This article first appeared in The Edge Financial Daily on May 25, 2018

KUALA LUMPUR: Following a weak first quarter, Hengyuan Refining Co Ltd expects better margins for the second quarter due to the pickup in crude oil prices and subsequently, the crack spread for motor gas.

The refiner has seen margins picking up in May, suggesting that there is support for the crack spread going forward, said its chief commercial officer William Chen Jung Huei. This is backed by rising global demand for refined products as end users stock up amid rising oil prices, he said.

“Our margins are sustainable but they may not be as good as last year’s,” he told reporters after the group’s annual general meeting (AGM) yesterday.

A lower crack spread had caused the group’s net profit for its first quarter ended March 31, 2018 to tumble by 68.94% to RM86.81 million from RM279.49 million a year ago.

This was despite a 4.31% increase in revenue to RM3.06 billion from RM2.93 billion on the back of higher average product prices. Manufacturing expenses were also marginally lower in the quarter.

Unfortunately, an oversupply of refined products in the region has exacerbated the decline in the group’s earnings.

“As a refiner, we rely very much on global supply and demand,” said Foo Ai Li, chief financial officer of Hengyuan.

Meanwhile, the Euro 4M Mogas project, which was originally targeted to be completed in the second half of 2018, has been rescheduled to be completed in the fourth quarter of 2019 after facing delays.

In the meantime, the group’s scheduled major turnaround (MTA) exercise in August will see it ceasing production for two and a half months.

Hengyuan chief executive officer David Keat said production will normalise in the fourth quarter. Foo added that there would be no disruption of its delivery to customers, although it is likely to record some financial impact from the downtime.

“We will see lower revenue and cost of goods sold during that period,” she said, adding that the group will also have to bear costs for its turnaround including overheads such as wages.

Hengyuan’s non-executive chairman Wang YouDe said the scheduled MTA was a regular once-in-five-years event, explaining that the unplanned downtime events in the first quarter of this year had been due in part to old facilities and instruments which need upgrading.

A total RM700 million of capital expenditure has been allocated to both Hengyuan’s Euro 4M Mogas project and the Atlas II project for the next one to two years.

The Atlas II, which is an integrated project that will be able to produce 1.15 million tonnes per annum, is expected to be completed during the scheduled MTA.

“The group will remain focused on the energy sector, while also watching out for [disruption by] the renewable energy sector,” Wang said.

As a measure to strengthen its financial position, Hengyuan has been hedging Brent crude oil prices within a “window”, which is typically between US$50 (RM199) and US$75 per barrel, according to Keat. Brent crude oil traded at over US$79.42 per barrel yesterday and has remained above US$75 for the last two weeks.

Foo shared that the group’s commercial team is currently involved in partial hedging after the board approved its hedging policy last July, which includes a mandate to hedge up to one year in advance.

“We’re always looking at whether we should hedge longer or shorter, but we are lucky that our shareholder is quite experienced,” Foo said. Malaysia Hengyuan International Ltd, which is controlled by China-based Shangdong Hengyuan Petrochemical Co Ltd, has a 51.02% stake in the group.