S-Oil Corp
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S-Oil Corp
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[Interpreted] Joining me is CFO J.W. Bang; [ IR team leader ], J.W. Ahn and IR team members. And allow me to go over the financial highlights for Q3 2023.
S-Oil recorded KRW 858.9 billion in Q3 operating income, which sharply went up quarter-on-quarter. The bearish Asian refining margin in Q3 [indiscernible] turnaround driven by strong demand in summer driving season and air travel peak season. It was the biggest contributor to a jump in operating income from the previous quarter.
We had heavy T&I of major processes from early June and completed it one by one from end of June until middle of July during when refining margin was at its lowest of the year. And start-up coincided with the refining margin turnaround, which minimized the opportunity loss.
International oil price jumped during Q3 in reaction to OPEC+'s voluntary output cut and the decision to extend it. This resulted in roughly KRW 230 billion in inventory-related impacts, which more than offset roughly minus KRW 190 billion inventory-related loss in the first half of the year.
As for the refining margin, global demand for refined products has been growing constantly despite economic uncertainties that have been lingering since the beginning of the year. The combination of demand recovered from pandemic shifting to endemic and summer peak demand in the Northern Hemisphere up to latest outlook on this year's oil demand growth in between 1.8 million to 2.4 million barrels per day, which is very decent.
Although post-pandemic run rate in the global refining industry went up, it did not fully catch up with the speed of demand growth causing global refined product inventory to fall below historical levels. We believe seasonal demand spikes for refined products, factors like start-up delays in new facilities or interruption of existing ones that, cause unexpected fluctuation in demand and supply could easily push up refining margin as it did in Q3. In this sense, we think Asia refining margin, which went down this month after the summer peak season came to an end, will be able to bounce back when demand for heating oil picks up in winter.
Next is about external financing for Shaheen Project, which is making a smooth progress. The company agreed on major terms and conditions for KRW 780 billion in shareholder loan and KRW 700 billion in standby credit lines. We also signed KRW 1 trillion in bank loan agreement and secured both shareholder loan and bank loan at competitive rates below market interest rates.
This minimized the company's financing cost at a time when the market environment is dictated by high interest rates. KRW 1 trillion in bank loan, in particular as policy backed loans for investing in facilities and [ within ] less carbon than conventional ones. It is a highly competitive low interest facility loans.
With low debt-to-equity ratio and outstanding cash generation capacity, we will be able to move on with the project as planned, maintain appropriate level of shareholder return and sound financial structure, even when assuming conservative marketing environment scenario during the project period. The company is throwing company-wide capabilities into successful completion of Shaheen Project to take advantage of petrochemical up cycle in the midterm and to respond to energy shifts in the longer term. We are, and we will keep putting our best resources -- best to take our corporate level to a higher level through the project success.
Team Leader, J.W. Ahn will take over from me to share Q3 performance and other details. Thank you.
[Interpreted] Good morning. This is J.W. Ahn leading S-Oil IR team. Before going through the materials, please be noted that Q3 2023 financial results are provisionals and subject to change according to outside independent auditors review.
Let me first touch on Q3 2023 performance and outlook. Please go to pages -- Page 5 for Q3 2023 financial results. The company's revenue in Q3 rose by 15.1% quarter-on-quarter to approximately KRW 9 trillion. This is attributable to increased sales volume after the end of major T&Is and higher oil prices compared to the previous quarter.
Q3 operating income stood at KRW 858.9 billion, far outperforming cumulative operating income of KRW 552.1 billion in the first half of the year. By segment, Refining business contributed the most with a major turnaround as bullish refining margin and international oil price resulted in inventory-related gains.
As for Petrochemical and Lube, operating income in both segments declined quarter-on-quarter due to one-off opportunity loss associated with regular T&I of some processes that ended in July and lower fuel demand. For your reference, T&I impact and inventory impact on the company's Q3 gain and loss is minus KRW 146.1 billion and KRW 234.3 billion.
For finance and other income, the company incurred KRW 89.5 billion in FX loss due to higher FX, and recorded KRW 737 billion in income before tax in Q3. But we have the company's FX risk management policy that offset FX loss on the nonoperating side with FX gains on the operating side on an annual basis. The company's cumulative operating income and income before tax up to Q3 2023 is KRW 1.411 trillion and KRW 1.0581 trillion.
Next is the company's financial status. Cash [ end at ] KRW 1.47 trillion as of the end of Q3 this year, which is an appropriate level from income generation and external financing, despite expenditures in Shaheen project. It is smaller than the previous quarter because working capital went up after the end of T&I and higher international oil price.
Net debt-to-equity ratio as of the end of Q3, is 54.2%. It is slightly higher than the end of previous quarter but we are still maintaining stable financial structure. As for profitability indicators, return on equity mark 12.1% and return on capital employed recorded 11.1%, driven by a sharp increase in operating income in Q3. Accumulated EBITDA up to Q3 recorded KRW 1.534 trillion.
Now I will go into market environment and outlook by each business segment starting with the Refining business. In Q3, Refining business recorded KRW 666.2 billion in operating income, which is KRW 958.3 billion higher than the previous quarter. While supply was tight, Asia refining margin sharply rebounded on the back of strong demand in summer driving in the Northern Hemisphere and air travel peak season.
On the supply side, run rate adjustment in some old refining facilities in Europe and Australia [indiscernible] to unusually hot weather, partial facilities interruptions and ramp-up delays in some new refinery in and out of the region, failed to bring enough supply to the market, resulting in lower inventory and higher margins.
Thanks to these factors, Singapore refining margins jumped from $0.90 per barrel in Q2 to $7.30 per barrel in Q3, and it became the primary contributor to the company's performance improvement. Dubai crude price went up significantly from $75 per barrel in June average to $93 -- $93.3 per barrel in September average. OPEC+'s announcement in additional output cut and period extension on the supply side serves as the key momentum for the oil price rally.
As for Q4 outlook, we are projecting healthy Asia refining margins as demand will go up in winter amid low global inventory level and conditions going to limited supply increase. Entering into October, refining margins adjusted downwards led by gasoline but this largely owed to the end of peak summer season. With stockpiling activities for heating and winter starting this year, we believe refining margins will return to a bullish momentum that it did in Q3.
The fast and new refining facilities have started up or our targeting start-up this year are going to slow start-up move the industry to forecast but the tight supply situation won't go away in the near future.
By products, we are expecting kerosene, jet fuel and diesel to drive up refining margin in Q4. And based on our outlook, kerosene and just fuel spreads will be supported by winter heating demand -- winter heating oil demand growth and continued recovery of travel demand. Diesel spread will remain firm driven by yield shift to meets kerosene demand in winter. And further details on the latest Refining business environment and outlook will be shared in key business updates.
Moving on to Petrochemical business. Petrochemical business reported KRW 45.4 billion in Q3 operating income as Olefin Downstream margin deteriorated. Starting off with aromatics, PX spread in Q3 stood at $425 per ton, which changed a little from the previous quarter and benzine spread slightly fell from the previous quarter to stand at $251 per ton.
Gasoline blending demand for feedstock aromatics during gasoline high season remained solid and additional demand from new large-scale downstream facilities were in favor of aromatics market environment. Aromatic spread may slightly adjust itself in Q4 when gasoline blending demand moderates with gasoline market environment entering into low season and aromatic production goes up. However, we believe the market will go to a boost when regional downstream facilities start-up after completing T&I scheduled in September and October.
As for Olefin Downstream, PP and PO market in Q3 stayed weak due to new start-ups in the region, continuing downturn in Chinese manufacturing, real estate and construction industries and shrinking downstream demand. Spread of PO in particular, sharply went down quarter-on-quarter as new facilities started up in China at the end of June. We expect Olefin goes from product demand to gradually get better in Q4 since China's consumer demand usually picks up deploying after a National Day holidays, which support PP and PO market.
Also, China's consumption indicators have recently increased a little. The spreading perception that the current margin level is at the bottom level where some players have no choice but to adjust down their run rate is projected to support Olefin Downstream market conditions.
Moving on to Lube. Lube base oil recorded KRW 147.2 billion in Q3 operating income. LBO spread in Q3 contracted quarter-on-quarter as off-peak season, stagnated demand, major suppliers completed their scheduled maintenance and lagging effects and feedstock price jumps -- jump yet reflected in product prices at a time lap, still posted $55.2 per barrel, which is a healthy and above historical average levels.
In Q4, some suppliers have scheduled T&I and lube base oil supply to be limited, if strong winter diesel demand causes yield adjustment. Also demand from customers to gradually recover after low season and given forecast, lube base oil strategy show a modest upturn.
Next, I will share the key business updates with you. First is global refined product inventory decline. Graph at the left shows trends of gasoline, kerosene, diesel and having built up in major refined product rating hubs in U.S., Europe, Asia and the Middle East. Global refined product inventory in 2023, marked in green, was slightly high in the first half of the year but it's going down in the second half of the year consistently below the range in 2017, which was 3 years before the pandemic and in 2019.
In particular, inventory of diesel, kerosene and jet fuel is at a low level across major regions in U.S., Europe and Singapore. This year's inventory level as well as last year is at the lowest since 2015, and this leads us to projecting upward pressure on kerosene and diesel spread towards winter when heating demand goes up.
The overall inventory decline of refined products is supported by solid fundamentals on the product demand side. Concerns around economic recession arising from monitory tightening policies in the U.S. and other major countries around the world, and subsequent questions over energy demand existed in the market.
Demand recovery of refined products for industrial use, which are affected by manufacturing, real estate and construction industries was broader slow, while demand for transportation fuels for vehicles and airlines is showing a healthy recovery throughout the year.
Oil demand growth outlook for this year by major institutions ranges from 1.8 million BD to 2.4 million BD, which is very decent. By product, demand for gasoline in the first 3 quarters of the year grew by roughly 860,000 BD year-on-year. Demand for kerosene and jet fuel also jumped by 1 million BD during the same period.
Diesel by contrast grew relatively less as industrial demand was squeezed. Demand for jet fuel recovered to 87% of pre-pandemic levels, which suggests there may be demand for further recovery in the future. By region, demand grew by 550,000 BD in China, driven by reopening this year. And demand also grew evenly in Asia other than China, North America, Middle East and Europe.
Next is progress of Shaheen -- financing for Shaheen Project. Total investment is KRW 9.258 trillion, out of which KRW 2.65 trillion or 29% will be financed as generally. We will borrow KRW 780 billion, which is $600 million in the green dot and shareholder loan from Saudi Aramco, which is the company's majority shareholders to cost of financing. The company agreed on the major terms and conditions and secured interest rates that is lower than that of normal facility loans from local and global financial banks -- commercial banks.
For bank loan, the company completed KRW 1 trillion low interest facility loan agreement. It is a policy loan for investments into less carbon-emitting facilities for intensity compared to existing facilities and we have completed assessment and verification procedures for external certification agencies by financing long-term facility loan at a very low interest conditions. At the early stage, we secured investment funds for the project and saved sizable amounts of financing costs at the same time.
As for the corporate bonds, our plan is KRW 870 billion, which we will issue the optimal timing from 2025 with consideration into bond market conditions and interest levels based on the company's outstanding credit rating. This diversified financing options will allow us to respond to uncertainties in the future financial markets by optimizing execution timing and minimizing financing costs.
For your information, Shaheen Project is making a smooth progress expand with site preparation, making a 31.4% and EPC 13.9% progress as of the end of September. We plan to communicate concrete progress of the project with analysts and investors on a regular basis.
This is the end of my presentation. Thank you. And please wait, this presentation in Korean has not finished yet.
[Foreign Language]
[Operator Instructions] [Interpreted] The first question will be given by in Jae Kyoung Song from Hanwha Securities.
[Interpreted] My first question has to do with the refinery capacity addition, which is for this year and up to next year and above.
And my second question is about the market situation that is getting better. This resulted in [indiscernible] cash flow. So if this level of cash flow is maintained, is there any chances for you to raise a payout -- a dividend payout ratio?
[Interpreted] For your question for the global refining capacity expansion, is it part for you to find out exact time line of the capacity addition, however, and the major institutions provide a wide range of outlook process. However, we can provide the long-term based outlook of financial institutions. The range of net capacity expansion scheduled ranging 4.2 million and 4.5 million between 2023 and 2030. However, demand growth is expected to reach over 7 million BD. This means that if that demand situation where demand growth outrate investment in the new refining capacity is expected to continue under global energy transition and greenhouse gas reduction trend.
According to several institutions on the on this year, net capacity addition, that is expected ranges between 1 million and 1.4 million BD for 2024 and it would be around 1 million BD for 2025, and after 2025, less than 1 million BD of net capacity addition if expected. Afterwards, it is expected to gradually go down.
However, it is expected to take more than -- up to more than a year from 6 months for the normal operation and the start-up of these projects - depending on the project timings. So the exact impact it will have on the market cap will be different depending on the project.
[Interpreted] This is CFO speaking. For your question on the chances of raising dividend payout ratio, in July, we have provided dividend guidance. And as we mentioned in there, even we are in the middle of progressing market share project, we will maintain the dividend payout ratio of 20% of net income or above to protect shareholder value. As we are still at the early stage of a project of conservative business change scenario was reflecting to this. Once our funding for the investment is secured above at certain level and we said that we may raise -- we may be able to raise dividend payout ratio even during the project period.
As was mentioned, the company is expected to create a health income based on bullish refining margin scenario for the coming years. So this will make us to raise our dividend payout ratio once we secure investment funding above a certain level at the later stage of the project.
However, since we are still at the initial stage of the project and global economy situation comes with uncertainty, we are expected to make decisions complying with the dividend guidance we have provided. And the final decision that is subject to COD and the Ordinary General Meeting of the shareholders, which will be held in March next year. This concludes my answer.
[Interpreted] The following question is by Lee Jin-Myung from Shinhan Investment Securities.
[Interpreted] Lee Jin-Myung from Shinhan Securities. I have a 3 questions. Recently national gas pipe increased and last year, we had seen the gas to oil switch. And do you expect this to happen again in this winter?
And my second question is has to do with the possibility of -- export quota increase -- export quota issuance from China, would it be issued for the third time this year?
And my third question is about your borrowing for Shaheen Project. External borrowing may increase with the progress of the project, can you tell us more details such as variable or fixed interest rates or the expected financing cost for the project?
[Interpreted] First on your questions about the chances of gas to oil switching in this winter, recently European natural gas price increased because of the damaged to gas -- natural gas pipeline and the shutdown of the gas fields on field a new area [indiscernible]. On a dollar per MMBtu basis, the price of natural gas lined up more than that of LSFO and HSFO. This push it -- this may push some European region to replace natural gas with fuel oil. However, still the price of natural gas is not reaching on price of diesel. So we have to monitor market situation more to find out whether gas to oil switching will occur in winter or not.
For your question on the chances issuing of export quota from China, Chinese Commerce Department issued export quota oil for light oil 3x this year, which amounts to 40 million tons. This is slightly higher than the total actual quota issued last year. In Q3 only, the issued export quota was 12 million tons. In the third quarter, the issuance of third and 4th quota on [ lease permit ] and refining margins, which should of course of Chinese refined products. However, till refining margin remains firm.
There was a news report in late September, referring to Chinese government view that the chances are not high for issuance in the first export quota. So the industry expects exports to come down because not enough, it resulted -- not enough export quota that's remaining.
From Q1 to Q3, a light oil export from China reached around 900,000 BD. Based on the remaining amount of the quota, the exports from the remaining period of this year is expected to be less than that of Q1 -- from Q1 to Q3.
This concludes my answer.
[Interpreted] As for your question on the financing for Shaheen Project, the 29% of our financing for Shaheen Project will be secured through external financing and for major shareholder loan and facility loan, we will apply interest rates that is related to [ CD ] rates, 1 year maturity of industrial finance [indiscernible], and we will apply a variable interest rate.
And as for the corporate bonds, you mentioned before, we will apply a fixed rate interest rate and issue it at the optimal timing given the condition of corporate bond market and interest rate conditions. And on bond interest expense, since interest rate level only vary, it is the hardest to give you exact details at this slide. However, as you mentioned, it will go gradually and we already reflected the interest rate high outlook for this. And interest rate expense -- the capitalized interest expense was already reflected to the project budget. And there will be capitalized interest expense for existing borrowing too. So the impact on the quarterly income would not be that big compared to steel of the 2023.
As we move towards 2025 and 2026, the later stage of the project, we expect interest rate to stabilize and in terms of rate uncertainties with the financial market to ease. So we will optimize our financing plan to minimize borrowing co-supported project.
This concludes my answer.
[Interpreted] The following question is by Cho Hyunryul from Samsung Securities.
[Interpreted] I have 2 questions. Can you give us -- or give me the breakdown of inventory impact and T&I impacted on each business segment? And my second question, which has to do with your new business. Refineries are recently increasing announcing the import of biofuel, do you have any plan for that? And other than Shaheen Project, are you considering any new business for your planning?
[Interpreted] First, for the inventory impact based on each business segment. For 3Q, it was plus KRW 210 billion for Refining business plus KRW 26 billion for Petrochemical business and minus KRW 71 billion for Lube base oil business.
For the T&I test, the company had T&I for the #3 CDU, CFF, hydrocracker and [indiscernible] related unit during June and July. So in the third quarter, we had a T&I impact of minus [ KRW 67 billion ] for Refining business, minus KRW 39 billion for Petrochemical business and minus KRW 41 billion for Lube base oil business.
For the remaining year, no T&I is scheduled for our major units. So we will try to maximize our process operation given market condition to maximize our profitability.
[Interpreted] For your question on new business, including biofuel. As part of green initiative that the company is pushing forward in response to energy transition, we are planning for biofuel, hydrogen and waste [indiscernible] base circular economy business. For this, we are planning to establish a cooperative system with Saudi Aramco and other partners, and we are also conducting feasibility -- planning to conduct the feasibility study and business model development.
As for biofuel business, for the fast entry into the market, we are pushing forward to processing to produce a biofuel by a trading biofuel cost into existing refining process with priority. And we are also reviewing the construction of a biofuel dedicated [indiscernible] construction.
As the company is also pushing forward a circular economy business that utilizes waste plastic base [indiscernible] oil business. The utilizes a waste plastic [indiscernible] oil. And we are -- we already gained exemption for the regulation to pursue green petrochemical products by treating our [indiscernible] oil within to the existing Refining business. For this, we are conducting activities to secure [indiscernible] related equipment.
As for the hydrogen business, we are collaborating with Saudi Aramco to import low-carbon ammonia that is produced from Saudi Arabia and we are co-operating to establish infrastructure and that includes site of storage facilities and pipeline for the [indiscernible] carbon ammonia [indiscernible] And for that, we have signed LOI with Saudi Aramco on October 22 for the low carbon ammonia import.
However, during the project period, we will conduct the feasibility study for the business that is optimal for future growth. And we will include priority on the investment that can utilize the existing facilities, for example, co-processing. And for the larger project, that will be pushed forward after Shaheen Project. But as a new business that I just mentioned, did not come with a big investment.
This concludes my answer.
[Interpreted] Analysts and investors, for attending this conference. Thank you so much. The results will always be available [indiscernible] Please reach out to [indiscernible] for this conference call. Thank you very much.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]