Very fast another 3 months had passed, since I had written two consecutive articles to predict Hengyuan’s Q2 EPS,
and Q3 EPS for 2017 as per below:
https://klse.i3investor.com/blogs/Insight1/129795.jsp
https://klse.i3investor.com/blogs/Insight1/137875.jsp
The actual reported earning was rather very close looking at the deviation in terms % points for Q3 2017
Thus, I would like the maintain the same basis of derivation for Quarter 4 2017.
Now let the same old boring story begin..
For any refinery, there are two independent factors that contribute to its quarterly earnings, one is the Refining Margin (1) and the other is the Inventory gain/loss (2) due to crude oil price changes between the reporting period.
Earnings factor (1): the refining margin
This is called the profit due to CCS Margin.
(A) CCS Profit = Refining Throughput, T (Barrels/day) x No. of days in operation (Days) x Refining CCS Margin (USD/Brl) x Exchange rate (RM/USD)
Considering some recent revelations in i3 on Diesel being the major product of Hengyuan and that it is much likely that the management had captured the crack spread better in Q4 relative to a much smaller window of opportunity they had in Q3 (though its peaks were higher for Petrol), and considering the changes in Diesel spread, and many other factors which is quite exhaustive to explain, I estimate the average refining margin in Q4 slightly higher at 10.5 USD/brl. This is just to keep the derivation presented here simple.
Using a realistic estimate of the expected Q4 average refining margin of 10.5 USD/brl, HRC CCS profit is as per below:
= 112k bpd x 91 days x 10.5 USD/brl x 4.1 RM/USD
= 439 M
Earnings factor (2): Inventory gain / loss,
This simply the valuation of their Inventory (consisting of both product and feed crude) as per the market valuation at end of the reporting period which I had revised to 2350 barrels.
As such taking a conservative approach, I estimate that Brent price of ~ 67 USD/brl to represent ending value for Dec17 and 57 USD/brl to represent starting value as of end Sept7. The difference is 10 USD/brl.
(B) The inventory Gain = Ending Value of inventory (Dec 17) – Starting Value of Inventory (Sept 17)
Starting Value of Inventory (Sept17) = Inventory (barrels) x Starting Price of Brent (USD/barrel)
= 2350k barrels x USD 57/brl
= 134M
Ending Value of Inventory (Dec17) = Inventory (barrels) x Ending Price of Brent (USD/barrel)
= 2350k barrels x USD 67/brl
= 157.5M
Thus, the inventory gain is
= 157.5M – 134
= 23.5M USD
= 96M RM
The Total Effect, Is the FIFO profit which will be the reported Gross profit is simply the addition of the CCS Profit with Inventory gain/loss.
Refineries divide the FIFO profit by the barrels processed to obtain FIFO refining margins.
Thus, the FIFO Profit (GROSS PROFIT):
= CCS Profit + Stock gain/loss
= 439M + 96 M
= 535 M
Taking HRC’s Sales & Admin overhead costs, Other expenses and Finance costs which comes to approximately 120M, the Net profit would be:
= 535M – 120M
= 415 M this results with a staggering EPS of 138 cents for Q4 -17 for HRC (assuming no tax as per previous qtr).
For PETRONM, i am unfortunately still skeptical if it can maintain its current EPS.
Considering some news on Europe for Simple Refiners, I estimate the EPS has possibility of dipping to 28 cents as PetronM is highly sensitive to Fuel Oil crack spread.
There will be an article posted shortly on Why Petron is investing 14 Billion to upgrade its refinery – this may shed some reason on why i think as such for PetronM Q4 2017 earnings.
