09-07 17:09 | Report Abuse

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

Posted by probability > 2022-09-07 17:16 | Report Abuse

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.

Posted by probability > 2022-09-07 17:20 | Report Abuse

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

Posted by anthonytkh > 2022-09-07 17:24 | Report Abuse

Probability, so much info from you. Thanks

So how would you compare Hengyuan with, say, Valero (VLO)?

Specifically, how do the numbers compare (cash, debtors, creditors, borrowings, real estate assets, leverage ie. equity vs liabilities) for these two companies?

It’s quite okay if you don’t have the time because it involves different accounting rules and regulations for the two countries. Thanks

Posted by probability > 2022-09-07 21:55 | Report Abuse

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.

Posted by probability > 2022-09-07 21:56 | Report Abuse

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

Posted by probability > 2022-09-08 00:15 | Report Abuse

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

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

Posted by probability > 2022-09-08 01:09 | Report Abuse

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.

Posted by vinc3362 > 2022-09-08 11:20 | Report Abuse

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.

Posted by Zhuge_Liang > 2022-09-08 14:42 | Report Abuse

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.

Posted by Zhuge_Liang > 2022-09-08 14:43 |

Post removed.Why?

Posted by probability > 2022-09-09 02:15 | Report Abuse

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

Posted by stockraider > 2022-09-09 10:42 | Report Abuse

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 ??

Posted by BobAxelrod > 2022-09-09 14:22 | Report Abuse

Joker unable to find the Sell button......

Posted by probability > 2022-09-09 19:23 | Report Abuse

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.

Posted by stockraider > 2022-09-10 08:54 | Report Abuse

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!

Posted by stockraider > 2022-09-10 08:54 | Report Abuse

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!

Posted by probability > 2022-09-10 10:46 | 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:
...............

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

Posted by stockraider > 2022-09-10 10:48 | Report Abuse

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:

Posted by stockraider > 2022-09-10 10:55 | Report Abuse

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!

Posted by stockraider > 2022-09-10 11:05 | Report Abuse

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!

Posted by stockraider > 2022-09-10 11:11 | Report Abuse

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!

Posted by stockraider > 2022-09-10 11:23 | Report Abuse

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!

Posted by probability > 2022-09-10 11:25 | Report Abuse

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