A rebound in global oil prices has put local refiners Hengyuan Refining Co Bhd and Petron Malaysia Refining and Marketing Bhd back on the radar of investors as evident in their more than 100% jump in share price in just over a month or so.

Last Friday, Brent oil hit the US$50/barrel mark for the first time since early March, and could inch further north as global economies recover from the Covid-19 pandemic.

As it has been about three years since Hengyuan and Petron reached a peak in their share price, shareholders will be pleased to see the stocks regaining traction since oil rebounded from March lows.

Both refiners have outperformed upstream and downstream oil and gas (O&G) players on the stock market. In less than 1½ months, Hengyuan’s share price has shot up 145%, while Petron has seen its value double.

Analysts say prices of refined products have run up much faster than the rise in crude oil prices, leading to the widening of the crack spread. The spread refers to the refining margin between crude oil prices and their refined finished products, primarily RON92 and RON95 gasoline or motor gasoline (mogas).

“Generally, demand for refined products is much higher than before. Note that the US gasoline inventory has actually come down over the course of the last few months, as now they are more used to the new normal with the recovery of economic activities. So these are the factors behind the widening of the crack spread,” an analyst tells The Edge.

He also attributes high product margins to low-cost inventory — in this case, crude oil. The commodity had been in the doldrums in April, with Brent crude for instance below US$20 a barrel.

“Right now, you are unloading your crude oil stocks to refined products, translating into higher selling prices. It is more like a stock drawdown thing.”

Another analyst notes that, typically, the crack spread will recover faster during the initial stages of recovery. “Even if oil prices are weak, the crack spread will widen if demand remains strong.”

The analyst, however, cautions that high prices of refined products may not be sustainable. “This wide spread probably will last for more than a quarter, then it may start tapering off, though it will still be higher than what it was.”

According to US-based futures trading giant CME Group, Singapore Mogas 92 ICE Brent Crack Spread futures are currently trading above US$2/barrel and up to US$3.1/barrel for May and June 2021, after trading up to US$5/barrel in October. Current prices are even further off compared with the peak of the second half of 2017 when it traded at over US$10/barrel.

In a Dec 9 note, Citi Research notes that US petroleum inventories, including commercial crude oil, strategic petroleum reserves and refined products, have risen 19.8 million barrels to 2.01 billion barrels. “Inventories across commercial crude oil inventories and major refined products including motor gasoline and distillate fuel oil rose 24.5 million barrels, while jet fuel and the more obscure ‘other oils’ category reported stock draws of 884,000 barrels and 207 million barrels respectively.”

Hengyuan’s market capitalisation has swelled to RM1.99 billion based on its closing price of RM6.62 last Friday while Petron is valued at RM1.61 billion based on its closing price of RM5.97. Year to date, both stocks are up 56.9% and 18.9% respectively.

Hengyuan is currently trading at a 12-month trailing price-earnings ratio of 19.77 times. Investors who bought its shares at a peak of nearly RM20 a share in December 2017 can remember all too clearly how badly the stock has plunged.

The stock staged a free fall to the RM6 level in just four months over December 2017 to April 2018, as its margins were hit by higher oil prices that drove up feedstock costs.

Similarly, Petron’s share price halved to below RM7 from a high of RM15 over the same period.

Closely held companies

Analysts say the fact that both stocks are tightly held by their major shareholders could be a reason that has contributed to the spike in their share price. “It is very easy to push the prices up, so I believe there is a lot of retail interest in these counters and their share price movements are very volatile,” observes an analyst.

Shandong Hengyuan Petrochemical Co Ltd, through Malaysia Hengyuan International Ltd, owns a 51% stake in Hengyuan, while Amanah Saham Bumiputera and the Employees Provident Fund (EPF) own 3.54% and 2% each.

Petron Oil & Gas International Sdn Bhd controls 73.4% of Petron Malaysia, just 1.6% shy of the maximum 75% threshold allowed to meet the minimum 25% public shareholding spread requirement.

Financially, both companies delivered a strong set of results for the July to September quarter.

Hengyuan registered a net profit of RM154.91 million against a net loss of RM11.43 million in the same quarter a year ago, on the back of higher average prices of oil products. Cumulative nine-month net earnings also jumped sixfold to RM79.46 million from RM13.42 million in the same period a year ago.

Based in Port Dickson, Negeri Sembilan, Hengyuan’s complex refinery has a licensed capacity of 156,000 barrels per day. Its main operating units comprise two crude distillers, a long residue catalytic cracker unit, two naphtha treaters and a Merox plant, one reformer and a gasoil treatment plant.

Its petroleum products are liquefied petroleum gas, petrol, jet fuel, diesel, fuel oil components, sulphur as well as chemical feedstocks such as light naphtha and propylene.

Petron’s net profit for 3Q soared 183.64% to RM97.64 million from RM34.42 million a year ago, underpinned by cost rationalisation measures and higher gross profit. But it incurred a net loss of RM55.33 million for the nine-month period compared with a net profit of RM148.16 million in the same period last year, owing to the Movement Control Order.

Petron owns and operates the Petron Port Dickson Refinery, which has a capacity of 88,000 barrels per day, producing gasoline, diesel, liquefied petroleum gas and aviation fuel. It operates across the country. Apart from refinery operations, Petron operates petrol stations across Malaysia.

Moving forward, analysts say the financial performance of the refiners is still very much dependent on the movement of global oil prices and economic recovery.

As at end-September, both Hengyuan and Petron were in a net debt position of RM682.7 million and RM238 million respectively. Hengyuan had much higher gross borrowings of RM899.3 million compared with Petron’s RM370 million.

In terms of cash and cash equivalent, Hengyuan had RM216.61 million to Petron’s RM132.02 million.

Hengyuan has not paid a dividend since 2018. Petron declared a 12 sen per share dividend in 2019, eight sen lower than the 20 sen per share paid out in 2018.