Hengyuan rides the Mideast crisis

THE Middle-East crisis drove product prices and refining margins to help Hengyuan Refining Co Bhd’s chalk up a strong first-quarter (1Q26) profit.

The stronger result also reflects operational improvements that began in 2025, including lower operating cost, improved plant reliability, shorter-term hedging and greater crude flexibility, says the company.

The question now is whether those changes are enough to keep the company profitable when the refining cycle eases from the unusually strong levels seen in 1Q26 ended March 31.

For chief financial officer (CFO) Yeo Bee Hwan, the recovery is not merely a one-quarter windfall. She says Hengyuan has recovered after three years of losses from 2022 to 2024, when its results were weighed down partly by its previous hedging approach.

“The worst is over,” Yeo tells StarBiz 7.

She says Hengyuan has since revamped its hedging policy, shifting from a longer-position strategy used during a more stable market environment to a shorter-term strategy that allows the refinery to respond faster to market movements.

The change came after the Russia-Ukraine war and subsequent geopolitical tensions made oil markets far more volatile.

“Previously, the world was rather peaceful, so the strategy at that time was different. You could take a longer position. But unfortunately, the market scenario changed,” she says.

This time, the market moved in Hengyuan’s favour.

In 1Q26, Hengyuan’s revenue rose to RM4.62bil from RM2.4bil a year earlier, while it swung to a net profit of RM525.6mil compared with a net loss of RM170.4mil previously.

The company said in its quarterly report that product prices increased across all main products during the quarter amid heightened geopolitical tensions in the Middle East.

Yeo acknowledges the Middle East situation gave Hengyuan an “exceptional bumper margin”, but says the company was already profitable in the first two months of the quarter before the impact of the geopolitical tension fully came through.

“So one thing is, fundamentally, we are efficient and our initiatives have shown results. Number two is, of course, the tension provided us some exceptional bumper margin.

“But it is not only due to the fundamentals. The plant must be up and running efficiently and stably. Otherwise, we will not have the opportunity to capture the benefit when the market provides this opportunity,” she says.

Hengyuan’s earnings improvement had already begun last year. Yeo notes that the company’s losses narrowed from 1Q25 to 2Q25, before it turned profitable in 3Q25 and posted a stronger 4Q25.

This was supported by a series of operational initiatives, including cost reduction, lower demurrage charges, reduced oil losses, product slate optimisation, better inventory management and a revised hedging framework.

According to Yeo, demurrage cost has improved by more than 70%, while oil loss has also seen “tremendous improvement”.

The company has also been reviewing market demand and product margins more closely to decide its product offerings.

Since 2025, Hengyuan has shifted more output from petrol to diesel, or gasoil, because diesel provides better margins.

“We will continue to optimise our product mix within the existing operational capability,” Yeo says.

The CFO adds that any future capital investment will be evaluated based on long-term market fundamentals and shareholder value creation.

For FY26, Hengyuan is budgeting about RM150mil in capital expenditure (capex), mainly for normal yearly capex depending on projects.

A key advantage for Hengyuan is its crude flexibility.

Yeo notes that the Port Dickson refinery can process a wide range of crude oil, including both sour and sweet crude. This allows the company to source crude from different locations, including Argentina, the United States and the Middle East.

“We do not solely rely on any single crude type. That gives us the benefit of selecting a more economic crude to achieve our output,” she says.

This has become particularly important during periods of geopolitical disruption.

Yeo says Hengyuan continued receiving crude supply during the Middle East tensions due to its diversified sourcing base and strong vendor relationships.

That flexibility, she says, helped the company avoid some of the feedstock problems faced by refiners with heavier reliance on Middle East crude.

Hengyuan’s refinery is more than 60 years old, but Yeo points out that many critical pieces of equipment have been replaced over time due to statutory inspections and major turnarounds.

Every five years, Yeo says the refinery undergoes a major turnaround involving upkeep and maintenance of the plant.

Still, one issue that stood out in the latest quarter was cash flow.

Despite the strong net profit, Hengyuan recorded negative operating cash flow, while trade receivables rose sharply.

Yeo says this was mainly a timing issue caused by higher selling prices in March and the normal 30-day credit terms granted to customers. About 80% to 90% of Hengyuan’s deliveries go to its major customer Shell, while other customers include Petroliam Nasional Bhd and Petron.

“These are mostly for domestic consumption. The big rise in receivables is merely a reflection of the significant increase in selling prices for all our refined products in March,” she says.

Yeo expects the working capital position to progressively normalise in subsequent months.

She explains the refinery typically needs to buy crude first, refine it and then sell the final products on credit terms, creating a working capital cycle of about 60 days.

“It is a normal cycle. You should see the reverse in quarter two,” she says.

The company’s future performance will still depend heavily on refining margins, which remain difficult to predict.

Its Port Dickson refinery was previously majority owned by Shell before China’s state-owned enterprise Shandong Hengyuan Petrochemical Co Ltd acquired this stake at end-2016.

This year marks about a decade since the acquisition and Shandong Hengyuan now has a 55.67% stake in Hengyuan.

Yeo says Hengyuan is trying to return to the kind of performance seen in 2017, when the company recorded a net profit of RM929mil.

“We are doing our best. Fundamentally, we have improved a lot,” she says.

For now, Hengyuan has the benefit of stronger refining margins, but the harder test will come when the market tailwind fades.

If the company can remain profitable then, this is indicative that the latest rebound is much more than just another cyclical recovery.