@Johnzang, crack spread has gone higher from a high value (end of Q1 -Mar) that was not reflected in Q1 22'

This higher value will start reflecting in Q2.

Just create a table a do the maths John. If you do it yourself, you can see..

The PAT is lagging by 1 month.

Sudden rise in crack spread becomes not fully reflected due to hedging loss - this 'loss' is is a representation of opportunity they were unable to capture as it happened suddenly.


Posted by Johnzhang > Jun 3, 2022 10:42 AM | Report Abuse

@Probability,
In latest QR note A18 , It is declared as below :
Financial instruments that were outstanding as at reporting date as as below :
Refining margin Swap Contracts ; Notional amount USD291mil (about RM1.22 billion) with nett liabilities of RM294.3mil (RM339.5 - 45.2). I suppose this is a one month rolling balance as your advocated.
Can you comment on this position and what is the implication to Q2 results as crack spread has gone higher compare to reporting date?
Thanks in advance.

Q1 22 PAT was poorer vs Q4 21' PAT as their hedging on INVENTORY ( NOT CRACK SPREAD or refining margin) which was not on the right direction, and exacerbated by oil loss written down

as per the Table represented, they hedge 1 month's supply and sales contract and close the balance the following month

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

hedging only DAMPENS the reflection of Gross margin on Net margin, it DOES NOT ERODE

do go through the table and see yourself how rise in crack spread (selling price vs purchase price) effects the hedging gain/loss



Posted by Johnzhang > Jun 3, 2022 9:56 AM | Report Abuse

The main hedging loss in Q1 2022 is in Refining Margin Swap Contracts which is tied to rising crack spread from about USD11 early Jan 2022 to about USD15 as at 31/3/2022. (pls refer to note A18 in QR for the breakdown of the various types of hedges and their respective position)
As at today, crack spread has surged passed USd32 . If it continue to stay high or go higher , I suppose Refining Margion swap contracts will suffer huge hedging losses that will offset the operating margin like we see in Q1. Can any financial accountant comment ?




Posted by Rabbit2 > Jun 3, 2022 10:07 AM | Report Abuse

Yes. what we know is the duration of the derivatives. How much % of locked in/hedged over total output is not being disclosed. just hope it's not extensive, else hrc will not fully enjoy the crack spread spike.

Improved version to see the table much easily:

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

Improved version to see the table much easily:

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

If the spike in the refining margin we see now never comes down to Q1 level, then it will never get reversed.

But the moment the current spike in margin stabilizes, the PAT will match the expected gross margin from the already spiked crack spread we are seeing.

When the margin drops suddenly say in the future, then we have hedging gain to cushion the drop or even show higher margin than the reduced crack.

The maths are clearly shown on the table.

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-H...

We just look forward for stability now.


Posted by stockwin > Jun 2, 2022 9:20 PM | Report Abuse

probability

For everyone's reading pleasure:

How hedging for refining margin causes derivative loss / gain: HENGYUAN


=================================================================
Thank you Probability.
Does that mean the RM432 M Fair value loss on derivatives in Q1 2022 just a book entry and will be reversed in future qtrs? tq

If you get the mechanism presented, you would be able to estimate Q2 22' yourself.

You just need to put in the sales figure for refined oil and cost for crude looking at the crack spread chart and brent historical pricing.

Q2 22 its going to be explosive.

Posted by lai3bu > Jun 2, 2022 9:02 PM | Report Abuse

Probability- the fear is Q2 again they screw up with derivative loss despite good gross profit . What is your assessment ?

@Johnzhang, i had provided the links to articles made by FutureEyes and Davistslim who had independently derived these information and also substantiated their claims by referencing to annual reports and news, including AGM queries.

I have no interest to further convince you otherwise as it neither brings benefit to the stock (PetronM) nor myself.

You can maintain your stance & beliefs - i have absolutely no issues.

If the spike in the refining margin we see now never comes down to Q1 level, then it will never get reversed.

But the moment the current spike in margin stabilizes, the PAT will match the expected gross margin from the already spiked crack spread we are seeing.

When the margin drops suddenly say in the future, then we have hedging gain to cushion the drop or even show higher margin than the reduced crack.

The maths are clearly shown on the table.

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

We just look forward for stability now.


Posted by stockwin > Jun 2, 2022 9:20 PM | Report Abuse

probability

For everyone's reading pleasure:

How hedging for refining margin causes derivative loss / gain: HENGYUAN


=================================================================
Thank you Probability.
Does that mean the RM432 M Fair value loss on derivatives in Q1 2022 just a book entry and will be reversed in future qtrs? tq

If you get the mechanism presented, you would be able to estimate Q2 22' yourself.

You just need to put in the sales figure for refined oil and cost for crude looking at the crack spread chart and brent historical pricing.

Q2 22 its going to be explosive.

Posted by lai3bu > Jun 2, 2022 9:02 PM | Report Abuse

Probability- the fear is Q2 again they screw up with derivative loss despite good gross profit . What is your assessment ?

For everyone's reading pleasure:

How hedging for refining margin causes derivative loss / gain: HENGYUAN

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

You need to ENLARGE the page to see the details. TQ

For everyone's reading pleasure:

How hedging for refining margin causes derivative loss / gain: HENGYUAN

https://klse1.i3investor.com/blogs/2017/2022-06-02-story-h1624195575-How_hedging_for_refining_margin_causes_derivative_loss_gain_HENGYUAN.jsp

You need to ENLARGE the page to see the details. TQ

Kindly press CTRL and ENLARGE you page to view the Table details.

EU Russia sanctions could ‘paralyze’ Lukoil refinery: Sicily president
Crude Oil Refined Products

1h ago

The EU’s pledge to phase out most Russian crude oil imports by the end of this year could paralyse the Italian Lukoil-owned ISAB refinery and cause a job crisis in Sicily, the region’s president said this week.

While the EU has exempted Hungary and other landlocked countries from its embargo, the economic bloc will cut off all seaborne Russian crudes, cutting off the main feedstock of the island’s 355,000-bpd site.

“There is a deafening silence on the occupational catastrophe that could overwhelm part of the Priolo petrochemical, with the embargo and the consequent paralysis of ISAB,” Nello Musumeci, President of Sicily, said in a post on Facebook this week.

......

355,000 bpd is not a joke - all these only shows that it will take a long time for refining margin to come down globally

@Johnzang, when petronM reports barrels sold, it includes outsourced (70%) refined oil from their parent company to directly sell at their petrol kiosks

snake bite or bitten by the Hurricane that went off as soon as it came?

those clueless can't differentiate

stick to where you are more knowledgeable & competent (forgot the name that makes culverts - OKA or somethin)..

if you dont understand avoid commenting

Posted by gohkimhock > Jun 1, 2022 9:11 PM | Report Abuse

all the volatile figures are enough to tell you that nothing is sustainable in this company. I have no idea how some people like to be bitten by the same snake twice.

@sslee, there were technical reasons why the could not go higher than 60%. I can't remember the exact details now. Are they not publishing their throughput on recent annual reports?

(I have not checked on their recent reports)

When it can only run at 60% throughput and the yield of Fuel Oil is high, the effective profitable throughput becomes even lesser:

88kbpd x 60% = 52.8 kbpd

If 30% fuel oil, it will wipe out (offset) at least another 20% of positive crack from gasoline. This means only 50% of the throughput results in positive crack.

The effective positive throughput then becomes:
= 52.8 kbpd x 0.50
= 26.4 kpbd

per qtr then becomes:
= 26.4 kbpd x 90 days/qtr
= 2.37 million barrels per qtr

I seldom lie

See the chart in 2016 annual report:

2) Refinery margin in a quarter (based on its regular throughput per day of 48k although its max daily capacity is 88k). Management also told us in AGM that its refinery currently running at around 60% (I use AR report throughput which is more conservative).
https://klse.i3investor.com/web/blog/detail/david_petronm/127344

Post removed.Why?

I doubt PetronM can make low sulfur Fuel Oil unless they use ultra low sulfur crude (which is at a premium against Brent)...since the sulfur will be enriched at the bottom distillate (higher vaporization point)

thanks mate..

Posted by Silemak > Jun 1, 2022 3:45 PM | Report Abuse

Tks probability , OTB for the info keep it up. We are not fools we can judge who are genuine!!!

Once bitten - twice shy phenomenon

Posted by gladiator > Jun 1, 2022 11:25 AM | Report Abuse

Wah Stockraider call buy HY in 2017 give TP=RM44 this year no support d.

For PetronM next qtr results do not expect more than 30 cents EPS - if you are happy with it - go for it - thats all i can say

For PetronM next qtr results do not expect more than 30 cents EPS - if you are happy with it - go for it - thats all i can say

it appears as a conman - coz you dont understand its business model and financial tools

TWO IMPORTANT information concerning PetronM for the chicken hearted who does not want to invest in HY but PetronM instead:

1) PetronM is a simple refinery that produces more than 30% Fuel Oil while HY (complex refinery) with about 2.6% Fuel Oil yield.

https://klse.i3investor.com/web/blog/detail/Insight1/2018-02-03-story146257-DIFFERENCE_between_PETRONM_and_HENGYUAN?_gl=1*19l8mrr*_ga*MTA3NDE2NTcwNi4xNjA4NTU5NDY5*_ga_MNBHX2J50S*MTY1NDA0Nzg1NC4yMDYuMS4xNjU0MDUyNjgyLjA.


2) The Fuel Oil crack spread is NEGATIVE against feed crude Brent

https://www.tradingview.com/symbols/NYMEX-SF31!/

@stockraider, quite disappointing to see your worthless comments (likely confusing newbies) despite being an old experienced investor in HY in 2017.

As i had detailed many times you must see HY as a refinery processing 10.7 million barrels per quarter whereas PetronM refinery at less than 1/4 of HY capacity, i.e about 2.5 m barrels. Reason being PetronM is a simple refinery which produces more than 30% Fuel Oil with crack spread hitting negative - 15 USD/brl .

Without Hengyuan (the HEAD) share price rising, do not expect PetronM ( the TAIL) to perform, unless if PetronM had raised it retails sales volume significantly.

As a matured investor you should know this better

the spike we see on diesel crack from 18$/brl early march to 38$/brl by end of Mar 22' could also explain the derivative loss in Q1 which wont repeat in Q2 as long as it does not shoot up further by 20$/brl suddenly by end of June

the gross profit will reflect the margin without the derivative effects

on the other hand if it reverts to 18$/brl there will be a derivative gain

i see gross margin appears to be lagging by at least a month period on their financial report vs crack spread chart


Posted by probability > Jun 1, 2022 10:05 AM | Report Abuse X

You need to copy paste below on your browser to view.

DIESEL CRACK SPREAD:

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!

yeah - very true

Posted by Sslee > Jun 1, 2022 9:00 AM | Report Abuse

High energy cost will destroy economy recovery and without economy recovery people will have less money to spend, travel, invest and etc.
The good balance is for crude oil at USD75 - 100 per barrel and crack spread between USD 15 -25 per barrel.

It was Diesel which made HY report extraordinary profit in 2017 during Hurricane Harvey

You need to copy paste below on your browser to view.

DIESEL CRACK SPREAD:

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!

and for PETRONM a simple refinery which produces MORE THAN 30% Fuel Oil yield:

FUEL OIL CRACK SPREAD:

https://www.tradingview.com/symbols/NYMEX-SF31!/

I hope i3 members here truly develop some intelligence on the fundamentals and dynamics of these crack spread and its importance to bottom line of these refineries

You guys needs to see bigger picture - Complex refinery like HY can selectively control yield of gasoline and diesel

HY has the ability to produce Diesel at yields of 45%

i suggest you guys monitor DIESEL SPREAD too which shot up by 7 USD/brl today

DIESEL CRACK SPREAD:

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!

a slight lower oil price is good as it would not dampen demand while maintaining high crack

always remember we only need 13 USD/brl average crack spread

and for PETRONM a simple refinery which produces MORE THAN 30% Fuel Oil yield:

FUEL OIL CRACK SPREAD:

https://www.tradingview.com/symbols/NYMEX-SF31!/

I hope i3 members here truly develop some intelligence on the fundamentals and dynamics of these crack spread and its importance to bottom line of these refineries

You guys needs to see bigger picture - Complex refinery like HY can selectively control yield of gasoline and diesel

HY has the ability to produce Diesel at yields of 45%

i suggest you guys monitor DIESEL SPREAD too which shot up by 7 USD/brl today

DIESEL CRACK SPREAD:

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!


a slight lower oil price is good as it would not dampen demand while maintaining high crack

always remember we only need 13 USD/brl average crack spread

Post removed.Why?

EU Council President Charles Michel said the agreement covers more than two-thirds of oil imports from Russia. However, Ursula Von der Leyen, the head of the EU's executive branch, said the punitive move will "effectively cut around 90% of oil imports from Russia to the EU by the end of the year."

Fantastic news:
..............................

Eurobob gasoline cracks hit a fresh record of $52.50/b at the official start of the US driving season on Monday, according to Quantum data, while diesel refiner margins topped a three-week high of $45/b.

Prices higher after EU reaches deal to cut 90% of Russian oil imports Crude Oil Refined Products

6min ago

Crude oil futures in early European trading hours Tuesday were climbing higher after the EU clinched a compromise deal that will potentially see Russian oil flows into Europe drop by 90% by the end of the year.

August ICE Brent futures were trading at $119.70/barrel (0705 GMT), compared to Monday's settle of $117.60/b, while the July contract was trading at $123.50/b ahead of expiry.

At the same time, July NYMEX WTI was trading $118.96/b, versus last Friday's settle of $115.07/b. There was no settlement Monday due to the US holiday.

European Union leaders agreed late Monday to embargo most Russian oil imports into the bloc by year-end as part of the latest round of sanctions aimed at Moscow, reaching a compromise that allows Hungary and others access to pipeline crude.

EU Council President Charles Michel said the agreement covers more than two-thirds of oil imports from Russia. However, Ursula Von der Leyen, the head of the EU's executive branch, said the punitive move will "effectively cut around 90% of oil imports from Russia to the EU by the end of the year."

"This move is supportive for prices. However, the market has had a month to digest the potential ban, and so we suspect it is largely priced in already. This is reflected in the price action in early trading in Asia this morning," said Warren Patterson, head of ING's commodity research.

Oil markets have also been underpinned in the early part of the week after China announced further measures to ease Covid restrictions.

"Crude oil prices gained as the outlook in China improved amid easing restrictions on travel. Shanghai allowed manufacturers to resume operations from June, while officials said Beijing's coronavirus outbreak was under control," said ANZ commodity strategist Daniel Hynes.

Refined products also continued to support crude prices, particularly the squeeze on diesel and gasoline.

Eurobob gasoline cracks hit a fresh record of $52.50/b at the official start of the US driving season on Monday, according to Quantum data, while diesel refiner margins topped a three-week high of $45/b.

Meanwhile, Mexico's 315,000 bpd Salina Cruz refinery on the Pacific coast is in the path of Hurricane Agatha, although the storm is unlikely to be strong enough at landfall to damage the plant.

The US and Mexico are particularly vulnerable to refining disruptions during this year's hurricane season, given the tightness of gasoline and diesel across the Americas.

Justification for crack spread resilience long term (at least at 13 USD/brl):

Refined Oil Exports by Country
..............................

United States: US$60.7 billion (13.9% of refined oil exports)
Russia: $45.4 billion (10.4%)
Netherlands: $34.7 billion (8%)
Singapore: $27.4 billion (6.3%)
India: $26.2 billion (6%)
China: $25.5 billion (5.9%)
South Korea: $23.2 billion (5.3%)
United Arab Emirates: $19.6 billion (4.5%)
Malaysia: $12.8 billion (2.9%)
Belgium: $10.5 billion (2.4%)
Spain: $9.6 billion (2.2%)
Germany: $9.5 billion (2.2%)
Italy: $8.3 billion (1.9%)
United Kingdom: $7.4 billion (1.7%)
Canada: $7.2 billion (1.7%)

....

Imagine you take out Russia from the above supply of REFINED OIL (which is where we are heading) - its just not possible to simply replace the 10% gap even if both China & India double their exports

In the future at most Russia can only sell its crude to India & China, but NOT refined oil...

and India & China cannot simply double their refining capacity to process russian crude

This should be a long term phenomenon provided EU does not change their stance on Russian oil dependence

Not with the intention to discourage, but i must inform you that our friend here sslee had made such attempts earlier, and if i am not mistaken he did not gain much insight.

I assure you that HY management is NOT doing anything with the wrong interest to their shareholders.

Just wait June 22' results (which is basically secured in another months time), provided no wild fluctuation on crude oil price and crack spread from current level, i can assure you that HY will report the best ever EPS in Bursa.

Stay calm - this refining margin rise phenomenon is GLOBAL and HY cant hide it even if they want to do so.

Posted by Subanginvestor > 53 minutes ago | Report Abuse

Valueguru has suggested that investors write to Local HY Corporate to demand answers for the poor Q1 result. I say let's write to HY HQ in Shandong and asks that they look into the following: 1. Why the huge surprise hedging loss again in Q1 22. HY Malaysia has from time to time incur huge hedging losses. It is time to look into this and stop this once for all. All hedging should be conducted by a bigger entity, like HY HQ. HY Malaysia should just focus on what they do best and that is refinery work and their aim is to provide shareholder value and not involve themselves in bets. 2. Huge share price fluctuation followed by huge disappointment in the Q1 result gives the IMPRESSION that somebody in HY is working with outside operators to manipulate price to the detriment of innocent hardworking retail investors. This is against the "Shared Prosperity" principles. Of course it is difficult to prove this criminal activity. But PERCEPTION is very important especially given how well Western Media has painted Chinese owned companies - as not transparent and untrustworthy. HY HQ will do well to remind their Chinese representatives in HY Malaysia (and other Chinese owned companies) that they have even a higher fiduciary standard to perform to. 3. HY HQ should send independent auditors to ascertain why HY quarterly results have been so inconsistent. Compare, for example, with a similar refinery Petron. Petron's quarterly results are far more consistent and predictable and they have been providing dividends to their shareholders, not HY.

@mytwocents, excellent info! Thanks

as far as i know HY had always made good profit when oil price had rise between reporting period right from Shell ownership of the refinery

thats why they have this CCS and FIFO margin calculation on their annual report summary table on performance

On @Investing_Bursa comments, this is something new to me - could be true due new hedging mechanism they had taken (swap, option, futures etc)

i still think HY will gain when oil price rise

may be HY HAD written down the crude contract paid for crude sourced from Russia as Shell had pledged not to buy even refined oil made from crude blended with russian oil

malaysian shell retail likely aligned them self with parent company

https://www.cnbc.com/2022/03/08/shell-apologizes-for-buying-russian-oil-announces-phased-withdrawal.html



Posted by Rehan > May 31, 2022 11:49 AM | Report Abuse

What is surprising is how come they had inventory loss this Qrtr when their raw material as well as product prices went up. Any explanation?

How does one know what will be the derivative gain / loss next qtr. Do we know the current derivative exposure and at what future price. ? They seem to have their hand full in derivatives. Derivatives over long term only ends up paying fees and other expenses. gains / loss should cancel each other over long period.

Asia oil/products:

2h ago

Gasoline
........

Gasoline prices continued to climb, with 92 RON coming within touching distance of multi-year highs hit at the beginning of March. In the cash market, PetroChina offered along the curve and weighed slightly on the structure at the front of the physical market, although moves in the paper curve meant that still translated into a flat price gain of $3.81/b to $149.68/b FOB Singapore. The crack was up another $1.92/b at a one-week high of +$32.92/b.


Jet Fuel
.......

Jet continued to gain amid wider bullishness across distillates and an open arb from Asia and the Middle East to Europe, leaving prices creeping towards a three-month high to start the week. Only BP and Total were in the cash window, the former bidding up through the window and adding another $0.58/b to Quantum’s cash differential assessment to take it to a $3.71/b premium to nearby swaps. That left the flat price up $2.86/b at $149.73/b FOB Singapore as the spot crack to Brent edged another $0.97/b higher to +$32.97/b.


Diesel
......

Diesel markets saw Trafigura and Vitol bid the middle and back of the 10ppm cash window higher and helped to lift Quantum’s cash differential $0.81/b from Friday to a $5.09/b premium to the curve. That left the 10ppm flat price up $3.86/b at a two-week high of $159.86/b FOB Singapore, while the spot crack to Brent gained another $1.97/b to +$43.10/b.

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

closing the shorting done on the refined products. They have to buy the refined oil (their own at high price) which they had sold forward.

This means automatically their next hedging batch will go to a higher margin level. The exact detail mechanism i must admit i dont really know


Posted by GrowthCapitalist > May 30, 2022 9:50 PM | Report Abuse

Just one clarification, when you said buy at higher price is crude or refined oil?

@GrowthCapitalist,

1) On Inventory gain or loss - its straight forward. They need certain minimum inventory in their plant at all time. The valuation difference between reporting periods simply gets reported as inventory gain / loss.
(a portion of their inventory is hedged as i understand - as such the inventory gain or loss effects is dampened).

2) On shorting of the refined products, its like sell forward and have to buyback within a certain period. Imagine they sell at cheap price and later it shot up high...they are forced to buy at a higher price. The refined products shorting and going long for crude is done at the same time to neutralize. So when crude did not rise at the same magnitude the gain from going long on crude is way smaller than the loss in shorting refined products. This is how i roughly understand.

This Israel refinery loss on the first qtr sounds like that.

Refined Oil Exports by Country
..............................

United States: US$60.7 billion (13.9% of refined oil exports)
Russia: $45.4 billion (10.4%)
Netherlands: $34.7 billion (8%)
Singapore: $27.4 billion (6.3%)
India: $26.2 billion (6%)
China: $25.5 billion (5.9%)
South Korea: $23.2 billion (5.3%)
United Arab Emirates: $19.6 billion (4.5%)
Malaysia: $12.8 billion (2.9%)
Belgium: $10.5 billion (2.4%)
Spain: $9.6 billion (2.2%)
Germany: $9.5 billion (2.2%)
Italy: $8.3 billion (1.9%)
United Kingdom: $7.4 billion (1.7%)
Canada: $7.2 billion (1.7%)

....

Imagine you take out Russia from the above supply, its just not possible to simply replace the 10% gap even if both China & India double their exports

In the future at most Russia can only sell its crude to India & China, but NOT REFINED OIL...

and India & China cannot simply double their refining capacity'

This is a long term phenomenon