@probability,
It's clear. Thanks

Profit for any qtr will be explosive when crack spread reaches plateau at high level like it is now .

But the absolute profit can still be very high after the hedging loss.
--------------------------------------------------
Assuming gasoline price go up USD10 per month for next 2 months while crude stay averaging USD120 (ie no change) , your realised crack margin is again negated by USD10 derivative loss for the next 2 month.
So, for 1 qtr sales your realised crack margin averaging (10+20+30)/3 =20
The spot crack margin is (20+30+40) = 30 (without hedging)
The opportunity loss can be substantial when crack spread continue to trend highe

Assuming gasoline price go up USD10 per month for next 2 months while crude stay averaging USD120 (ie no change) , your realised crack margin is again negated by USD10 derivative loss for the next 2 month.
So, for 1 qtr sales your realised crack margin averaging (10+20+30)/3 =20
The spot crack margin is (20+30+40) = 30 (without hedging)
The opportunity loss can be substantial when crack spread continue to trend higher.

Probalility :
Your Sample business transaction of HY refers:

Your twin brother's gain or lose in derivative depend on the magnitude of refined and crude price divergence ie widening of narrowing of crack spread.

Let's put some numbers to your illustration.

Your cash transaction :
you sell to me gasoline @usd140/bbl
correspondingly you buy crude USD120/bbl
your crack margin USD20 (140-120)

Your twin brother's future trading :
Your twin brother sell crude @USD120/bbl
His long position 4 weeks ago was @USD120/bbl (assuming no change to crude)
He is breakeven here.

At the same time he buy gasoline @USD140/bbl
His short position 4 weeks ago was @USD130/bbl (ie crack margin was USD10 )
He lost (USD10/bbl) because crack spread has widen to USD20 in cash market.
Your twin brother's suffer bigger derivative lose when crack spread widen from previous month.

On the contrary, your twin brother make gain when crack spread become smaller than previous month.

Make sense ?

@Klee, with due respect, we are deliberating about the profitability of HY in present market environment. We are not dictating what's its share price tomorrow, a week later or a month later and we all very well understand that share price performance is affected by the broad market sentiment . When one is convinced of its earning prospect, it is then up to one when and how to buy in. Those are individual choice basing of the individual's perspective and risk appetite. There is no sure right or sure wrong. The end results matter.

Moneymakers, go to see a pyschiatrist for your mental illness and see a bomoh for the chasing away the ghost in you. Hehehehe...

Hi Probability,
First of all , i truly respect your perseverance and effort in getting to the bottom of the hedging issue. Many, including myself , managed to pick up new knowledge which is useful in evaluating another investment opportunity in the future.

Your explanations and the general conclusions make good sense. I also suspect that Q2 and Q3 profit will be way higher than Q1 irrespective if hedging loss is higher , same or lower. The huge jump in crack spread in Q2 will take care of any hedging uncertainty.

I only have the following to highlight (again , a laymen perspective ) :
1. Your case study is base on 100% sales hedged 1 month forward on rolling basis . I like to think that management would hedged 2 or 3 months forward as management should be more concern of uncertainty in longer future.
2. You did not consider the discount in forward contract for crude and refined. a USD2-3/bbl discount for 1 month forward is very common.
3. You only look at the refining margin swaps in your case study. There are 3 other type of commodity hedges, namely Forward priced Commodity Contracts, Commodity Swap Contracts and Commodity options contract with considerable notional sum . I appear to me that these 3 other commodity hedges are independent of the refining margin swap and may have some impact to bottomlines.

In the nutshell, the purpose of hedging are 2 folds :
(a) to protect inventory losses from the effect of price falling before the sales materialized
For this, the hedging gain/loss will be offset by the higher/lower cost of sales.
(b) to lock in (protect) reasonably good margin of future months sales.
For this, company may suffer opportunity losses when crack spread trend higher and additional profit when crack spread trend down.
---------------------------------------
Probability posted :
Johnzhang, would love to know your comments on this article:
https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-

To all other I3 members.
I apologize for some of the humiliating messages i posted. This is very unusual of me.
Those messages are simply for the benefits of the two clowns ,botakpang2 and moneymakers who don,t even have the slightest self respect and dignity.
Just skip those messages as you may chose.

Moneymakers, I told you already you have mental issue repeating the same nonsense over and over again. This is clear sign of mental regression. Pls go to see a doctor fast!
Another advice to you is don't read too much horror ghost stories until you see ghost day and night.

botakpang2, you are just so tiny that I can put you in my pocket. Go an ask your mama what is the meaning . hehehe....

You can keep the hell note for yourself because you need them soon. Hehehe…

botakpang2 telling more lie to cover previous lie. Who will believe your endless lies ?
Go on to suck your milk bottle.
Hehehe….

Even if HY go down below $4 and I lose money that is non of your business. It not your money.
You better jaga you get enough milk and get your shit washed than to worry for others. Hehehe…

botakpang2, people will judge if you are telling lie .
Btw, has your mama changed your soiled pampers since last night?
You are really a clown to keep me entertained
Hehehe….

No my style to quarrel. But these clown botakpang2 and moneymakers have been hauling personal attacks and utter nonsense and lies nonstop. They have gone overboard will get the humiliation well deserved.

botakpang2 telling more lie to cover previous lie. Who will believe your endless lies ?
Go on to suck your milk bottle.
Hehehe….

botakpang2,
In Petron forum I said you making huge profit in your DREAMS only is with proof one . Mphb capital was not even listed 10 years ago 2012! Mphb capital achieved its peak share price in late 2014 only . How you could sell at peak price 10 years back ????? Sold in your dream!
Your big lies all ‘bocor’ and everyone can see it now ! Hahaha…
————————
Posted by botakpang2 > 8 hours ago | Report Abuse

Wan to talk with me mphbcap ah? Very proud right? Pls check la, i oredi made huge gain 10 years back when it was traded at 2.80. Now only u bought ah? Kakaka

When I said you making huge profit in your DREAMS only is with proof one . Mphb capital was not even listed 10 years ago 2012! Mphb capital achieved its peak share price in late 2014 only . How you could sell at peak price 10 years back ????? Sold in your dream!
Your big lies all ‘bocor’ and everyone can see it now ! Hahaha…
————————
Posted by botakpang2 > 8 hours ago | Report Abuse

Wan to talk with me mphbcap ah? Very proud right? Pls check la, i oredi made huge gain 10 years back when it was traded at 2.80. Now only u bought ah? Kakaka

Moneymakers is just a stupd kid . He Keep uttering the same thing over and over again which exhibit his mental problem. He is finished

botakpang2,
You are only good at sucking milk bottle. Hehehe…..

botakpang2,
Still crying? You must have shitted in your pampers. Hahaha…

@botakpang2,
Still crying for milk ? Already cried so much at Petron forum not enough meh?
At least the 2 people are eager to learn new knowledge .
Carry on sucking your milk bottle and perhaps watch few more horror ghost movies. Ending up seeing ghosts all over .
Hehehe…..

Understood. It’s a rolling hedging.
————————
probability
@Johnzhang, considering your query i had added some clarification on why the hedging are closed and renewed every month.

@probability,
I asked about the lead time between crude purchase to realizing sales of the refined products which is about 3 months is trying to link how advance the hedging is done . For example Jan 2022 to enter refining margin swaps for April 2022 delivery ? ( ie 3 mth forward to match to the lead time mentioned earlier).
If that is true , the realizable crack spread is always at 3-month forward discount to spot rate which can be considerable. For example, the crack for spot month June is 30.6 whereas the rate 3 months later (Sep) is 23.5, giving rise to usd7.1/bbl difference .

Same for commodity hedge on crude . 3 months forward can be as high as usd10/bbl discount.
Let’s talk more tomorrow.

@probability,
Average inventory holding in 2021 and 2022 were 1.72 months and 1.86 months of sales vol. (figures derived from year end BS , inventory value/ avg purchase per month).
Taking into consideration of 1+ months of lead time between contracts and crude arrival, the gap between contracting crude and eventually selling refined products will be 3 months. Hedging is therefore particularly important to cover the risk of price going opposite direction during the 3 months.
Can you simulate another example under scenario described by me in above.

@probability,
I am absolutely a layman in derivatives. Will come back to you with my layman’s opinion tomorrow. Thanks
————————
Johnzhang, would love to know your comments on this article:

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-H...

@botakpang2,
You still day dream making huge gain ? Anybody believe you ?
Go on dreaming and sucking your milk bottle. Hehehehe…

Sslee,
you hit the nail on its head !
Many experienced the ghost in glove and see ghost everywhere now. There is no ghost in refinery, at least not until price rocketed to euphoric stage .
It is very common to experience 10-20% price correction even in many solid counters due to during nervous market sentiment. Such price correction had nothing to do with fundamental change of a business but largely market sentiment. Many can not tell the difference.
For plantation counter like Bplant, we have witnessed 10-20% prices pullback in multiple times since early 2021. In the end , it has surged 100% even with last week’s pullback. Last week pullback will be just one of the many pullbacks we have gone thru . Meanwhile, enjoy the exceptionally handsome dividend from Bplant and others .

———————
Sslee posted:
Just wonder why so many naysayers keep repeating the glove case when what they should do is short sell Petronm and Hengyuan to make million.

Or they already short Hengyuan and Petronm and now are working hard in Petronm and Hengyuan forum to make sure their short will make them million?

@botakpang2,
You are still crying for milk ? Hehehe..

@botakpang2 baby,
Didn’t you see my below posting in HY forum as far back as Feb 2022? Am I chasing HY at $7 plus?
Go on sucking the milk bottle lah . Hehehe…
————
Posted by Johnzhang > 2022-02-14 21:15 | Report Abuse

Crack spread is near record high , growing demand for refined products from reopening, oil price inching higher , etc , are good enough reasons for me to add position in PetronM and Hengyuan . I am convinced they will pay off very well eventually.

Ya , you bought a lot in the dream. Hehehe..

When I started accumulating Petron back in Jan/Feb at $4.40. -$4.70, you were still day dreaming and sucking the bottle. Go and check when I started talking about this share in this forum.
Don’t have pretend you are smart when you actually have no substance at all .
Btw , I am also very big in mid and small cap plantations like Bplant and MPHB capital too. Also ,go and check when I started posting in the respective forum and compare the prices between then and now.
———————————-
botakpang2 posted:
All holding at high px giving all sort of excuse to comfort themselves. In d end, left in a sinking boat into indian ocean. Kakakaka

Equating glove sector to oil refinery is real stupig . You must have experienced ghost in glove and now seeing ghost everywhere and all the time . No medicine can cure you.

——————————————
botakpang2 posted :
This is call atogant stupaid. Kakakaka. Same old story for gloves last time. All said vacine not working la, high asp la. Plantation oso. High cpo px la due to war. Bla bla bla. How is the plantation counter now? Kakakaka

You are exactly right . Many are naive to compare other sector to the horror story of glove . They saw ghost once and now seeing ghost everywhere and all the time .
———————————-
Titan3322, posted :
Lots of people got bitter experience from gloves but this is no gloves lah bro. Don't worry lah SOP problem is only the cheap esos to its execs. I think what calvin wrote is true but the TP no RM10.00 lah maybe after the esos is done it may go back to 6.00 only lah. But most important is the BOD must decide on a decent dividend policy lor.

Petron will earn net profit in the tune of $310 to $380 mil in Q2 2022. Should crack spread average usd20/bbl for full year , Petron will earn OVER $1 bil net profit. And no of share is only 270 mil .
You don’t have to believe this .

Equating oil sector to glove sector! I am speechless.

Should crack spread averaging usd20/bbl which I think will be , HY’s NPAT for 2022 will EXCEED a whopping $1 bil ! This is good enough reason for me to shift more capital to it. You don’t have to believe this .

Inflation fear , interest rate hike and recessionary pressure induced by high inflation are dampening equity in general . But , crude oil producers, refinery, CPO producers are the few places to be .

irrespective how pessimistic many in this forum are, I am buying the dips in HY and Petron on staggered basis and hold them for 6-9 months .
I am never a trading guy. With poor and nervous market sentiment, coupled with extremely lack of buying support from retailers and institutions, manipulators are in temporary control tempering prices even for the most solid stocks. Meanwhile, day traders, short term view traders and panicky retailers get crushed .

@OTB, I think Sslee is correct. The prosperity tax is for assessment year 2022. Our tax system is pay as you earn . As such, assessment year 2022 refer to year income is earned.
Sslee posted :
Prosperity tax was tabled last year for Budget 2022 thus I think it should be for taxable income above RM100 million for year 2022.

@OTB,
I just want to point out the following historical data with respect to PBT vis-a vis Crack spread:
FY2016 PBT $335m crack 8.04
FY2017 PBT $974m crack 10.34
FY2018 PBT ($24)m crack 5.82
FY2019 PBT $147m crack 4.90
FY2020 PBT $256m crack 1.44
FY2021 PBT $128m crack 7.78
------------------------------------
6-yrs avg PBT $303m crack 6.39
----------------------------------------
Q12022 PBT $85 crack 13.53

Over 6 yrs of financial data, it is still very difficult to clearly define the link of profitability to crack spread. There is something in-between that we outsider truly can not understand ie the impact of Derivatives !
Hope someone out there can shed some light.

Hi Probability,
Are you sure ? As far as I know, the figures in the note of account for inventories write down or gain entails all event including inventory mark to market .
How do you explain the RM132 mil inventory write down in Q1 2022 ? For off spec too ?
-------------------------
FYI John
realized where u took this numbers
these are inventory write down (similar to offspec) not stockholding gain/loss..

Dear OTB,
Sorry for responding late as I have an outing today.
I hold the opinion that the basis of your calculation is generally realistic.
GP based on avg crack spread @USD20.84/bbl , sales vol of 10.6 mil bbl and Xtare 4.4 is indeed RM972 mil.
Total cost of manufacturing, adm, depr, finance = RM100 mil/qtr (on 2021 average)
Estimated Refining margin swap contract loss = RM103 mil
PBT = 972-100-103 = RM769 mil
Tax @ 33% = 254mil (1st Q PBT of RM85mil almost reach the $100 mil threshold)
NPAT = RM769 - 254 = RM515 mil or EPS RM1.72

However, I think HY's hedging is more complex. They are 4 different types of derivative instruments they use. Here, we are only looking at one ie refining margin swap contracts. The potential derivative losses from the other 3 types derivatives contracts are difficult to assess as public are not privy to their hedging policy and status. The potential losses from other derivatives can be substantial amount if HY's lack of prudence.
I suspect NPAT for Q2 in the worst case will not be lower than RM300 mil



----------------------------
OTB posted :
I take the crack spread margin of March, April and May 2022 as the crack spread margin for Q2 2022.
Refined margin calculation required a month lead time, hence the crack spread of June 2022 will be reflected in Q3 2022.
The average crack spread margin for Q2 2022 is USD 20.85.
Assume 25% of revenue in Q2 2022 (stated in Q1 2022 report) are hedged at USD12.00 (stated in FY2021 annual report).

Gross profit of Hengyuan
Sales volume for Q2 2022 = 10.6 million barrel
Average crack spread for Q2 2022 = USD 20.85
1 USD = RM 4.4
Gross profit = 10.6*USD 20.85*RM 4.40 = RM972.4 million

In this case what is the refined margin derivatives loss in Q2 2022 ?
25% of revenue is sold at USD12.00.
10.6*25%*USD8.85*RM4.40 = 103.2 million

Is this 103.2 million as refined margin derivatives loss a real physical loss ?
The answer is no because 103.2 million is captured in the total sales volume of 10.6 million barrels in the earlier calculation which I use USD20.85 to calculate the gross profit.
This 103.2 million as refined margin derivatives loss is just an opportunity loss if the management of Hengyuan did not hedge 25% of the revenue to sell them at USD12.00.

You will be frightened to note that the gross profit of RM972.4 million in Q2 2022.
After deducting manufacturing cost, admin cost, depreciation and finance cost, refined margin derivatives loss and income tax, the PAT is around 600 million.
Number of shares issued = 300 million.
Estimated EPS is about 2.00.

Tell me which stock listed in KLSE can give you EPS around 2.00 per quarter.
This stock is called Hengyuan.

Good Morning Sslee,
don’t take these pessimists and naysayers seriously.
Some said what they said with an ulterior motive and I am not surprised if they are ‘employed’ to do so.
Some are inexperienced and yet not willing to learn new knowledge with open mind.
Some see ghost once and now see ghost everywhere and all the time .
That’s how we get all kinds of comments.

@Sslee, Moneyamakers is going to tell you don’t be too happy, crack spread in heading for a brutal collapse like glove . Hehehe…..

I personally feel many people in this forum bark the wrong tree.
HY and Petron are NOT crude oil producers who benefit or suffer from crude oil price up /down.
Instead, they are refiners who derive their profits from refining activity and selling the refined products. What matter to them is the difference between crude price and the refined products prices ie crack spread!
crude oil price movement (up or down) merely impact the inventory value of physical stock and outstanding crude oil purchase contract. The risk of crude price change can easily be covered by prudent hedging and this is what both Petron and HY do.
Also, the conversion cost of turning crude into refined products is merely about Usd2/bbl . Therefore, gross profit at refinery plant level is crack spread minus about usd2/bbl Crack spread level at USD28 today present insane amount of gross profit! Bear in mind that average crack from 2016-2021 was merely $6.39 and yet HY and Petron made reasonable level of profit.
Simple enough reasoning ?

I personally feel many people in this forum bark the wrong tree.
HY and Petron are NOT crude oil producers who benefit or suffer from crude oil price up /down.
Instead, they are refiners who derive their profits from refining activity and selling the refined products. What matter to them is the difference between crude price and the refined products prices ie crack spread!
crude oil price movement (up or down) merely impact the inventory value of physical stock and outstanding crude oil purchase contract. The risk of crude price change can easily be covered by prudent hedging and this is what both Petron and HY do.
Also, the conversion cost of turning crude into refined products is merely about Usd2/bbl . Therefore, gross profit at refinery plant level is crack spread minus about usd2/bbl Crack spread level at USD28 today present insane amount of gross profit! Bear in mind that average crack from 2016-2021 was merely $6.39 and yet HY and Petron made reasonable level of profit.
Simple enough reasoning ?

MM,
You hope to watch an unhappy show in HY? That is sadistic characteristic . I advise you to see a psychiatrist soon . Hehehe….

MoneyMakers posted ;
John HY epic collapse inevitable
No way im missing the show

@OTB,
Many people said unsubstantiated things with motives in mind and purposes to achieve.
They are some choose to bury their head underground . Some don’t want to know the truth because knowing the truth hurts .
All kind of people around. So, avoid getting too irritated by them .