[Focus] S-OIL Swings to 1.2 Trillion Won Profit…Regains Strength Ahead ...

Construction is in full swing at S-OIL’s Shaheen Project site for the TC2C facility, which refines crude oil to produce petrochemical feedstocks. Photo=S-OIL.

|NewsWatch= Reporter Song Ho-gil| S-OIL swung to a year-on-year profit in the first quarter of this year, posting operating profit in the 1.2 trillion won range. The company attributed the earnings improvement to a sharp rise in oil prices caused by the war in the Middle East and the blockade of the Strait of Hormuz, along with stronger refining margins.

However, analysts say earnings volatility could increase from the second quarter onward depending on the direction of oil prices, as more than half of operating profit came from inventory-related gains and earnings were heavily concentrated in March.

S-OIL said on May 11 that it recorded consolidated first-quarter revenue of 8.9427 trillion won, operating profit of 1.2311 trillion won and net profit of 721 billion won.

Revenue rose 1.7% from 8.7926 trillion won in the previous quarter. Compared with 8.9905 trillion won a year earlier, revenue declined slightly. Operating profit turned around from a loss of 21.5 billion won in the first quarter of last year and surged 231% from 371.9 billion won in the previous quarter.

The key driver of the earnings rebound was the refining business. By segment, the refining division posted revenue of 7.1013 trillion won and operating profit of 1.039 trillion won. This means refining accounted for more than 84% of total operating profit.

The petrochemical division recorded revenue of 1.1044 trillion won and operating profit of 25.5 billion won, turning to a modest profit. The lube base oil division posted revenue of 737 billion won and operating profit of 166.6 billion won. However, operating profit declined quarter on quarter as the rise in raw material costs was not fully reflected in product prices.

One notable aspect of the quarterly results was the inventory effect. S-OIL’s first-quarter inventory effect amounted to 643.4 billion won, accounting for 52.3% of total operating profit. As oil prices rose, the value of crude oil and petroleum products held in inventory increased, sharply boosting inventory-related gains.

Earnings were especially concentrated in March. S-OIL’s monthly operating profit stood at 176.6 billion won in January, 242.4 billion won in February and 812.2 billion won in March. About 66% of first-quarter operating profit was generated in March alone. The inventory effect also swung from a loss of 9 billion won in January to a gain of 52.9 billion won in February and then surged to a gain of 599.5 billion won in March.

During a conference call, S-OIL said, “Oil prices and refining margins remained strong due to the impact of the war in the Middle East.” The sharp rise in Dubai crude prices also contributed to improved refining earnings through the lag effect that occurs between the timing of crude oil purchases and the sale of refined products.

However, the company said, “Regular maintenance and opportunity losses caused by the government’s implementation of a maximum petroleum price system partially offset the positive effect of stronger refining margins.” This means the improvement in refining margins did not fully translate into operating profit.

The outlook for the second quarter is mixed. If supply disruptions continue, refining margins could remain solid. S-OIL expects refining market conditions to stay favorable, saying the impact of supply disruptions is likely to outweigh concerns over demand slowdown caused by high oil prices.

On the other hand, if oil prices fall, the inventory effect and lag effect that boosted first-quarter earnings could work in the opposite direction. While rising oil prices generate inventory-related gains, falling oil prices can lead to inventory valuation losses and margin pressure.

Despite supply and demand uncertainties stemming from the Middle East, S-OIL emphasized supply stability. The company said it is maintaining a stable crude oil procurement system based on its long-term crude purchase contract with parent company Aramco and its long-term transportation contract with Saudi Arabian shipping and logistics company Bahri.

During the conference call, S-OIL said, “Due to geopolitical issues such as the war in the Middle East and the blockade of the Strait of Hormuz, uncertainty and volatility have increased to unprecedented levels across many areas, including crude oil procurement, oil and product prices and the won-dollar exchange rate.” It added, “We immediately activated our companywide risk management system, and top management and all employees are responding to rapidly changing market conditions.”

The company continued, “Even during the extreme crisis situation in March and April, we were able to procure crude oil stably through smooth communication with various stakeholders, including our parent company Saudi Aramco, the Korean government and our customers.” It added, “In line with government policy, we are stably supplying petroleum products to the domestic market while also responding to demand from domestic and overseas customers.”

S-OIL has normally imported 10 cargoes of crude oil per month. In March and April this year, monthly imports fell to 7.5 cargoes due to regular maintenance, but the company plans to restore imports to the normal level of 10 cargoes per month in May and June.

The Shaheen Project, S-OIL’s large-scale petrochemical investment project, has also entered its final stage. S-OIL said the project’s EPC progress rate stood at 96.9% as of the end of April and that it is targeting mechanical completion by the end of June this year.

By category, engineering progress reached 97.3%, procurement 99.9% and construction 93.6%. Installation of key facilities, including major steam cracker equipment and the TC2C furnace, has also been completed. Branch pipeline construction connecting to major customers in the Ulsan area is scheduled to be completed during the first half of the year.

S-OIL aims to complete preparations for commercial operation through commissioning by the end of this year and begin commercial operation early next year. Ahead of the Shaheen Project’s startup, the company is also pursuing annual supply contracts to expand its olefin monomer customer base. For polyethylene, it has completed long-term export contracts and is working to expand its customer base through pre-marketing.

Regarding the Shaheen Project schedule, S-OIL said, “Mechanical completion is scheduled for the end of June, followed by commissioning in the second half of the year and commercial operation early next year.”

The company took a cautious stance on initial profitability. S-OIL said, “Due to the high volatility caused by the war in the Middle East, it is difficult to comment at this point.” However, it added, “In the mid to long term, we expect petrochemical product spreads to gradually improve, which should ultimately have a positive impact on our earnings.”

Reporter Song Ho-gil newswatch@newswatch.kr