This article first appeared in The Edge Financial Daily on December 29, 2017

KUALA LUMPUR: Refiners Hengyuan Refining Co Bhd and Petron (M) Refining & Marketing Bhd are enjoying yet another strong march this week before the year ends. The duo were the top five gainers on Bursa Malaysia yesterday.

Hengyuan soared to a fresh record high yesterday, after gaining RM1.46 or 8.85% to close at RM17.96 for a market capitalisation of RM5.39 billion. Year to date, the counter has gained an outstanding 784.7%. Its market capitalisation has ballooned from RM609 million to RM5.39 billion.

Meanwhile, Petron, which is also the country’s third-biggest petrol station operator, gained 74 sen or 5.34% to also close at its all-time high of RM14.60. The group now has a market capitalisation of RM3.94 billion. The counter also, churned out an impressive 251.8% gain to date.

This week’s rally in the two counters were despite the rally in Brent crude oil prices, which breached US$65 (RM264.55) per barrel (bbl). The benchmark crude prices peaked at its multi-year high of US$67 on Boxing Day, and now hovers above US$66/bbl.

Rakuten Trade’s research vice-president Vincent Lau attributed the uptick in the two counters to widening crack spread — which is the difference between crude oil prices and refined petroleum products.

“Investors are positive on the outlook for the refiners though, as oil demand remains stable and widening crack spread, which is an indicator of refiners’ margin,” Lau said.

Hengyuan produces a range of refined petroleum products including retail fuel like mogas and diesel, as well as commercial products like aviation fuel, light naphtha and propylene, among others.

It said in its financial report for its third quarter ended Sept 30, 2017 (3QFY17) that it “aims to match the average price of its crude oil intake to the planned production of refined oil products, to manage the risks of margin erosion and stock-holding losses to an acceptable level”.

While not involved in the retail business, Hengyuan does have a 10-year product offtake agreement covering gasoline, diesel and jet with Shell Malaysia Trading Sdn Bhd and Shell Timur Sdn Bhd for the supply of its refined petroleum products.

Similarly, Petron, has footprints in the commercial fuel segment — comprising naphtha, kerosene and low sulphur waxy residue — which makes up 20% of its revenue, according to a report by RHB Research on Oct 3, 2017.

Unlike the automated pricing mechanism that dictates a set margin for retail products like petrol and diesel, the commercial products are subject to price fluctuations.

This means fluctuation of crude and product prices could have an impact on margins. “We expect spreads for naphtha and kerosene to range between US$2/bbl and US$7/bbl for the long term,” said RHB Research.

“As such, we believe its commercial fuel would provide Petron with a higher earnings growth potential compared to that of its peers,” it said.