News Update – KUALA LUMPUR: Shares of Hengyuan Refining Co Bhd, which has gained over 643% year-to-date, continued to climb in early trade on Wednesday riding on the wave of global oil prices recovery. The refiner gained 40 sen, or 2.6% to RM15.80, its all time high. It is currently the top gainer on Bursa Malaysia. The counter trades at a PE of 4.95 times.

Hengyuan-CG rose eight sen to 93 sen, Hengyuan-CD gained five sen to RM1.12 while Hengyuan-CA advanced five sen to RM1.25. Analysts said the optimism on Hengyuan was due to the global oil prices recovery and also that the company had returned to the black on improved refining margin.

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Similar Malaysian-listed refining company, Petron Malaysia has also recorded significant increase in its share price.

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My common sense seems to suggest that being downstream entities in the oil and gas chain, lower crude oil (translates into lower raw material costs) should theoretically lead to higher earnings for these refining entities. Since there has been a recent (or even) gradual hike in crude oil, did these stock counters “outrun” their fundamentals? Or, am I missing something that may be reasons that are behind the meteoric rise in the share price of Hengyuan and Petron?

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Earnings & Brent Analysis

The following summarises the quarterly revenue & gross profit of both Hengyuan and Petron since 2013 and their relationship with the movements in 3 & 6 month median of brent crude oil (USD):

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As shown below, a decline in brent crude oil will lead to higher gross profits for the both refining companies (negative relationship)- Hengyuan and Petron.

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51% of variability in gross profits of Hengyuan can be explained by the movements in Brent (USD). Hengyuan has achieved a much higher actual gross profits than the forecast gross profit as per the regression relationship. Could this have explained the outperformance in the share price of Hengyuan?

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Similar to that of Hengyuan, Petron’s gross profit is approximately 50% related to the movements in Brent (USD). Further, it has achieved higher actual gross profits than the forecast gross profit as per the following regression analysis.

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Given the negative relationship between the profitability of oil refiners and brent, one should be cautious if there is a further hike in brent / oil price.

Production cut by Opec, Russia and other oil producing countries has helped rebalance the global oil inventory, and the move has been supporting the prices in the last six months. Current global demand-supply looks evenly balanced. 

Positive global indicators from developed economies, especially from the US and European Union, is supporting the crude prices. Looking at the present demand and supply mechanics, we expect WTI would move towards the $60 mark by first week of January,  Read more at:
//economictimes.indiatimes.com/articleshow/62255841.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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