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Is Shell Refining Berhad Really A Good Buy?
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Publish date: Sat, 16 Jan 2016, 08:23 PM
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Shell Refining Company Berhad produces a comprehensive range of petroleum products, some 90% of which are consumed within Malaysia, with a licensed production capacity of 156,000 barrels per day.
Revenue and the refining margin
The revenue of the company is still largely dependent on the refining margin.
As we can see from the figure, the qoq revenue growth is correlate with percentage changes in crude oil price. In 3Q2014, crude oil declined 13.4%, the revenue also did the same by falling as much as 12%. In 3Q2015, the company posted 57% lower revenue due to MTA and shut down of production for 44 days, hence only 4.7 million barrels were processed that quarter.
Stockholding gain/loss
Next, we look into how crude oil prices can translate into stockholding gain/loss for Shell Refining Berhad. This is the crucial part that determined the bottom line of the company.
Lower crude oil price quarter to quarter will translate into stockholding loss and thus impact the net income of the company. This is due to FIFO inventory reporting standard (in accordance to Malaysian Financial Reporting Standards 12) that translate into stockholding loss if crude oil price is in deflationary environment. Based on the figure, we can roughly estimate that 1% drop in crude oil qoq will result in stockholding loss of $10million.
In 2014, Shell posted a better refining margin of USD 2.65 per barrel on current cost of supplies basis in comparison to a lower margin of USD 1.10 per barrel in 2013. The margin was affected by stockholding losses of USD 4.99 per barrel in 2014 compared to stockholding gain of USD 0.80 per barrel in 2013.
This doesn't bode well for Shell's net income, as a big portion of the after tax loss was in fact impacted by the stockholding loss.
3Q2014, 199 million net loss (153 million from stockholding loss)
4Q2014 916 million net loss (445 million from stockholding loss, 462 million impairment loss)
3Q2015 151 million net loss (137 million from stockholding loss)
The only short term relief was in 1Q2015, whereby crude oil was down 11.6% but yet Shell managed to record a slightly stockholding gain of 4 million. This is because oil price was not down in a straight line that quarter but in fact in range bound for about 2 months before drop in March 2015.
Impairment
The impairment of 462 million on the last quarter of 2014 put Shell into an even difficult position to turn around. As the changes in crude oil prices and refining margin indicate that the carrying amount may not be recoverable in accordance to Malaysia Financial Reporting Standard.
Now the question is, will last quarter of 2015 results in possible impairment loss?
4Q2015 Result Forecast
The last quarter financial result will be out soon in mid of February 2016 and here is our revenue and net income forecast based on the the previous growth rate and with the assumptions of operating expense remain constant.
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1 person likes this. Showing 19 of 19 comments
anyone who needs the details in a legible format...please let me know your e-mail address here..i will send you the excel sheets and will answer your questions.
2016-01-16 20:56
PureBull, GreatStock...appreciate to you have your e-mail address so that I can post it to you guys and you guys can a make a blog out of it...so that everyone can understand. ( I don't know how to make Blogs !).
2016-01-16 20:57
I hope I was wrong. But, based on the P&L it shows that it is indeed difficult for the company to turnaround.
2016-01-16 20:57
Post your blog in a legible format first.....
I can use it to explain the corrections.
Its not easy to explain via the thread.
2016-01-16 21:09
Send me your spreadsheet calculation to mystockdeck@gmail.com, and I will have a look.
2016-01-16 21:21
Mystockdeck, I can see that you are assuming refinery margin same for all the quarter and try to extrapolate the result for coming quarter. Trust me, those thing only true in Mathematic classroom and never in financial world. What you should or can do is estimate the gross profit (you know the production capacity, refinery margin - can get from Bloomberg) and minus out the expenses (refinery will have quite fix expenses except Q3 2015 due to MTA of 44 days), finance cost (very high too due to high debt for shell) and depreciation. The tricky part is to estimate is loss/gain from derivative and stock holding gain / loss. You pointed out correctly that Y2014 refinery are very depress at only 2~3 USD per barrel. Margin have improved significantly in Y2015 around 6 ~ 8 USD per barrel in Q2 and Q3 2015. Try to guest how much is the refinery margin in Q4? I cant remember the exact value, I think should be 14~18 USD per barrel. Comparing to just than USD 3 per barrel a year a ago, that is why whole world is talking about refinery party.
2016-01-16 23:10
Anyway, quarterly should be out in one month time, just wait and we will know the answer. Happy Investing
2016-01-16 23:12
mystockdeck thinks he is calculating apples and oranges output....hahaha...sau pei la
2016-01-16 23:44
Yuefei01, spot on! According to Singapore benchmark GRM, refinery margin was $5.8 in Q1, $4.8 in Q2, $6.3 in Q3 and average at $8.6 in Q4. The wild card is still on the stock holding gain/loss in Q4 as crude price has been fallen 18%.
2016-01-17 00:02
In 3Q2015, even though the GRM is $6.3, still $138 million of stock holding loss due 23% drop in crude price overshadowed previous 1H2015 stock holding gain of $101 million. Anyway, let's wait for the figure in one month time then.
2016-01-17 00:32
Probability, Thanks for the heads up! Could u please email the figures in a spreadsheet to ghodge1965@gmail.com?
Much appreciated
2016-01-19 11:13
hi guys...sorry I cannot reveal the calculation as I am at a huge loss currently.... will delete my derivation above soon. Good luck...and no fear...
2016-01-19 20:54
my god, RM1.80 is super depress price, all SHELL holders good luck. Lucky I did not buy last year when lure to............
2016-02-02 12:31
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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....
Probability
Sorry to say...a real 'hyena' wrote this.
His analysis is completely wrong.
I am chemical engineer and his derivations completely wrong...he had masked his derivation....to use fear tactic to grab as much possible before the results are out.
One can understand why..he needs to go into such great lengths...
2016-01-16 20:52