With that, two key Question remains to the experts in accounting to Answer. Appreciate anyone's input.


QUESTION 1
..........

@Rabbit2,

Could the cash flow hedge and the cost of hedging of HY in Q2 results not related to the refining margin at all?

My feeling is that it could be purely related to their USD DEBT and interest charges due to exchange rate movement.

https://vinodkothari.com/2022/02/guide-to-hedge-accounting-under-ind-as-109-ifrs-9/


Accounting of Cashflow Hedges

A cash flow hedge is a hedge of the exposure to variability in cash flows that

1 - is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction or a firm commitment in respect of foreign currency and

2 -could affect the statement of profit and loss. An example of a cash flow hedge is the hedge of future highly probable sales in a foreign currency using a forward exchange contract. Another example of a cash flow hedge is the use of a swap to change the future floating interest payments on a recognised liability to fixed rate payments.





QUESTION 2:
...........

How can HY refining margin hedging cause the reported cash flow hedge or the cost of hedging of 800 million?


HY Refining Margin Swap Contract (RMSC) - NOTIONAL VALUE value is only around 250m USD. This is not the margin itself but the CONTRACT SIZE, i.e barrels x hedging price/brl. Refer below link:

www.wallstreetmojo.com/notional-value/

Notional Value = Total Units in the Contract * Spot Price

As such their hedging quantity of crude or refined products in barrels should be about 3.5 million barrels only (about a month throughput) thats is used for securing current margins as per MOPS every month or two.

If you see HY Q2 gross profit before the derivative losses as described in section A10 (of about 500 million) it is about 1.4 billion exactly as i had predicted earlier using above model as per my last article.


Such small volume of hedging cannot produce the Cash flow reserve or the Cost of hedging (~800 million) we have seen on Q2 22 results of HY. Simply no way.


Further argument why RMSC is not the hedged margin but the contract size?
.............................

Refer Refining Margin Swap Contract (RMSC) notional value at end of Dec 2019 (USD 357 million).

At that time in 2019, the refining margin is barely 5 USD/brl. If you use your formula, the volume of barrels hedged would be:

= 357 million / (5 USD/brl)
= 71 million barrels

That is equivalent of 7 qtr sales volume throughput of hengyuan, i.e 2 years throughput had been hedged?

This cannot be possible.

Which company can hedge their refining margin hedge swap for next 2 years sales volume in advance?

If that is possible, they can hedge June 22 exceptional margin of 50 USD/brl for next 2 years then. They can then ensure they can clear their long term debt and even buy a new refinery.

Why not 4 years, whats stopping?

My understanding is HY need to be able to fork that notional value of the commodity during maturity and as such requires huge cash - equivalent to 2 years sales volume - that's around 30 billion.

What happens if the refinery breaks down for 6 months - what guarantee the hedge contract provider has from HY?

I totally understand sslee

will ping you on messenger some other better day :)


Posted by Sslee > Sep 2, 2022 10:30 AM | Report Abuse

Thanks probability for pointing out my understanding on refinimg margin swap notional value might be wrong.

I give up on this HRC forum which have become very toxic.

But one thing for sure HRC and Petronm will still report a profitable Q3

Adios.

@Picanto, we shall talk on avg refining margin at end of 2019 so that we get the avg barrels qty hedged.

Which company can hedge their refining margin hedge swap for next 2 years sales volume in advance?

If that is possible, they can hedge June 22 exceptional margin of 50 USD/brl for next 2 years then

Why not 4 years, whats stopping?

@sslee.

Refining margin swap notional value at end of Dec 2019 (USD 357 million).

At that time, the refining margin is barely 5 USD/brl. If you use your formula, the volume of barrels hedged would be:

= 357 million / (5 USD/brl)
= 71 million barrels

That is equivalent of 7 qtr sales volume throughput of hengyuan, i.e 2 years throughput had been hedged?

This is certainly impossible.

would it not be possible for the Notional value of the refining margin swap is the total contract size of feed crude (Price/brl x Barrels) and refined products (Price/brl x Barrels) that was hedged instead of the difference?

It would be good if we can confirm this. Last 2 years if you see at very qtr the notional value is about the same fluctuating along with commodity price.

Posted by Sslee > Sep 2, 2022 9:16 AM | Report Abuse

Note:
My calculation is based on 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

As each quarter end some of these outstanding refining margin swap contracts will become mature and any gain/loss will be recorded into derivatives financial instruments gain/loss in the profit/loss before tax is arrived at after crediting/charging.

As at each quarter end some new refining margin swap contracts will be added with new margin per barrel hedged.

@sslee, thanks for the derivation above.

Isn't Notional value is barrels x price/barrel on commodity futures / spot price that was hedged.

refer extract from here:

https://www.wallstreetmojo.com/notional-value/

Notional Value = Total Units in the Contract * Spot Price

I have never seen anywhere in google that its linked to the spread 'difference between two commodity'. It always appears at absolute value

Could you share any links where you had obtain the below statement linking to margin?

Posted by Sslee > Sep 2, 2022 8:59 AM | Report Abuse

V: Volume of outstanding refining margin swap contract (Barrels)
A: Average outstanding margin per barrel hedged (USD)

Post removed.Why?

The reason the Refining Margin Swap - Notional value decrease/increase on the financial statement is because HY renew the contract monthly as per the current market pricing of commodity, along with cash market transaction, and thus it changes in proportion to the commodity price changes.

The refining margin is continuously hedged to the latest available crack spread. It is updated monthly - approximately.

It function exactly as per the model presented here earlier:

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

@Rabbit2,

Could the cash flow hedge and the cost of hedging of HY in Q2 results not related to the refining margin at all?

My feeling is that it could be purely related to their USD DEBT and interest charges due to exchange rate movement.

https://vinodkothari.com/2022/02/guide-to-hedge-accounting-under-ind-as-109-ifrs-9/

Accounting of Cashflow Hedges

A cash flow hedge is a hedge of the exposure to variability in cash flows that

1 - is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction or a firm commitment in respect of foreign currency and

2 -could affect the statement of profit and loss. An example of a cash flow hedge is the hedge of future highly probable sales in a foreign currency using a forward exchange contract. Another example of a cash flow hedge is the use of a swap to change the future floating interest payments on a recognised liability to fixed rate payments.

....

If you see HY Q2 gross profit before the derivative losses as described in section A10 (of about 500 million) it is about 1.4 billion exactly as i had predicted earlier.

The Refining Margin Swap - NOTIONAL VALUE value is only around 250m USD. This is not the margin itself but the CONTRACT SIZE, i.e barrels x hedging price/brl. As such their hedging quantity of crude or refined products in barrels should be about 3 million only (about a month throughput)

https://www.wallstreetmojo.com/notional-value/

Refer my below message before QTR results:


Posted by probability > Aug 30, 2022 1:42 PM | Report Abuse

Dear all,

just so that you dont misinterpret what shared by Zhuge above, kindly use the below as a very fair guidance for Q2 results as per my discussion with Johnzhang earlier.

The derivative loss, will equally match the gross profit that will be reported higher than 1,056 below which can possibly hit 1.4 billion above.

Expect Q3 PAT to be higher than Q2 as all the derivate loss will disappear by then.


Posted by Johnzhang > Aug 14, 2022 4:15 PM | Report Abuse

Hi probability, Thanks for the explanation.

Total expenses after GP (ie manufacturing, Adm, Dep & Amortisation, Finance) was $95M for Q1 2022, $100M per qtr average for 2021 and $106M per qtr average for 2020. Your $80+100 M = $180M expenses for Q2 is well above the actual in recent qtrs and therefore with huge buffer built-in.

Your estimated GP is $1,056 M
less hedging loss ($100M)
less Expenses ($180M)
-------------------------------------
PBT $776M

Tax $100m @24% ($24M)
Tax $676M @33% ($223M)
-----------------------------------------
NPAT $529M
EPS $1.76

The upside are :
1. lower expenses than the $180M built-in the calculation
2. Higher GP from significantly higher Diesel yield (46 vs 34%) and lower Fuel oil.

The reservation i have if the Management's actual hedging deviate from the model described by you. Let's wait for the QR with much excitement.

We look forward to the exciting QR.



Posted by probability > Aug 14, 2022 4:39 PM | Report Abuse

Well summarized John, thanks

Any higher GP reported than $1,056 will result equally higher hedging loss to give back the same after hedging loss of $956.

thanks Rabbit2..

Posted by Rabbit2 > Sep 1, 2022 12:09 AM | Report Abuse

@Probability @Johnzhang @Sslee @Zhugeliang @Hng33
Not sure whether this will be the better example to explain marked to market thingy…
You purchased a bond RM1 mil at 3.8% interest p.a. with a tenure of 3 years. Due to OPR movements, investors’ risk and reward expectation, the market yield of your bond increase to 4.3% and hence causing the market price of your bond now dropped to below RM1 mil I.e. unrealized marked to market loss. However, if you hold your bond until maturity, you will still get your 3.8% fixed interest p.a., with all this marked to market gain or loss will eventually reset to zero on the maturity date as you will get back exact amount principal repayment of RM1 mil from the issuer.
Fair value of derivatives consist of 2 components which is the spot element and forward point (basis swap spread) element. Spot element is like the 3.8% interest element, basis swap spread/cost of hedging is like the market expectation which the unrealized gain/loss will eventually reset to zero on the contract maturity date.
This is why I said losses on cash flow hedge will be recycled to pnl when the settlement is due, whereas losses on cost of hedging will eventually reset to zero upon maturity.

@sslee, after studying all the notes on hedging, if possible make an article how hedging of commodity & refining margin swap work with the precise meaning of notional value, maturity etc and cash flow hedge and cost of hedging

this article will be useful for both petronm and hengyuan in the future

sanction havent started yet

TQ (if i have time i will do also)

exactly sslee, their hedging position is in gasoline where the margin is thin for protection

thats why they made huge money in Q2 with the gain in Diesel and Jet Fuel crack


Posted by probability > Aug 31, 2022 9:16 AM | Report Abuse X

The most likely commodity hedging that caused the unrealized derivative loss is the Gasoline.

Note that the crack spread of gasoline jumped from 10 USD/brl to 32 USD/brl from Q4 21 by end of Q2 22

Say they hedged 10 million barrels 'gasoline - brent' crack by end of 2021 (considering the intent to secure relatively good margin in Q4 21' compared to avg of only 7 USD/brl last few years).

They would have bought brent crude at 100 USD and sold gasoline at 110 USD/brl in futures market with maturity of 2 years (end of 2023).

The above means they have a margin swap hedging contract valued at 10 million barrels x 10 USD/brl = USD 100 million expiring by Dec 2023.

Now by end of Q2 , the gasoline margin had expanded to 32 USD/brl.

They would need to mark to market the hedging contract status by end of Q2

This means they will report an unrealized hedging loss of 10 million x 22 USD/brl (crack expansion from their hedging to 32 from 10), which equal 220 million USD.

Now by end of Q3, if the present crack maintains for gasoline, the crack would drop back to 10 USD/brl resulting with zero hedging loss.

They can choose to realize the hedging by this qtr without affecting the P&L at all or they can do it when another opportunity arise before end of 2023 (but they must realize before the maturity).

crack spread is against brent (their price difference)

the absolute chart i showed is for Mogas95 - the actual market price

Posted by sonyx123 > Aug 31, 2022 11:26 PM | Report Abuse

@Probability. Could you explain why the pricing for D1N1 trend is much different, while seems to be coming down to normal level? Which in theory should be the right one to look at

https://www.tradingview.com/symbols/NYMEX-D1N1%21/

Why Q3 22 will no longer have the unrealized hedging loss reported in Q2 when mark to market is done on their hedging positions?
................................

You can view absolute price of each commodity (refined products) here:

Diesel:
https://www.tradingview.com/chart/?symbol=NYMEX%3AAGX1!

Gasoline:
https://www.tradingview.com/chart/?symbol=NYMEX%3AAV01!

Jet Fuel:
https://www.tradingview.com/chart/?symbol=NYMEX%3AAKS1!

The message here is that their current pricing is more or less the same as it was at end of Mar 22 (as per Q1 22 mark to market unrealized hedging loss).

These refined products market pricing at end June 22' (Q2 22) is exceptional one-off figure that gave huge unrealized derivative loss when mark to market.

End of Q3 22' market pricing of these products will be somewhat similar to Q1 22' and thus the unrealized derivative loss will be back to similar level.

It has nothing to do and will not affect the gross profit of Q3 22 derived using avg crack spread.

Asia oil/products: Dubai slumps 5% on expiry, diesel cracks near $50/b.

1h ago

https://www.qcintel.com/article/asia-oil-products-dubai-slumps-5-on-expiry-diesel-cracks-near-50-b-8166.html

Products


Gasoline offers along the curve at a premium to the swaps price weighed on the cash market, with Total looking to sell a 92 RON cargo for loading 15-20 days ahead at a $1.60/b FOB Singapore premium to swaps and PTT for loading 20-25 days ahead at a $1.80/b premium. Cutting $0.50/b from the physical assessment, that translated into a flat price fall of a chunky $11.62/b to $96.81/b, with the spot crack to Brent falling $5.25/b to just +$0.57/b.

Jet saw Aramco, PetroChina and Unipec as the sole participants in the cash market again on Wednesday, with the latter offering down a cargo for loading 15-19 September to a $3.50/b FOB Singapore premium to swaps pricing around 17 September. That shaved value off the front of Quantum’s cash curve and lowered the differential assessment $0.08/b from Tuesday to a $2.71/b premium to the curve. Translating into a flat price down $5.89/b at $139.27/b, that left the spot crack to Brent up $0.48/b at +$43.03/b.

The diesel 10ppm market saw Aramco offer down a cargo for loading 15-20 days ahead to a $1.90/b FOB Singapore premium to the curve while Total bid for 25-30 days ahead cargoes at $2.70/b, with neither side being hit. That was enough to flatten out the structure of the cash curve, however, and averaged out it took $0.05/b from Quantum’s cash assessment to leave the physical market assessed at a $2.06/b premium to swaps. That left the 10ppm spot price down $5.14/b at $145.43/b, with the spot crack to Brent up $1.23/b at +$49.19/b.

once you read above and understand hedging and mark to market, it should be quite easy to understand why Q3 will have its unrealized hedging loss back to end of Q1 22 level if current pricing remains till end of Sept 22 (Q3).

see the charts presented here - the pricing of each commodity at end of Q1 22, end of Q2 22 and present.

Q1 22 could not make the PAT projected here as the crack margin only shot up at end of Mar 22.



Posted by probability > Aug 31, 2022 8:54 PM | Report Abuse X

@investor77, no doubt on that

the great thing is the unrealized hedging will likely be back to neutral as gasoline crack had returned back to Q1 level

there is absolutely no reason for the unrealized hedging loss of Q2 to remain in Q3 at present pricing of Crude & refined products which are all back to end of Q1 22 level. This is simple common sense

.........


HY Complex refinery margin update - 31/08/22


Diesel: https://www.tradingview.com/symbols/NYMEX-GOC1!/

Jet Fuel: https://www.tradingview.com/symbols/NYMEX-ASD1!/

Gasoline Mogas 92: https://www.tradingview.com/symbols/NYMEX-D1N1%21/
Gasoline Mogas 95 premium: https://www.tradingview.com/symbols/NYMEX-SMU1!/

From above:

1. Diesel at 46% yield, cracks USD 45.24/bbl
2. Jet fuel at 7% yield, cracks USD 35.83/bb
3. Gasoline Mogas 95 at 35% yield, cracks USD (9.62 + 3.75) / bbl
4. Rest of product yield at 12%, using Mogas 95 cracks USD 13.40/bbl

Gross refining margin:

= (0.46 x 45.24 ) + (0.07 x 35.83) + (0.35 x 13.40)+ (0.12 x 13.40)
= 20.81 + 2.50 + 4.69 + 1.61
= US $ 29.6 / brl
.................

Gross Profit at above derived present refining margin

= (10.7 million barrel sales per qtr) x ( US $29.6/brl) x (MYR 4.4/USD)
= 1.393 Billion MYR
...................

@firehawk, the below link is for you:

https://www.investopedia.com/terms/m/marktomarket.asp

KEY TAKEAWAYS

Mark to market can present a more accurate figure for the current value of a company's assets, based on what the company might receive in exchange for the asset under current market conditions.

However, during unfavorable or volatile times, MTM may not accurately represent an asset's true value in an orderly market.

Mark to market is an alternative to historical cost accounting, which maintains an asset's value at the original purchase cost.

In futures trading, accounts in a futures contract are marked to market on a daily basis. Profit and loss are calculated between the long and short positions.

...

For HY case, their hedging on crude oil will be on LONG position

hedging on refined products are on SHORT position

when market crude price drop, they will have hedging loss (and vice versa)

when refined products price up, they will have hedging loss (and vice versa)

snake at least got some substance..that MM and Jerichomy is space junk

i guarantee anyone who bought at 6.95 tomorrow, in 3 months time will make fantastic profit....

collect at 6.95 also not bad....still got good chance to make money... got 300% return potential when it hits 2017 peak price

Yang lambat faham seperti ularsaw...mungking dapat at limit up price

I think tomorrow when trading opens...

it is SIAPA CEPAT 'FAHAM HEDGING' DIA DAPAT - jackpot untung dari saham HY.......LOL!

LOL! what a sharp and yet comical answer..

fantastic sslee

Posted by Sslee > Aug 31, 2022 7:47 PM | Report Abuse

Ular gotone very OKU question want to ask you leh. Why HY earn 222sen in last Qtr but NTA drop more than than lat Qtr from 662 sen to 524sen.

Itu China boss ada baca MM punya comment: war over, no more war premium, crude oil and refining margin rutuh harga maka dia pun takut dan terus buat future refining margin 3 juta barrel setiap bulan untuk 15 bulan pada USD 20. Manatahu itu MM blow water saja refining margin sudah naik ke USD30 dan account boss sudah realised rugi USD 3x3x10= USD 90 juta dan unrealised rugi USD 3x12x10 = USD 360 juta.

Maka kalau unrealised loss USD 360 juta masuk P&L itu profit sudah jadi loss kurang cantik. Boss pun pandai masuk itu unrealised loss ke Balance sheet maka NTA pun jadi jatuk dari 662 sen to 524sen.

Itu semua salah MM

@firehawk, when you hedge its about protecting yourself from future transaction that will take place, not what had already happened (like the inventory you already purchase).

extract from above provided link:

..

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.

i am too tired ular, fighting with MM... a great fighter...
however, at the end i realized it was a girl

need to rest today to watch tomorrow's drama

now those answering decided not to entertain any condescending query

good luck ular..LOL!

@ularsawa, kindly go through comments from Rabbit2, Sslee and hng33 if you are lazy to scroll through all the historical comments since yday where the same questions had been asked and answered

Posted by UlarSawa > Aug 31, 2022 5:38 PM | Report Abuse

Walao Oil Specialist still active at HY. Must be making alot lately sapu cheap cheap lah. Ular gotone very OKU question want to ask you leh. Why HY earn 222sen in last Qtr but NTA drop more than than lat Qtr from 662 sen to 524sen. Why earn so much still need to raise so much of fund and borrowed more money leh. Debt increased alot leh. Why ha. Can help answer or not. Boleh?

if you hedge refined products and you current market pricing went higher than the price you had hedge, you have unrealized hedging loss when mark to market

its the opposite for crude oil

for crude (raw mat) inventory , its buying in futures

for refined oil (products) inventory, it selling in futures

refer how hedging is done on below link:

www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html

Posted by firehawk > Aug 31, 2022 5:06 PM | Report Abuse

By hedging the inventory, you are buying or selling the hedging contract?

LOL..you thought this is bond kah?

as suspected you never really understood the meaning of hedging

Posted by MoneyMakers > Aug 31, 2022 4:59 PM | Report Abuse

Aiyoyo Probability longer maturity = higher risk

Thats why 6month bonds pay lower yield/interest than 10yr/30yr bonds

Longer maturity = higher risk = compensate with higher bond yield/interest

you are absolutely wrong on this statement
the greater the maturity period, the lesser the risk - this should be obvious

the only pay some minimal interest charge for longer maturity

Posted by MoneyMakers > Aug 31, 2022 4:43 PM | Report Abuse

Nobody will enter huge longterm commodity hedge (exponential risk).

read carefully its for refining margin swap, ie the crack spread for gasoline

example above is for crude oil to show hedging effects qtr to qtr

Posted by MoneyMakers > Aug 31, 2022 4:32 PM | Report Abuse

Aiyoyo makes no sense to enter 1yr hedging contract at fixed price usd120

Oil could be usd60 in 1yr who knows

Daily/weekly oil price alrdy highly volatile - risk on 12month contract is exponential

yes, market is intelligent eventually..

the sooner one realizes the greater the opportunity to make money from HY

like i said earlier, any price below limit up price is a bargain


Posted by stockwin > Aug 31, 2022 4:26 PM | Report Abuse

Perhaps those who believe HY is doing pure hedging by the book will benefit from holding on to HY to see it rise eventually if not tomorrow. Those who think HY is doing derivatives trading will shun the stock and regret later.

@Mike even 12 months is plenty of time, in fact Q3 market pricing for crude, and refined products already matching Q1

As such the unrealized derivative loss will go back to the level reported in Q1 22

you can now keep repeating the same
all concern & disputes had been clarified

Only Q2 we have sudden spike on refined products price end of June for Diesel and by April for Gasoline

refined product price going above hedging price will be reported as hedging loss as mentioned above

Posted by MoneyMakers > Aug 31, 2022 4:20 PM | Report Abuse

Pg 130 says hedging contract maturity between 1-33months (2020: 1-12months)

Likely most HY hedge contracts only shortterm 1-3months @ thats why see sudden huge ‘pending’ hedging loss 1.07Bil (newly entered contract not seen in prev QR)

thats why HY is confident in giving interim dividend...

wait till you see the russian oil sanction takes effect

@Mikecyc, read the annual report its for refining margin swap

refining margin swap is basically hedging the feed crude and refined products at the same time

for crude , if market price drops below hedging price, its hedging loss and vice versa

for refined products, if market price rise above hedging price, its hedging loss and vice versa

Refer pg 130 of 2021 annual report - refer 'maturity date' its until 2024

Posted by MoneyMakers > Aug 31, 2022 3:50 PM | Report Abuse

What their annual report means is UP TO 24months

Impossible leh ALL hedged contract 24months expiry - not logic (too long)

Go and read their annual reports (search using CTRL F for derivatives / notional amount), all hedging contract has approximately 24 months for maturity.

Posted by MoneyMakers > Aug 31, 2022 3:43 PM | Report Abuse

Aiyoyo where got HY hedge longterm 1yr at same hedged price

Q2 is 1st time show huge ‘pending’ 1.07Bil hedging loss (new hedge position entered @ not reflected in any prev QR) - means their hedging contract shortterm basis

Hedged price also change with new contract entered lo

For layman, one can view that HY has an inventory (crude) of 6 million barrels where they hedged at say 125 USD/brl by end if Q4 21.

If by end of Q1 22, the market inventory value is at 120 USD/brl.
They will report this as hedging loss of :

(125 - 120) x 6 million barrels
= 132 million MYR loss

If by end of Q2 22', the market inventory value is at 100 USD/brl
They will report this as hedging loss of :
(125 - 100) x 6 million barrels
= 660 million MYR loss

If by end of Q3 22', the market inventory value is at 125 USD/brl
They will report this as hedging loss of :
(125 - 125) x 6 million barrels
= 0 million MYR loss

If by end of Q4 22', the market inventory value is at 130 USD/brl
They will report this as hedging loss of :
(125 - 130) x 6 million barrels
= 132 million MYR GAIN!

The above is true as long as they kept the same inventory and did not utilize it for sales at market value on any of the qtrs above.

The maturity date of the hedging contract is the deadline where they have to realize it as sales. Once they make it as sales, they will be paid as per market value and that is when the hedging loss or gain above will be realized and reported on P&L.

Say in Q1 22 they had decided to sell at market value. They would have been paid 120 USD x 6 million barrels = 720 million USD

On their hedging contract they have to pay the same 6 million barrels at 125 USD/brl = 750 million USD

(the hedging contract simply means you need to pay the agreed amount (price) before maturity and take hold of the 6 million barrels)

The difference in cash flow; 720 million (IN) - 750 million (OUT) = - 30 million USD is the hedging loss that would go to P&L.

We can see from above the loss reported on unrealized Hedging may never take place at all and be reported on P&L as they have plenty of time for the market pricing to match again their hedging price.

HY does hedging on the crack and also on the inventory.

If the hedging is done on inventory, you can see hng33's explanation.

If the hedging was done on margin, you can see my explanation. It can be purely gasoline or any combination of the refined products. But, gasoline fits the changes best for ease of explanation here.

Its most likely combination of both inventory and crack / margin.


Posted by hng33 > Aug 31, 2022 11:43 AM | Report Abuse

Based on Q2 revenues and cost, hengyuan realize crack spread around USD 28, which in accord to average crack spread range from Mar to May crack for gasoline+ diesel + jet fuel. Hengyuan realize pretax profit RM 900m.

The next Q3 result comprises of crack spread june to Aug, average crack spread for gasoline + diesel + jet fuel is around USD38. Therefore, it can extimate than hengyuan upcoming Q3 pretax profit is RM 1.2 billion. EPS = RM 3

The hedging position will revert back from loss to gain as crude oil, feedstock cost, fallen from USD 135 in Q2 to USD 105 in Q3. Hengyuan NTA will booster significantly from RM 5.2 to + RM 3( from reversal hedging) + Q3 EPS RM 3 - - - - > total NTA for hengyuan RM 11


Posted by probability > Aug 31, 2022 9:16 AM | Report Abuse X

The most likely commodity hedging that caused the unrealized derivative loss is the Gasoline.

Note that the crack spread of gasoline jumped from 10 USD/brl to 32 USD/brl from Q4 21 by end of Q2 22

Say they hedged 10 million barrels 'gasoline - brent' crack by end of 2021 (considering the intent to secure relatively good margin in Q4 21' compared to avg of only 7 USD/brl last few years).

They would have bought brent crude at 100 USD and sold gasoline at 110 USD/brl in futures market with maturity of 2 years (end of 2023).

The above means they have a margin swap hedging contract valued at 10 million barrels x 10 USD/brl = USD 100 million expiring by Dec 2023.

Now by end of Q2 , the gasoline margin had expanded to 32 USD/brl.

They would need to mark to market the hedging contract status by end of Q2

This means they will report an unrealized hedging loss of 10 million x 22 USD/brl (crack expansion from their hedging to 32 from 10), which equal 220 million USD.

Now by end of Q3, if the present crack maintains for gasoline, the crack would drop back to 10 USD/brl resulting with zero hedging loss.

They can choose to realize the hedging by this qtr without affecting the P&L at all or they can do it when another opportunity arise before end of 2023 (but they must realize before the maturity).

@sharemarket21, i can almost confirm that Q3 EPS should be exceeding RM 3

Dear all,

just so that you dont misinterpret what shared by Zhuge above, kindly use the below as a very fair guidance for Q2 results as per my discussion with Johnzhang earlier.

The derivative loss, will equally match the gross profit that will be reported higher than 1,056 below which can possibly hit 1.4 billion above.

Expect Q3 PAT to be higher than Q2 as all the derivate loss will disappear by then.


Posted by Johnzhang > Aug 14, 2022 4:15 PM | Report Abuse

Hi probability, Thanks for the explanation.

Total expenses after GP (ie manufacturing, Adm, Dep & Amortisation, Finance) was $95M for Q1 2022, $100M per qtr average for 2021 and $106M per qtr average for 2020. Your $80+100 M = $180M expenses for Q2 is well above the actual in recent qtrs and therefore with huge buffer built-in.

Your estimated GP is $1,056 M
less hedging loss ($100M)
less Expenses ($180M)
-------------------------------------
PBT $776M

Tax $100m @24% ($24M)
Tax $676M @33% ($223M)
-----------------------------------------
NPAT $529M
EPS $1.76

The upside are :
1. lower expenses than the $180M built-in the calculation
2. Higher GP from significantly higher Diesel yield (46 vs 34%) and lower Fuel oil.

The reservation i have if the Management's actual hedging deviate from the model described by you. Let's wait for the QR with much excitement.

We look forward to the exciting QR.



Posted by probability > Aug 14, 2022 4:39 PM | Report Abuse

Well summarized John, thanks

Any higher GP reported than $1,056 will result equally higher hedging loss to give back the same after hedging loss of $956.

he he..nice one newbie8080

@sslee, ok got it. Its exactly matching the yield they mentioned on the Q&A...thanks

https://corporate.exxonmobil.com/-/media/Global/Files/crude-oils/Tapis/Crude_Oil_Tapis_assay_pdf_new.pdf

ha ha, they did say its extra light..

Posted by Sslee > Aug 29, 2022 10:59 PM | Report Abuse

https://corporate.exxonmobil.com/Crude-oils/Crude-trading/Tapis

@sslee, did not get when you said 'Tapis cut vol %'

referring the Q&A , i do believe their statements on the yield

it appears like Tapis is very sweet and light (shorter hydrocarbon lengths avg)

very interesting, got such diff MFRS accounting also

Posted by Rabbit2 > Aug 29, 2022 10:21 PM | Report Abuse

@Sslee
Agreed that derivative losses will be reversed but it's not a provision. It is merely a marked to market losses as at end June to reflect the current contract price in the market. This will eventually be reversed and replaced with actual periodical settlement.

If HRC and Petron consistently apply its hedging strategy and based on today's 29 August cut off, most losses will be reversed and likely there is a marked to market gain by now.

Accounting standards are trying hard to force all companies to reflect their numbers based on current fair values but it comes with unintended consequences in particular to those companies that are entering derivatives for hedging purposes.

If both HRC and Petron apply new hedge accounting rules under MFRS 9, these marked to market losses/gains could possibly be reflected under other comprehensive income instead of profit or loss.

That's my thought.