The crises have a high potential for contagion across the globe

Brazil is another country beginning to feel the pressure of diesel shortages. Petrobras, the state-owned oil company, has warned of shortages unless the company was allowed to sell its fuels at market prices rather than subsidized rates that encourage consumption. If the traditional suppliers cannot meet the demand and there is a continued squeeze on Russian supplies, it makes for a potentially critical situation. The geopolitical context is unsuitable for turning to Russia and its associates as relief measures. Europe is also wary of its continued energy reliance on Russia, which has hampered its anti-Russia strategy in the wake of the invasion of Ukraine.

Meanwhile, the major consumers of diesel are demanding its steady supply despite the challenges in the market today. The economic recovery in the post-Covid 19 era is bound to be problematic due to the increasing demand for diesel beyond the expectations of a downturn. Economies require diesel to run, and the supply is not doing the trick. The expectations of a relief phase when sanctions against Russia are eased are not likely to come until 2023. This makes a grim reading for those in the logistics and transportation business and ordinary consumers that rely heavily on diesel.

Wrapping up

A combination of a supply squeeze and demand expansion means that diesel is in short supply. Even more worrying is the reality that the current state of the market is not likely to ease until next year. Russia is embargoed by much of Russia, and the USA must think about its domestic needs when harvests begin in the Midwest. In addition, some South American countries are rethinking their price controls on diesel and other fuels to stem demand. Meanwhile, African countries are facing civil strife and significant logistical problems due to the shortage of this essential fuel. The post-Covid 19 era is bringing new economic and political challenges that will require strong policy interventions in the medium and long run.

Diesel prices are likely to climb again soon

September 8, 2022

https://www.shiplilly.com/blog/sorry-diesel-prices-are-likely-to-climb-again-soon/

Cost and viability implications for the logistics industry

There are indicators that the diesel price crisis is ongoing. Such indicators belie the expectations that the economy is slowing down. Instead, demand for diesel is increasing. Some countries are already grappling with a diesel shortage. For example, many European countries are rushing to secure diesel deals because of the embargo placed on Russian barrels. As the harvest season comes to the US in the Midwest, demand for diesel is bound to rise even further. It may be that the suppliers must play a balancing act between meeting a domestic need and catering to international demand.

Diesel as an essential fuel of economic activity

John Kemp of Reuters has indicated in his oil-buying periodical that institutional traders and hedge funds are buying diesel contracts at some of the fastest rates since November 2020. In real terms, this means 9 million barrels are added to holdings. Bloomberg indicated that the demand for US diesel hit the highest level in the last half-decade. The winter is likely to bring even more demand. Indeed, the US exports of diesel reached an all-time high just last month. The biggest destinations of these exports are Europe and South America.

Other countries are putting protective mechanisms to ensure their supply of diesel. For example, India has placed exportation limits on diesel based on concerns about the adequacy of domestic supplies. Additionally, diesel from Russia has been shunned by mainstream Europe due to the existing sanctions regime that emanated from the invasion of Ukraine. That embargo will not likely end before the current year’s close. Even though there have been diesel shortages before, this one is gathering much publicity.

Government action to mitigate the risks of diesel shortages

An European Petroleum Refiners Association executive indicated at the beginning of the year that most governments were aware of the link between GDP performance and access to diesel. This was in response to the sanctions against Russia when some skeptics were worried about unintended consequences such as the current scarcity of diesel. This is no idle speculation since Russia remains the largest supplier of diesel to the European Union. It is estimated that Europe imports an average of 750,000 barrels every day from Russia, a matter of necessity given the freight transportation, heavy industry, and economic impetus.

Setting the sanction aside for the moment, the diesel market has generally experienced a much faster demand rebound than supply growth following the Covid-19 pandemic. That pattern was reflected in the market for crude oil. Some experts have noted that the demand growth has slowed down recently on the back of an expectation of a global downturn. This would make sense given the central bank rate increments and inflationary pressures discouraging buyers. However, that pattern only lasted for a relatively brief period to be replaced by an even greater demand for diesel.

An inventory that is lacking in reliability and completeness

A columnist for Reuters has noted that US crude oil inventories were failing to fully recover, despite the fuel price inflation. The implication is that the tightness of the fuel markets and the consequent price elevations will likely continue for the rest of the year. The Department of Energy in the USA reported this was that US oil inventories had fallen to their lowest levels since 1985. Indeed, the strategic petroleum reserve now stands at only 469.9 million barrels. As a result, the problems and worries are spreading to the rest of the world.

Some African countries, for example, have reported such shortages in fuel and drivers, impacting the supply chain in a myriad of ways. The Central African Republic is a case in point. Here, humanitarian organizations that have been active in the country recently have scaled back their engagement. A shortage of diesel has been partly blamed for this withdrawal. Cameroon is another case that has had to deal with street protests over dwindling fuel supplies and the inevitable soaring prices.

@upshare, as per the maturity date of respective barrels hedged

if you see the RMSC, they are able to hedge even up to 2 years (maturity) in advance..subject to availability of counterparty to provide the hedging contract.

u see this one also like to use very advance sophisticated language with ZERO content at the end, haiyo, correct?

Posted by i3lurker > Sep 9, 2022 9:39 PM | Report Abuse

no calculations required
unless you are Dragon who ngam ngam passed maths at UPSR level
[Govt terminated this exam so that future Dragons no need embarassment]

Brent at zero,
HRC is liquidated,
banklap [Dragon hear this is very excited]

no need zero for long period of time
if Brent reaches zero for 1 microsecond, and then goes back up to 90.00
all those swaps are terminated and HRC will owe billions to sex firm
thats how the swap market works

also, you realized or not these low IQ naysayers think just by using some professional english words they think readers may value their toilet paper worth opinions...really taking a lot of forum space right! haiyo, correct?

Posted by sharemarket21 > Sep 9, 2022 9:34 PM | Report Abuse

Nah, many of you pumped all the nonsenses and unfounded factual from the peak and disregarding the stock market fundamental flow and rules, causing so much damages, yet you trying to be act tough here ? It's 4.60 and not 7 above. We are here to expose and a few newbies ought to find out. You had your moment but roasted and roasting.

Ular, you realize or not one thing about all these naysayers?

they never get in to the information presented to discuss but always talk about the promoters themself and their motives

is it naturally the naysayer IQ is mostly very low? haiyo, correct?

Posted by sharemarket21 > Sep 9, 2022 9:25 PM | Report Abuse

Check slightly below top left in this wet market website, you will see the current share price. One ought to be cautious when you start seeing bunch of commenters who have caused so much damage start complimenting each others and continue disregard the potential downside. Let's wait patiently and squeeze harder for any windows opportunity in this tiny volume trading. The only way to make some decent profits from the little fake men.

yes Ular..i agree with you, but sometime this qqq3 simply pluck things from thin air and annoy people...thats why..

ask him to refute more decently... sure people no attack him i think..

@ular..ask him to repost..we are here to listen all naysayers...loud and clear

ok, exactly as i thought earlier..ok great! :)

By sslee's way of query, i was thinking he was stressing the point that COHR is not of any concern till the time the actual physical market transaction takes place along with the hedge crack closure in futures..

@sslee was that the message? or is it a sincere query?

@upshare, i totally understand these. I was trying to answer sslee but i was not sure what was his question..

the unrealized losses shown on COHR are purely future hedging losses IF the mark to market spot price of the refined products on June 30th remains.

Its derive to show the probable future at that point in time. This his nothing to do with P&L and thats why the placed in OCI

@sslee, i did not really understand your query above.

I am perfectly inline with Zhuge's statement above.

Does the below simplified statement not answer your query?

........


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.

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.

the OCI section is used to measure - 'how good is the person doing the hedging for HY'?', i,e how much good foresight he has on the future in capturing maximum margin vs mediocre margin

of course, we know the person who had hedged 18 million barrels with good margin with maturity over next 2 years at the end of 2021 could not have predicted Putin's move on capturing Ukraine and subsequently EU reacting by sanctioning oil...

nevertheless its mainly hedged on gasoline which is relatively at very low margin presently...

OCI will show by next qtr - Q3 results that this guy who had hedged is not really that bad after all...coz the negative figures on OCI will turn to positive like it was at end of Q1 22

not probably return to profitable, but certainly profitable as per the hedge values..

all those hedging losses you see are just opportunity for gretaer profit that will be probably lost...if the extraordinary crack spread margin end of June 22 maintains indefinitely..

Posted by UlarSawa > Sep 9, 2022 5:58 PM | Report Abuse

Now ular know already. Oil specialist keep cakap crackspread margin drop then HY recoup the hedging losses and probably will turn into profitable lah. Like this interpret lah. Very simple mah. Why write so long long essay macam mau attend ACCA exam ini macam leh. Haiyoh. Correct?

dont runaway ular, only need UPSR level to understand above...seriously

but i agree stockraider cannot understand forever

i am confident if you go through the youtube video shared above even half sleep you will understand....

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.

yes sslee, is simply brilliant :)..

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.

Truth cannot be suppressed very long, the earlier one investigates and accept the truth the more upper hand - advantage one will have

the longer you wait the more odds are for others to find out

....

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

If prices of refined products relative to crude (the crack spread) are back to Q1 - 30th Mar level, cost of hedging reserve shall be exactly back to the figure reported in Q1 22 results for Q3.

exactly...money is right in front of their eyes....but they chose to see OCI instead of P&L...


Posted by Zhuge_Liang > Sep 9, 2022 12:19 PM | Report Abuse

The earning is so strong and PER is so low.
This is a life time opportunity to win in a big way.
I think should not aim for peanut profit like many day traders.

oh i see..5.96 also got..not bad..

Posted by UlarSawa > Sep 9, 2022 12:09 PM | Report Abuse

Not really leh. Ular TP PE 1.5 - 2.0 leh. That is 4.20 to 5.96 leh Mana ada so bias so much leh. At the middle ground leh. Haiyoh. Correct?

i totally agree all those spam postings is really irritating with name calling

Ularsawa is way more decent but TOTALLY BIASED on the pessimist side..hehe

but nvmind...strong resistance can be strong support later!

yes, ular.. i have given up now on fighting with anyone...once you kmow they are not at your level or sincere...you should stop..

will continue posting my banners on the accounting principles and refinery hedging..whenever the forum gets flooded with nonsense...

slowly i shall gain more people who can understand these..lets see :)


Posted by UlarSawa > Sep 9, 2022 11:26 AM | Report Abuse

You cant convince kakijudi one with crackspread alone leh. No matter how hard you are trying pun no one bother leh. Bcos kakijudi only see harga saham only leh. Win or lose the judi is more important leh. Haiyoh. Correct?

@sslee,

as long as one never understand these hedging principle and accounting of these in OCI...those pessimist will never get convinced other wise

suggest, instead of talking about hengyuan...we talk about these accounting terms and hedging principles..

it will be useful for other stock investment too

Hengyuan is Garbage stock!
Its going bankrupt!
EPS will drop badly!
The management is con man!
It has no fundamentals!
Its cash flow is bleeding!
share price not worth more than RM 4!

one certainly cannot prove anyone's assertion out of thin air on the above as incorrect...
even if HY payout their Q2 earnings of RM 2 as dividend end of this month, one can still continues shouting the same repetitively...

and..no more earnings projection from me..no promotion

However,

try spending some time learning the above accounting definitions i had shared and typical refiners crack hedging practise, and then give a second thought and see....

its not that difficult to see

2021 annual report page 132
............................

Cash flow hedge reserve and cost of hedging reserve:

The cash flow hedge reserve is used to record gains and losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.

The cost of hedging is seen as cost of achieving the risk mitigation inherent in the hedge. It is incurred to protect the Company against unfavourable changes in price. The changes in the cost of hedging is initially recognised in other comprehensive income and removed from equity and recognised in profit or loss in the same period that the hedged cash flows affect profit or loss.

What is refining margin Hedging?
.............................

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.

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging#:~:text=In%20order%20to%20mitigate%20their,or%20fix%20the%20refining%20margin

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

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 (i.e, the higher the future price, the higher the hedging gain)

For refined products hedge, it is about going SHORT, the higher the future price, the greater the hedging loss.

The net effect of both above is what reported by HY under their OCI.

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 (i.e, the higher the future price, the higher the hedging gain)

For refined products hedge, it is about going SHORT, the higher the future price, the greater the hedging 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

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

sad...hope the durian planted there cannot taste as great as our malaysian made musang king!..

omg... musang king is growing there? very sad...

What is refining margin Hedging?
.............................

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.

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging#:~:text=In%20order%20to%20mitigate%20their,or%20fix%20the%20refining%20margin.

2021 annual report page 132
............................

Cash flow hedge reserve and cost of hedging reserve:

The cash flow hedge reserve is used to record gains and losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.

The cost of hedging is seen as cost of achieving the risk mitigation inherent in the hedge. It is incurred to protect the Company against unfavourable changes in price. The changes in the cost of hedging is initially recognised in other comprehensive income and removed from equity and recognised in profit or loss in the same period that the hedged cash flows affect profit or loss.

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

yes, uncle Koon got fixated with gasoline crack spread and got spooked by its dive recently...

the fact is even in 2017, reason for spectacular EPS is mainly due to Diesel


Posted by UlarSawa > Sep 8, 2022 4:46 PM | Report Abuse

No matter how high the crackspread no one want to believe it anymore. After 2017 goreng until charchoal lah. History lah. Orang cannot forget the painful incident lah. Even Uncle Koon also dont believe it anymore leh. Haiyoh. Correct?

wah ular...where got tipu..Q2 EPS you no see meh?

Posted by UlarSawa > Sep 8, 2022 4:42 PM | Report Abuse

Crackspread pun cracked already leh. Dont use crackspread anymore lah. No one believe after 2017 lah. Tipu pun dont tipu twice lah. Suiyee pun panlai already lah. Haiyoh. Correct?

Big Frog masked by Gloves...thats why they cant see it! LOL...

the company is paying Dividend without anybody forcing them to do so...

they are surely not doing this to goreng the share price

it just simply means the future prospects of earnings is good

Unrealized Cost of Hedging Reserve (COHR) , loss / gain: (A-M) x V

A = hedged crack spread value, 12.7 USD/brl
V = barrels volume of refined products hedged, 18 million
M = Marked to Market pricing of the hedged refined product at end of reporting period (mark to market)

Since at the end of June 22', the avg crack spread of the refined products, e.g gasoline at 31.6 USD/brl, the opportunity lost for the period of hedging is

Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 31.6) USD/brl x 18 million barrels
= - 338 million USD or MYR 1,490,267,000

...

Now lets see what happens when say at end of Sept 22, Gasoline crack drops to its usual average of 5.7 USD/brl

Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 5.7) USD/brl x 18 million barrels
= 90 million USD or gain of MYR 395,000,000

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

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

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

as predicted, Diesel Crack exploded to 55 USD/brl...

https://www.tradingview.com/symbols/NYMEX-GZ1!/

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

Fair estimation:
...............

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.

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 (refer my article on Q2 results prediction earlier) and this is expected to become zero as crack spread stabilizes from month to month.

Posted by Sslee > Sep 8, 2022 7:27 AM | Report Abuse

2021 annual report page 132

Cash flow hedge reserve and cost of hedging reserve:

The cash flow hedge reserve is used to record gains and losses on derivatives that are designated and qualify as cash flow hedges and that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.

The cost of hedging is seen as cost of achieving the risk mitigation inherent in the hedge. It is incurred to protect the Company against unfavourable changes in price. The changes in the cost of hedging is initially recognised in other comprehensive income and removed from equity and recognised in profit or loss in the same period that the hedged cash flows affect profit or loss.

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.