30 USD/brl against Tapis? Crazy..

Simple deduction...its either A or B only


A) Worst scenario :
..............

Posted by probability > May 8, 2022 3:43 PM | Report Abuse X

Guys just imagine now Hengyuan is trading at RM 10, even if Q1 results is out with EPS 60 cents (purely from inventory gain - assume nothing much from refining margin from pure bad luck), would the price drop after results?

I really dont think so...it will look forward for Q2 results already

As such i think its good timing to go all in



B) Best scenario :
.................

If they manage to switch to russian crude in Q1 22' itself

Posted by klee > May 8, 2022 4:16 PM | Report Abuse

40 times 35= 1400 usd profit on top of crack spread differential

recheck the EPS...it shd be way more that

Posted by klee > May 8, 2022 4:21 PM | Report Abuse

If assume crack spread average usd25 for 2022.Hrc net profit may exceed Rm3 per share

yes, before covid lock down, in 2019 is 41.9 m barrels

Posted by klee > May 8, 2022 4:14 PM | Report Abuse

Probability.Is hrc's processing capacity at 40 mil barrels per yr?

This is once in a life time opportunity to make a killing...

with sound judgement and real intelligent calculated risk

Guys just imagine now Hengyuan is trading at RM 10, even if Q1 results is out with EPS 60 cents (purely from inventory gain - assume nothing much from refining margin from pure bad luck), would the price drop after results?

I really dont think so...it will look forward for Q2 results already

As such i think its good timing to go all in

Hengyuan can go through Shandong Hengyuan China for payments if necessary

Hengyuan can go through Shandong Hengyuan China for payments if necessary

SUPERB NEWS! this is truely fantastic for Hengyuan...

They can guzzle all the RUSSIAN CRUDE they want!!

....................

Malaysia does not recognise unilateral sanctions, remains non-aligned to any side

https://www.malaymail.com/news/malaysia/2022/05/08/saifuddin-malaysia-does-not-recognise-unilateral-sanctions-remains-non-alig/2057677

Indonesia’s Pertamina eyes cheaper Russian oil

https://www.energyvoice.com/oilandgas/asia/399254/indonesias-pertamina-eyes-cheaper-russian-oil/


“Politically, there’s no problem as long as the company we are dealing with was not sanctioned. We have also discussed the payment arrangement, which may go through India,” she told parliament members.

Indonesia holds the G20 presidency this year and has said it will remain neutral amid the Russia-Ukraine conflict, which has sparked the biggest humanitarian and geopolitical crisis in Europe since World War Two. The Indonesian government has raised concerns about the invasion but stopped short of condemning it.

Indonesia’s Pertamina eyes cheaper Russian oil

https://www.energyvoice.com/oilandgas/asia/399254/indonesias-pertamina-eyes-cheaper-russian-oil/


“Politically, there’s no problem as long as the company we are dealing with was not sanctioned. We have also discussed the payment arrangement, which may go through India,” she told parliament members.

Indonesia holds the G20 presidency this year and has said it will remain neutral amid the Russia-Ukraine conflict, which has sparked the biggest humanitarian and geopolitical crisis in Europe since World War Two. The Indonesian government has raised concerns about the invasion but stopped short of condemning it.

Indonesia’s Pertamina eyes cheaper Russian oil

https://www.energyvoice.com/oilandgas/asia/399254/indonesias-pertamina-eyes-cheaper-russian-oil/

“Politically, there’s no problem as long as the company we are dealing with was not sanctioned. We have also discussed the payment arrangement, which may go through India,” she told parliament members.

Indonesia holds the G20 presidency this year and has said it will remain neutral amid the Russia-Ukraine conflict, which has sparked the biggest humanitarian and geopolitical crisis in Europe since World War Two. The Indonesian government has raised concerns about the invasion but stopped short of condemning it.

SUPERB NEWS! this is truely fantastic for Hengyuan...

They can guzzle all the RUSSIAN CRUDE they want!!

....................

Malaysia does not recognise unilateral sanctions, remains non-aligned to any side

https://www.malaymail.com/news/malaysia/2022/05/08/saifuddin-malaysia-does-not-recognise-unilateral-sanctions-remains-non-alig/2057677

SUPERB NEWS! this is truely fantastic for Hengyuan...

They can guzzle all the RUSSIAN CRUDE they want!!

....................

Malaysia does not recognise unilateral sanctions, remains non-aligned to any side

https://www.malaymail.com/news/malaysia/2022/05/08/saifuddin-malaysia-does-not-recognise-unilateral-sanctions-remains-non-alig/2057677

any country keep threatening wanting to use nuclear weapon, NATO will slowly choke them till they weaken

that is my logic too...until people like Putin is exterminated from Russia, Europe & US will never buy their oil

Posted by cactus81 > May 8, 2022 12:26 PM | Report Abuse

Question now is how soon the sanction can be lifted. Even war ended doesn't mean the aanction will be lifted immediately. In addition, there are not many new investments into refinery due to ESG issues. All these are positive for HY.

once bitten, twice shy phenomenon...but time is in our side

Posted by valueguru > May 8, 2022 12:14 PM | Report Abuse

@probability you brought up a good point. I remember some people used this to extrapolate into many quarters of high profit but it was really just a temporary event. Many people were caught when the price fell. This time round it's structural but yet people see it as temporary!

valueguru point is valid, for structural change in margin to 10 USD/brl average you do not need the war to sustain

Posted by klee > May 8, 2022 12:18 PM | Report Abuse

If war last forever then it will be structural in nature.Else it cannot be.

Just for everyone info the average gross refining margin Hengyuan captured during Hurricane Harvey in 2017 - Q3 2017 (peak EPS exceeding RM 1), was only 10 USD/brl

this is because the spike in margin due to Hurricane Harvey was a temporarily blip in the qtr (less than a month)

yup, totally agree and aware

Posted by valueguru > May 8, 2022 11:35 AM | Report Abuse

@probability, I track years of daily crack spread data from reuters (minus weekends and holidays). What I observe is Jan and Feb have been higher than past few years average (most likely due to lifting of pandemic restrictions). The real spike started in March due to the war. In the article I just posted, it mentioned that analysts forecast of average GRM USD12 for this year but this was before the war. Though GRM plays a big role for refiners, another area is how they run their operations (hedging, cost management, maintenance etc). For HYR, I believe their main weakness is hedging (and hopefully I'm wrong here!!!). This time round because the GRM has risen so high, I hope this will negate any hedging loss, if not increase the gain!

many investors have phobia of hengyuan due to 2017 experience like sslee etc...they hate the stock thinking management lied to them...

the truth is its the Hurricane'fault... as fast as it came...it left

the price from RM 17 immediately came down as the refineries were back in production after halting temporarily for the Hurricane in US

Now, can anyone immediately help to tap the 3rd largest refiner in the world - russia to Europe?

Another Important fact to remember is that the crack spread shot up higher than the 2017 Hurricane Harvey level even before the war started simply due shortage of refinery (ESG issues as valueguru highlighted) and demand was picking up after covid

Bloody 2 years no additional refining capacity were made but existing ones ceased production

agree pang72, no matter what the Q1 results, Hengyuan share price will be forward looking for Q2 and ahead..

Remember i was saying margin is shocking it its unfolding earlier..it will come in news... i was aware that it shot to 28 USD/brl last week itself

The Feb & March refining margin spike is contributed by Diesel & other refined products

@valuegure, I have data for Feb & March - it shot up significantly


Posted by valueguru > May 8, 2022 11:04 AM | Report Abuse

As mentioned in my post, I don't expect much impact on March quarter result (I might be wrong) but rather the June quarter will be interesting.

USD 26/brl....LOL!

i really hope readers can do the simple maths

i see at least 2 million barrels additional sold in Q1 22'vs Q4 21'

leave readers to do the maths on implication on bottom line

Posted by pang72 > May 8, 2022 10:13 AM | Report Abuse

https://www.theedgemarkets.com/article/some-petrol-stations-run-out-su...

FIRST TIME HAPPENS OIL SHORTAGE IN MSI

Post removed.Why?

Shandong-based independent refinery buying Russian crude discounted $35 per barrel against Brent crude

MAY 4 2022

https://www.ft.com/content/4f277a24-d681-421a-9c94-29d6fd448b20

China’s independent refiners have been discreetly buying Russian oil at steep discounts as western countries suspend their own purchases and explore potential embargoes because of the war in Ukraine.

An official at a Shandong-based independent refinery said it had not publicly reported deals with Russian oil suppliers since the Ukraine war started in order to avoid attracting scrutiny and being hit by US sanctions.

The official added that the refinery had taken over some of the purchase quota for Russian crude from state-owned commodity trading firms, which are seen to represent Beijing and have mostly declined to sign new supply contracts.

Many western companies are self-sanctioning or struggling to secure the insurance, shipping or financing needed to buy Russia’s commodity exports, raising expectations that energy-hungry China will step in and buy the unsold barrels.

The purchases from China’s independent refineries reveal how some importers are bypassing traditional routes to access cheap Russian oil, helping Beijing maintain a low profile as the west barrages Moscow with sanctions.


Brian Gallagher, head of investor relations at Belgian tanker group Euronav, said the consolidation of Russia oil on to larger ships for transport to Asia was “unusual”. But with Urals discounted $35 per barrel against Brent crude, he added that Chinese refineries were motivated to buy.

............


Shandong Hengyuan Petrochemical Company Limited (SHPC) is a state-owned enterprise based in Linyi County, Shandong Province, China.

http://hrc.com.my/shandong-hengyuan-petrochemical.html

...............

22 Dec 2021 - COSA agreement between HRC & Shell to buy their Brent crude is over

Shandong-based independent refinery buying Russian crude discounted $35 per barrel against Brent crude

MAY 4 2022

https://www.ft.com/content/4f277a24-d681-421a-9c94-29d6fd448b20

China’s independent refiners have been discreetly buying Russian oil at steep discounts as western countries suspend their own purchases and explore potential embargoes because of the war in Ukraine.

An official at a Shandong-based independent refinery said it had not publicly reported deals with Russian oil suppliers since the Ukraine war started in order to avoid attracting scrutiny and being hit by US sanctions.

The official added that the refinery had taken over some of the purchase quota for Russian crude from state-owned commodity trading firms, which are seen to represent Beijing and have mostly declined to sign new supply contracts.

Many western companies are self-sanctioning or struggling to secure the insurance, shipping or financing needed to buy Russia’s commodity exports, raising expectations that energy-hungry China will step in and buy the unsold barrels.

The purchases from China’s independent refineries reveal how some importers are bypassing traditional routes to access cheap Russian oil, helping Beijing maintain a low profile as the west barrages Moscow with sanctions.


Brian Gallagher, head of investor relations at Belgian tanker group Euronav, said the consolidation of Russia oil on to larger ships for transport to Asia was “unusual”. But with Urals discounted $35 per barrel against Brent crude, he added that Chinese refineries were motivated to buy.

............


Shandong Hengyuan Petrochemical Company Limited (SHPC) is a state-owned enterprise based in Linyi County, Shandong Province, China.

http://hrc.com.my/shandong-hengyuan-petrochemical.html

...............

22 Dec 2021 - COSA agreement between HRC & Shell to buy their Brent crude is over

Shandong-based independent refinery buying Russian crude discounted $35 per barrel against Brent crude

MAY 4 2022

https://www.ft.com/content/4f277a24-d681-421a-9c94-29d6fd448b20

China’s independent refiners have been discreetly buying Russian oil at steep discounts as western countries suspend their own purchases and explore potential embargoes because of the war in Ukraine.

An official at a Shandong-based independent refinery said it had not publicly reported deals with Russian oil suppliers since the Ukraine war started in order to avoid attracting scrutiny and being hit by US sanctions.

The official added that the refinery had taken over some of the purchase quota for Russian crude from state-owned commodity trading firms, which are seen to represent Beijing and have mostly declined to sign new supply contracts.

Many western companies are self-sanctioning or struggling to secure the insurance, shipping or financing needed to buy Russia’s commodity exports, raising expectations that energy-hungry China will step in and buy the unsold barrels.

The purchases from China’s independent refineries reveal how some importers are bypassing traditional routes to access cheap Russian oil, helping Beijing maintain a low profile as the west barrages Moscow with sanctions.


Brian Gallagher, head of investor relations at Belgian tanker group Euronav, said the consolidation of Russia oil on to larger ships for transport to Asia was “unusual”. But with Urals discounted $35 per barrel against Brent crude, he added that Chinese refineries were motivated to buy.

............


Shandong Hengyuan Petrochemical Company Limited (SHPC) is a state-owned enterprise based in Linyi County, Shandong Province, China.

http://hrc.com.my/shandong-hengyuan-petrochemical.html

Shandong-based independent refinery buying Russian crude discounted $35 per barrel against Brent crude

MAY 4 2022

https://www.ft.com/content/4f277a24-d681-421a-9c94-29d6fd448b20

China’s independent refiners have been discreetly buying Russian oil at steep discounts as western countries suspend their own purchases and explore potential embargoes because of the war in Ukraine.

An official at a Shandong-based independent refinery said it had not publicly reported deals with Russian oil suppliers since the Ukraine war started in order to avoid attracting scrutiny and being hit by US sanctions.

The official added that the refinery had taken over some of the purchase quota for Russian crude from state-owned commodity trading firms, which are seen to represent Beijing and have mostly declined to sign new supply contracts.

Many western companies are self-sanctioning or struggling to secure the insurance, shipping or financing needed to buy Russia’s commodity exports, raising expectations that energy-hungry China will step in and buy the unsold barrels.

The purchases from China’s independent refineries reveal how some importers are bypassing traditional routes to access cheap Russian oil, helping Beijing maintain a low profile as the west barrages Moscow with sanctions.

.......


Brian Gallagher, head of investor relations at Belgian tanker group Euronav, said the consolidation of Russia oil on to larger ships for transport to Asia was “unusual”. But with Urals discounted $35 per barrel against Brent crude, he added that Chinese refineries were motivated to buy.

What would you need to justify a TP of RM 12 with PE 5?
.......................................................

(PE 5 is conservative considering its just the beginning of golden age for refinery now)

If you see Q4 21'results which delivered EPS of 60 cents. You only need such performance on average every quarter for TP of RM 12 with PE5.

During this quarter, the Gross Profit added with other Operating Gains was MYR 309m.

This is the gross refining margin you need with a stable oil price (not dropping) in order to deliver EPS of 60 cents per quarter as you have not even subtracted the manufacturing cost.

Lets see what is the average crack spread you would need to deliver the above earnings going forward:

Barrels processed / sold per Qtr average 10.5 m

Gross refining margin per barrel needed:

= ( MYR 309 ) * (1/4.2) / (10.5 m barrels)
= USD 7.0/brl

Hope with the above people will realize its not that hard to hit RM 12 with current refining margin exceeding USD 20 / brl

The 5 years crude sourcing from Shell is over by 22 Dec 2021, I believe Hengyuan being a smart China management would have sourced crude oil from Russia:

https://www.euractiv.com/section/energy-environment/news/the-fossil-fuel-companies-profiting-from-europes-oil-trade-with-russia/

The company’s refining margins jumped to staggering levels in March, according to media reports.

Compared to the previous ten-year record of $9.3 per barrel on refined products, MOL earned $34.9 per barrel of oil refined in March.

This is largely due to the much lower price of the Russian export oil blend (REBCO) used in MOL’s refineries compared to other types of oil.

Frequently asked questions on refinery like HRC for investors knowledge:

https://investor.esso.co.th/en/frequently-asked-questions

Why are refined product prices set based on singapore market prices?
.........

Oil is a commodity product in a market which is highly competitive. Pricing policy or production and sale strategies of a market player can impact the overall market as the other players may consequently make price adjustments in order to maintain their competitiveness. Therefore, the to-be reference oil price should be determined by demand and supply capabilities in free markets within a given proximity. This approach which is similar to what is done with agricultural goods such as fruit reference prices at Tai market or rice reference prices at Kumnun Song market.

The three major oil trading regions are North America, Europe and Asia Pacific. The AP trading hub is in Singapore as it is the biggest exporting country in the region. Singapore reference prices are not refined product prices set by Singapore government or refineries. They essentially are the prices of products which are traded in Singapore by oil traders in the region.

Thailand is in the AP region and located near Singapore; therefore, it is logical that Singapore oil prices are used as reference prices. Singapore oil prices not only reflect equilibrium prices of free markets in the region but also globally align with the other regional trading hubs.

check 2021 annual report

India

Posted by BoomBerg > May 7, 2022 4:35 PM | Report Abuse

Who dare to buy Russian oil since USA already imposed sanctions

@Sparrow & Boomberg refer annual report for 2016, pg 45


COSA
.....

The 5-year COSA is intended to ensure continuity of supply of
crude oil to HRC post completion of the Share Sale. With effect
from 22 December 2016, being the completion date of the
Share Sale, HRC will procure crude oil mainly from SIETCO on
the terms and conditions set out in the COSA for an initial period
of five years, which may be extended for a further period of three
years by mutual agreement of the parties in writing.

The minimum amount which has to be purchased from SIETCO will reduce
each year during the abovementioned five years.
The price for each parcel of crude oil supplied to HRC under the
COSA shall be agreed by HRC and SIETCO based on, amongst
others, the prevailing market crude oil price, freight costs and/or
insurance. Again the price follows the various international Platts
markers for crude oil

Posted by sparrow > May 7, 2022 2:56 PM | Report Abuse

@probability may know where you get this detail?

"by 22 Dec 2021 Hengyuan no longer forced to buy Brent from Shell, the 5 year contract is over and they are free to buy Russian oil..."

Hurricane Harvey is a temporary blip in 2017...it is incomparable to whats happening now

A new golden age of oil refiners

https://www.home.saxo/en-mena/content/articles/equities/a-new-golden-age-of-oil-refiners-04052022

https://klse1.i3investor.com/blogs/Crackspreads/2022-05-06-story-h1622444383-Why_crack_spreads_for_refined_oil_products_have_NOT_peaked.jsp

Posted by emsvsi > May 7, 2022 1:00 PM | Report Abuse

Dear Mr Koon,

It is clear that you are selling oil palm and buying Heng Yuan. However you must remember what happened in the past in Heng Yuan where you and many others were burnt badly. Remember, what goes up must come down. Especially a cyclical stock like Heng Yuan. All the promoters will disappear when Heng Yuan crashes to the depths of the world, and when the 'crack spread' and one off inventory gains turn to losses

Sincerely,
EMSVSI

The beauty is that their margin (as a minimum) are fixed against Brent at Means of Platts Singapore for the next 5 years while they are free to source crude from anyone to expand it....

its like there is a minimum margin but no maximum

simply brilliant!

The 5 years crude sourcing from Shell is over by 22 Dec 2021, I believe Hengyuan being a smart China management would have sourced crude oil from Russia:

https://www.euractiv.com/section/energy-environment/news/the-fossil-fuel-companies-profiting-from-europes-oil-trade-with-russia/

The company’s refining margins jumped to staggering levels in March, according to media reports.

Compared to the previous ten-year record of $9.3 per barrel on refined products, MOL earned $34.9 per barrel of oil refined in March.

This is largely due to the much lower price of the Russian export oil blend (REBCO) used in MOL’s refineries compared to other types of oil.

Frequently asked questions on refinery like HRC for investors knowledge:

https://investor.esso.co.th/en/frequently-asked-questions

Why are refined product prices set based on singapore market prices?
.........

Oil is a commodity product in a market which is highly competitive. Pricing policy or production and sale strategies of a market player can impact the overall market as the other players may consequently make price adjustments in order to maintain their competitiveness. Therefore, the to-be reference oil price should be determined by demand and supply capabilities in free markets within a given proximity. This approach which is similar to what is done with agricultural goods such as fruit reference prices at Tai market or rice reference prices at Kumnun Song market.

The three major oil trading regions are North America, Europe and Asia Pacific. The AP trading hub is in Singapore as it is the biggest exporting country in the region. Singapore reference prices are not refined product prices set by Singapore government or refineries. They essentially are the prices of products which are traded in Singapore by oil traders in the region.

Thailand is in the AP region and located near Singapore; therefore, it is logical that Singapore oil prices are used as reference prices. Singapore oil prices not only reflect equilibrium prices of free markets in the region but also globally align with the other regional trading hubs.

From above, we can see 22 Dec 2021 was the date they would have switched to Russian Oil.

Q1 22'will see the real power of Russian oil...

uncle Koon, for your reading pleasure:

https://klse1.i3investor.com/blogs/2017/2022-05-07-story-h1622469652-Hengyuan_2_pictures_says_a_thousand_word.jsp

What would you need to justify a TP of RM 12 with PE 5?
.......................................................

(PE 5 is conservative considering its just the beginning of golden age for refinery now)

If you see Q4 21'results which delivered EPS of 60 cents. You only need such performance on average every quarter for TP of RM 12 with PE5.

During this quarter, the Gross Profit added with other Operating Gains was MYR 309m.

This is the gross refining margin you need with a stable oil price (not dropping) in order to deliver EPS of 60 cents per quarter as you have not even subtracted the manufacturing cost.

Lets see what is the average crack spread you would need to deliver the above earnings going forward:

Barrels processed / sold per Qtr average 10.5 m

Gross refining margin per barrel needed:

= ( MYR 309 ) * (1/4.2) / (10.5 m barrels)
= USD 7.0/brl

Hope with the above people will realize its not that hard to hit RM 12 with current refining margin exceeding USD 20 / brl

Good thing is the 5 - year contract for crude sourcing is over and they can freely use Russian oil at easily 20 USD /brl discount against Brent

Remember PAT margin in Q4 2021 was only 4.4%, we dont need margin like gloves stock to deliver powerful earnings for refinery.

The msg here is you dont need a large rise in crack spread for Hengyuan to deliver extraordinary earnings.

You just need about 13 USD/brl to hit TP of RM 24 with PE 5.

Guys, study the Q3 2017 vs Q4 2021 Income Statement as closely as possible.

Compare the Gross Profit and divide them by the avg barrels processed & sold usually in a qtr (about 10m) to see the margin per barrel.

All you need is 3 USD/brl higher average margin in Q1 2022 vs Q4 2021 to obtain an EPS close or more than RM 1.

The depreciation per qtr now is half of it used to be in 2017.

For Q2 2022 no need to estimate lor.....buta buta jackpot!

i was not aware of point no.3, thanks for sharing

Summary:

Oil refining is typically not a high ROIC business except for the Finnish based Neste, but the recent jump in crack spreads are causing revenue growth to soar to above 70% y/y and with crude oil supply remaining tight these refining margins will remain high for a considerable time period. The question is how long this new golden age of oil refining will last. As long as capital expenditures are not being raised considerably in the energy sector the market will remain tight for quite some time.