S-Oil Corp
KRX:010950
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S-Oil Corp
Earnings Call Analysis
Q3-2024 Analysis
S-Oil Corp
In the third quarter of 2024, S-OIL reported a 7.6% decrease in sales revenue, amounting to KRW 8.84 trillion. This decline was primarily attributed to falling international product prices alongside a reduction in dollar rates, leading to an operating loss of KRW 414.9 billion. The sector faced challenges due to increased inventory-related losses and unfavorable foreign exchange impacts, indirectly affecting the refining business—resulting in an inventory-related loss of KRW 286.1 billion and an FX loss of KRW 50.5 billion.
Analyzing business segments, the refining sector experienced significant distress with an operating income loss of KRW 573.7 billion, widening due to the drop in oil prices and exchange rates. However, the petrochemical sector also saw a dip, with a reported operating income of only KRW 5 billion due to decreasing spreads in both aromatic and olefin products. In contrast, the lube oil segment showed resilience, generating KRW 153.8 billion in income, slightly up from the previous quarter, benefitting from tightened supply despite slowing demand.
S-OIL's financial health is underlined by a cash balance of KRW 1,615 million at the end of Q3, supported by reduced working capital needs. The net debt-to-equity ratio rose slightly to 65.3%. The company targets annualized returns of -0.9% for ROE and 0.8% for ROCE, while cumulative EBITDA for the year reached KRW 454 billion. This data reflects a delicate balance between managing costs while navigating fluctuating commodity prices.
Looking ahead, Asian refining margins are anticipated to recover given seasonal demand growth and planned refinery maintenance. The expected demand for kerosene, jet fuel, and diesel arises as the market responds to winter consumption patterns and post-pandemic recovery. S-OIL forecasts an increase in global demand for jet fuel, projecting a need for 940,000 barrels per day, with a significant share attributed to Asian consumers.
Amidst current pressures, S-OIL's Shaheen Project progresses well, currently at a 42% completion rate for EPC work. The engineering aspect is nearly complete at 92.9%. This ambitious project aims to enhance S-OIL's long-term competitive angle, transitioning towards energy sustainability through new energy initiatives and co-processing renewable feedstocks. The company remains committed to developing products like sustainable aviation fuels, indicating growth in renewable segments despite being in nascent stages.
S-OIL has reported cumulative CapEx of KRW 1.5 trillion, which is significantly below its annual target of KRW 3.136 trillion. The under-spending seems tied to scheduling rather than capability, with assurance that remaining expenditures will align with goals. Shareholder returns are guided by maintaining a consistent dividend payout policy, with plans for clear future disclosures to enhance investor confidence, particularly as they address ongoing market dynamics.
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[Interpreted] Good afternoon. This is S-OIL IR team leader, HD Tong. Before we begin, please be noted that Q3 financial results are provisional based on the company's preliminary disclosing and subject to change according to independent external auditors' audit results.
Now allow me to explain Q3 financial results and outlook. First, please refer to Page 5 for Q3 financial results. Q3 sales revenue dropped by 7.6% from the previous quarter, recording KRW 8.84 trillion. This is due to international price of major products in dollar terms that declined with oil price during the quarter. Selling price in one term also fell as 1 dollar rate dropped. In Q3, the company's operating income stood at minus KRW 414.9 billion. Despite quarter-on-quarter uptick in refining margin, the decline in operating income resulting from inventory-related loss and decline in FX rate widened the loss in the refining business.
While quarter-on-quarter income from petrochemical business reduced, lube business posted a small increase in income compared to Q2, thanks to the rebound in product spread. For your reference, minus KRW 286.1 billion of inventory-related impact and minus KRW 50.5 billion of FX impact were reflected to Q3 operating income. Decline in the international oil price resulted in one-off loss as opposed to a small gain in the previous quarter. Negative impact of lagging margin also affected the overall income.
In finance and other income, we had KRW 202.1 billion of net FX gain resulting from the decline in 1 dollar rate. Q3 income before tax recorded minus KRW 272.5 billion. As was mentioned, we consistently run an FX risk management policy to ensure that the impact of FX rates on the operating side is neutralized in annual income before tax with a certain time lag by FX gain and loss.
The company's cumulative operating income to Q3 2024 is KRW 199.8 billion. Despite reduced income in this quarter in petrochemical business, cumulative income up to Q3 this year remained above the level of the same period last year.
Next is financial status. Cash balance as of Q3 end inched up to KRW 1,615 million from Q2 as the decline in oil price reduced working capital requirements. Net debt-to-equity ratio slightly climbed up to 65.3%. Despite volatility in the external environment, we are keeping our financial structure stable with enough liquidity to ensure smooth execution of Shaheen project. As for profitability indicators, annualized ROE stood at minus 0.9% and ROCE at 0.8%. Cumulative EBITDA from Q1 to Q3 recorded KRW 454 billion.
Now allow me to go through market environment and outlook by each business segment. First, Refining business segment. In Q3, operating income of Refining business was minus KRW 573.7 billion widened from the previous quarter owing to one-off impact caused by the drop in international oil price and FX rate. Q3 Asian refining margin was up by $0.4 from the previous quarter. Despite sluggish gasoline, kerosene and diesel market sentiment that worked as a downside factor, completion of a regular C&I of regional naphtha crackers improved demand, thereby pushing quarter-on-quarter refining margin slightly upward.
After reaching its peak in early July, Dubai crude price declined to an annual low on worries over global economic slowdown, but continuing geopolitical instability limited the price from falling further. As for Q4 outlook, Asian refining margin is predicted to recover, supported by the growth in the seasonal demand amid restricted supply on the back of regular T&I in and out of the region.
On supply side, adjustments of operation rate that continued into Q3 due to bearish margins and scheduled T&I in Q4 by refineries in and out of the region are forecast to lay the ground for improved market fundamental. On demand side, kerosene, jet fuel and diesel for heating purpose are expected to lead growth. This post-pandemic recovery of jet fuel demand continues into this year-end. Jet fuel demand is forecast to increase when trouble season peaks at the end of the year. Furthermore, we are forecasting demand for diesel inventory build-up and the consumption in winter to support market fundamentals in Q4. More details and the outlook will be explained with the specific data in key business update section.
Let me move on to Petrochemical business segment. In Q3, operating income of Petrochemical segment dropped from the previous quarter to KRW 5 billion due to weakening spread of overall aromatic and olefin downstream products. First is aromatic products. In Q3, PX spread went down from the previous quarter recording $271 per ton. The downward correction was caused by added supply, resulting from reduced gasoline blending demand for feedstock aromatics with the beginning of a low season after the summer and the completion of a regular T&I in many regional PX facilities. And spread remained relatively strong, though it narrowed from the previous quarter to $315 per ton.
As was for PX, completion of regular T&I of facilities also pushed out benzene supply. Despite weakened import demand from the U.S., spread stayed bullish thanks to expanded import from China. Although seasonal slowdown in gasoline blending demand is anticipated in PX and benzene market in Q4, we are forecasting this to be partially offset by demand growth coming from the startup of new downstream to CA and SM facilities.
As for olefin downstream products, PO market remained unchanged in Q3 as opposed to PP market that weakened. PO spread was maintained at the level, similar to the previous quarter due to maintenance and throughput adjustment of Chinese PO facilities, both of which sustained market sentiment. By contrast, PP spread went down quarter-on-quarter due to a combination of a sluggish downstream demand and the branded supply following completion of regular T&I in regional PP facilities. Despite continuing capacity expansion in China, we forecast market condition to improve in Q4 based on our expectations for demand recovery driven by China's economic stimulus package.
Turning to Lube business segment. Q3 operating income of Lube business recorded KRW 153.8 billion, inching up from the previous quarter. Though demand softened in the face of low season, including India's motion and manufacturers are shutdown during summer holiday season in major economies, the market remained firm, backed by tight supply of mainly Group 2 products. Affected by feedstock price, that declined with oil price LBO spread widened by $4 from Q2 recording $55.8. As for Q4 LBO market, we're expecting bullish sentiment just like in the previous quarter, as regular T&I of facilities in the U.S. and Europe will bring down supply in the market.
Next is key business updates. Allow me to touch a gradual improvement in supply-demand balance in the short-term outlook. In Q2 and Q3, Asian refining margin was maintained at a low level as geopolitical risks could shift ocean freight higher, limiting outbound shipping of diesel from Asia to Europe amid sluggish demand affected by China's economic downturn. This bearish margin forced the less competitive regional refiners to cut their run rate disrupting around 950,000 bd of supply since May.
China's refiners, whose operation rate is started to come down from April, maintained their rate at mid-70%. Despite the uptick following issuance of the third export quota, utilization rate still remain low compared to the previous year. Refineries located in Europe, including Italy, Greece, Spain, also are known to have recently announced downward adjustment in their throughput, which suggests that less competitive facilities will keep adjusting run rates until economics are secured. In addition, following the seasonal pattern, autumn T&I already started and are ongoing in the U.S. and Europe.
In Asia, capacities that are scheduled to undergo T&I in Q4 is expected to be higher by 14,000 bd compared to the same period last year. Such adjustment in operation rate and regular T&I will serve as supply tightening factors in the region in the short term. Although we witnessed lower than expanded demand growth from major products in Q3, we're anticipating the demand to recover over quarter usual averages in Q4. According to the outlook by one institution, Q4 global demand for major products is forecasted to reach up to 940,000 bd.
By product, demand for heating oil in Japan and increase of travel at the end of the year are projected to drive around 450,000 bd in demand growth for kerosene and jet fuel. We are also expecting 310,000 bd increase in diesel demand due to increased industrial activities in India and Southeast Asia after the monsoon season as well as winter hitting demand.
By region, Asia is anticipated to account for 60% of overall demand growth. Slowing demand pickup from China is projected to be supplemented by strengthening demand in India and other emerging economies, which are experiencing high economic growth rate. There is also a chance of even greater demand depending on the impact of China's economic stimulus package and changes into winter temperature. To sum up, we expect the Asian refining margin to slowly recover against the backdrop of the market fundamentals pointing to a gradual improvement.
Next is the progress of Shaheen Project. We are in the middle of Shaheen project as part of our efforts to respond to energy transition and improve long-term corporate value. As of October end, EPC works are ongoing slowly as planned with 42% in progress rate. Progress rate for engineering is 92.9% with the completion of a 3D model review that reflects detailed engineering. We are issuing drawing for construction based on review results.
We're at 51.8% in the progress of procurement as we have completed order placement for most equipment and materials. We are closely monitoring the overall procurement process, including manufacturing and the delivery of equipment and materials ordered to make sure we procure on time.
As for construction, 26.3% has been completed. Currently, foundation work for TC2C equipment that converts crude and low-value refining product into petrochemical feedstock is well in progress. As for steam cracker, which will treat naphtha or LPG as a feedstock to produce olefin monomer, including ethylene and propylene, we're also installing storage tanks and cracking heaters, a core appointment for steam cracker. Construction for building polymer extruder that will produce HDPE and LLDPE from pedestal ethylene produced instant cracker and automated warehouse is also taking place.
With the construction work now fully underway, you can also see the project's progress at the site in the next slide. The picture on the left shows previously explained cracking heaters, a core equipment, the first steam cracker. On site installation started in June, and 8 out of 10 heaters have been installed. On the right, you can see polymer area where structure work for pipe crack and construction for polymer extruder building are ongoing.
With this, I'd like to wrap up my presentation. Thank you.
[Foreign Language] [Operator Instructions] [Foreign Language] [Interpreted] The first question will be given by Jin-Myung Lee from Shinhan Investment Securities.
[Foreign Language] [Interpreted] I am JM Lee from Shinhan Investment securities. I have 2 questions for you. First, is regarding China. The Chinese refineries run rate has been going down. And compared to their export quota, the export volume itself seems to be lower. What is your outlook on China's export quota going forward? And is there any chance that there was the regional margin will face a downward pressure as China expands their export volume towards the end of the year. Second question is about the value of index. I understand that S-OIL has been included in the value of index. How are you going to respond to this?
[Foreign Language] [Interpreted] So first of all, on your question about China on export and the export quota and the outlook into the future, at the end of September, the Chinese government announced third export quota, which stands at around 8 million tonnes for the light oil products. And on a cumulative basis for this year, they're going to allocate 41 million tonnes. So this already exceeds the last year's export quota of 40 million tonnes. So given the fact that the export economics are not very favorable at this moment, though their chances of giving extra export quota before the end of the year seems quite limited.
And as the Chinese economy, as you know, the Chinese government recently announced their economic stimulus packages, and that had ever since led to some positive signs of their economy. Rate in the urban in the cities was $18 [Audio Gap] in October exceeded 50 for the first time since April. So given these situations, we don't.
[Foreign Language] [Interpreted] So this is CFO, JW Bang. Let me answer your second question regarding the company being included in the value of index. In running and operating our business, we always put top priority in improving the shareholder value. And this is obviously reflected in our mid- to long-term strategies, and it's also one of our key factors in our shareholder return policies.
So we believe the best and the most desirable way to value up is to consistently invest in high profitable projects and initiatives and thereby increase the company's income. So as the company has consistently invested and maintained consistent dividend policy, the company's price book ratio is the highest in the industry, which is a key indicator. And this also explains why the company was the only player in the energy sector to have been included in the value of index in September.
So we believe the best way to value up is to make sure that we successfully deliver the Shaheen Project. And we are considering to give a public disclosure next year on our specific and concrete value up plan that maximizes the shareholder value and also shows our commitment to being part of the government policy. This answers my question.
[Foreign Language] [Interpreted] The following question is by Woo-Je Chun from KB Securities.
[Foreign Language] [Interpreted] This is Woo-Je from KB Securities. I have 3 questions. First is with regard to the PX fire incident in July. What was the impact of the fire incident on the company's financial performance? And I'd like to know if the #2 PX is on track and up and running right now. Second question has to do with Shaheen Project. Has there been any changes or updates on the financing of the construction? And third is about the immersion cooling. Could you give us any updates on your plans for the immersion cooling business? When are you going into the market? And how big would you like to scale this business up?
[Foreign Language] [Interpreted] So to answer your first question about the impact of the incident and the #2 PX at the end of July, as you know, after the incident, we had to shut down the production, but we took immediate measures to bring up the facility. So the main processes are all up and running. The aromizer is in full throttle. And the only facilities that have been still under a shutdown situation is Ulsan, which resulted in a partially reduced production of PX, but we have fully substituted this with aromatics, which is the feedstock and also with the MX, which we are selling in full volume. And fortunately, the [ spread ] between the PX and MX at the moment is very limited. And as a result of that, there is almost zero impact on the company's income as a result of the incident.
So at the moment, the company is putting in all the efforts to make sure that our processes are fully back in operation, including the Ulsan and our target and our plan is to get them all back into operation in March next year.
But since we have been insured to the property all index and the business interruption -- property all insurance and the business interruption insurance will be fully compensated for the loss resulting from the fire incident other than fully compensated for the amount exceeding $2.5 million and for the period exceeding 60 days from the date of the incident.
Second, with regard to any changes in the financing plan for Shaheen Project, let me tell you that there is no change in the financing plan because when we set the plan itself from the outset, we assume that the business environment we assume on a very [Audio Gap] we will fully be able to respond to the situation by flexibly operating the credit period extension with Saudi Aramco and also through the standby credit line, which has already been committed and is valued at around KRW 1 trillion.
With regard to your third question on the immersion cooling oil business, at the end of October this year, the company launched the S-OIL e-cooling solution, which is a high flash point immersion cooling oil. We utilize -- we performed the empirical test of the product by using in the server manufactured by one of the top tier server manufacturers in third quarter this year. And because finding suggest a stable operation of the server and an outstanding management performance.
The emerging cooling technology is widely applicable not only to the data centers, but also to the energy storage system and the battery cooling. And as a result -- and because of this, the company is engaging in joint studies with multiple partners, and we plan to continuously expand the heat management solutions across many industries.
This answers your question.
[Foreign Language] [Interpreted] The following question is by Jin Ho Lee from Mirae Securities.
[Foreign Language] [Interpreted] This is Jin Ho Lee from Mirae Asset Securities. I have 3 questions. First is with regard to Shaheen Project. I read this article about the crude oil to chemical projects having been canceled or being reviewed again within Saudi Arabia. Could you clarify this? And is this any sign that Saudi Aramco has changed its overall direction in their business going forward?
And second is with regard to SAF. Could you give us any updates on SAF, including the news that the government may potentially require SAF in a few years. And third is about the new refining facilities ramp up. We saw the operation -- the start-up of new facilities last year. Could you give us any updates on these new facilities?
[Foreign Language] [Interpreted] So to answer your first question on Saudi Aramco COTC project, I understand that one of the newspapers in South Korea recently announced, a running news article, that the Saudi Aramco scrapped their COTC project and locally, we -- but I don't think it is appropriate for us at this moment to tell you whether this is true or not. And if it is true, why they did so.
Well, on the contrary, if it is true that they did cancel their COTC project as was covered in the major newspaper, then I think that would put a bigger spotlight on the company's Shaheen Project because if they didn't scrap the COTC project, that would further sharpen the Shaheen Project's cost competitiveness and will allow the company to secure a better footing and position in the market.
So as part of the green initiative, in order to respond to the global energy transition and in order to become a competitive low-carbon product supplier, we are looking into new energy businesses like renewable diesel, SAF and circular chemicals of treating the biofeedstocks.
So as was announced to the investors and the market in the previous earnings release and through the media coverage, we have launched the coprocessing to our existing refining facilities that treat the biofeedstock and the pyrolysis -- waste pyrolysis oil to get the renewable fuel and circular chemicals, thus as a way to make sure that we quickly enter into the market. And also in the same line, in April this year, we acquired the ISCC certifications.
And in the second half of this year, we made an agreement with Korean Airlines and other airliners to supply the company's staff to the regular international flights, and we are extending these discussions with other airliners as well.
So in order to enlarge the company's coprocessing volume, we are currently investing in the dedicated tents in the pipelines. And in the mid- to long-term, we also have plans to make further investments into SAF. But once the details are set and agreed upon, we are going to announce them to the market.
And to answer your third question on the new refining facilities and their utilization at the moment, we understand, according to the market intelligence that the Dangote refinery would be 650 MBD refinery. There, utilization rate stands at around 40% to 50%. And their diesel and jet fuel is mostly sold in the domestic market and for naphtha, which was dedicated to the export market. We understand that they have not been exporting naphtha recently because they have been running their naphtha reformer in full scale to get gasoline.
And we understand that they are getting around 100 MBD of gasoline from the reformer mostly for the domestic market. And we forecast that the volume going forward will continue to be used in the domestic market to make up for the shortage. And they started the test run for the RFCC in August, and they are fully ramping up at the moment, but I don't think it will have an impact in the global export market for this year, but maybe there will be some changes as they continue to wrap up and export and -- start their exports in 2025.
[Foreign Language] As for the 350 MBD Olmeca refinery in Mexico, we understand that they have some troubles in running the CDU, and they are reporting the VGO on the spot market to -- for their FCC operations. So considering these situations, we don't expect them to go into normal commercial operation within this year, and they will probably go into a full commercial operation from 2025 -- first half of 2025.
And finally, as for the China's 400 MBD Yulong refinery in Shandong province, some base tests run, there's 200 MBD CDU, but we believe they will be able to go into full operation -- on spec full operation from the middle of 2025. That answers your questions?
[Foreign Language] [Interpreted] The following question is by Parsley Ong from JPMorgan.
This is Parsley. So I see that your CapEx -- cumulative CapEx so far is only KRW 1.5 trillion, which is a lot lower than your full year guidance of KRW 3.136 trillion. So do you think there is potential for your 2024 CapEx to undershoot guidance? And could you share what's your outlook for 2025 CapEx, free cash flow and therefore, your dividend?
Second question is with regards to your renewable projects or sustainable projects. You mentioned earlier a lot of new products like sustainable aviation fuels, biofeedstocks, e-cooling solutions. Do you have any capacity numbers to share, like how much do you already have in 2024 and 2025? And then do you have any competitive advantages that could help S-OIL protect or gain market share versus other peers in the region who I'm sure are also pursuing very similar projects?
[Foreign Language] [Interpreted] So with regard to your first question about the potential CapEx underrun, the numbers show that our execution is actually less than our annual plan for 2024 -- less than half of our annual plan for 2024. But actually, this is all because of the schedule issues, and we are executing our CapEx as planned. And the remaining will all be executed before the end of the year.
As for the year-end dividend, it's a little premature to give you any information about our dividend. However, we have already given our guidance on the company's dividend payout ratio. But as you know, our income and gains -- our income, the numbers are not final yet. So we cannot give you the details about it, but I think we can just refer to our guidance on the dividend payout ratio for now.
So with regard to the company's renewable projects, there are still in the infancy stages, and we're only reviewing our plans to further expand it into the future. So we cannot give you any specifics about the capacity and the competitive advantage since we're still in the initial stages. But once we have the specifics that we can share with you with regards to the capacity and our competitive edge, we will share that with you.
With regard to the staff, we have signed an MOU to source some of the feedstocks at a competitive price. So once any further updates are made, we are going to share that with you. So this answers your question.
Thank you very much for giving your attention to S-OIL. The company continues to exert full efforts to fairly communicate with the market and also in the most transparent manner to the analysts and investors. If you have any further questions, please contact the company's IR team. And this concludes the earnings release for third quarter 2024.
[Foreign Language] [Interpreted] This concludes the fiscal year 2024 third quarter earnings, which is by S-OIL. Thank you for your participation.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]