but really sad case. it's always derivative hedging part that's not profitable. maybe a west-friendly regime would have to make this refinery to change hand. only then can receive dividends again.
@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.
@otb As per accounting rules, all derivatives are to be measured at fair values i.e. the current price for a contract if you were to enter now with same remaining maturity. It consists of 2 elements i.e. current spot element and the forward point (forward element). Other than the spot element (Hedged) which is creating noise in your position, the forward element (unhedged element) is just a temporary noise due to current market volatility (and you can ignore that) of which it will become zero when the contract near to maturity.
Hope it helps as I do appreciate your (and probability) analysis which save my time preparing my own :). I only focused on the hedging part disclosed in the annual report (more informative) comparing to their interim report.
@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.
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.
@Rabbit2, I do not have good knowledge on this derivative. I like to seek your opinion, what is the estimated derivative loss in Q2 2022 result ? Please enlighten me. Thank you.
As what I know fr insider, they are doing very well for April and May in their hedging. If they can get it right in June, then the profit will be rocket.
@OTB they just mention that they are doing very well in April and May. They are confident that they will do well in June. As long as June is not end yet, no one can tell.
Not all derivative employed by these companies are for hedging purpose loh!
Sometime use it for speculation mah!
For msia refinery.....u no need bcos govt already have a formula for your products price...u no need to really hedge mah!....Bcos govt formula is a natural hedge mah!
Remember during Shell & Esso time....none of them use derivative mah!
They do use derivative bcos....this may run the risk of gambling...if they over do it loh!
Main concern is with the commodity options contract because it's most likely a naked call and when they set up, there wasn't any stock/inventory to cover the price rise against the strike (e.g. fair value gain from inventories) and losses might rise further but I suspect lower; and also HY quickly build up inventories in the current quarter. The good news is they never increase this options position further.
On the refining margin swap, the notional value of swap contract is about RM1.28bil currently with a net liability position of RM294mil. Most likely they swap a refined product (gasoline or diesel?) for a fixed price and we all know that refined products' prices have gone up way higher than crude. If you were to interpret the net gain from the counter party perspective, it is 23% gain and yes, refining margin has gone up a lot! The good news is that the notional value is only about 26% of its current quarter revenue. The next big position HY established is the commodity swap contracts. Can't really guess is it fixed or floating position but so far so good. Will have a better view in the next quarter.
@subwayzzz Q2 result should be able to reflect the high crack spread. Q1 got too many unexpected event which erode the profit. Petronm and HY both also got hedging loss. Even more, HY got inventory write down RM 131558000 probably due to purchase of Russian oil. Without the write down, total profit for HY will be RM 179014000 or EPS RM 0.597.
HY bought russian crude at USD 80 per barrel.....but later sold to the parent in CHINA very cheap at USD 7 per barrel loh! Resulting in a loss of more than Rm 131m loh!
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
subwayzzz
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Posted by subwayzzz > 2022-06-03 11:59 | Report Abuse
*back to HY tongsan