Analysts warn that gains may fade as Q1 profits surged on low-priced crude bought before Middle East tensions
SK Innovation announced that it recorded 24.2121 trillion won ($18.62 billion) in sales and 2.1622 trillion won ($1.66 billion) in operating profit in the first quarter. (Photo provided by SK Innovation)
As high oil prices persisted following the outbreak of the Iran war in February, South Korea’s four major refiners (GS Caltex, HD Hyundai Oilbank, SK Innovation, and S-Oil) all posted first-quarter earnings surprises.
The industry, however, maintains that the profit increase was temporary, driven by low-cost crude oil purchased at the start of the year.
SK Innovation, which announced its results on May 13, disclosed first-quarter revenue of 24.2121 trillion won (approximately $16.47 billion) and operating income of 2.1622 trillion won. Revenue rose 15.2%, while operating income returned to the black.
GS Caltex and HD Hyundai Oilbank also recorded operating income of 1.6367 trillion won and 933.5 billion won, respectively. GS Caltex saw its operating income increase 14-fold compared to the first quarter of last year, while HD Hyundai Oilbank posted a gain of 2,901%.
Including S-Oil, which had released its results earlier, the combined operating income of the four major refiners came to approximately 6 trillion won, an increase of more than 70 times compared to the combined figure of 81.1 billion won recorded by the four companies during the same period last year.
This earnings turnaround is understood to reflect inventory valuation gains, as crude oil stockpiles secured at lower prices prior to the Middle East war were sold during a period of rising oil prices.
On May 13, HD Hyundai Oilbank said at a conference call, “The future direction of oil prices will be determined by the outcome of ceasefire negotiations,” adding that the company “plans to operate with a focus on appropriately maximizing utilization rates by monitoring refining margins.”
GS stated, “Operating income increased compared to the same period last year due to a temporary inventory effect arising from the Middle East situation, but in the refining segment, refining margin profit excluding the inventory effect declined quarter-on-quarter as a result of the maximum petroleum price scheme.”
The key issue is whether the earnings improvement can continue and how the government will calculate losses under the maximum price system.
Since March, the government has been implementing a maximum price system to control the prices of petroleum distributed through gas stations in order to stabilize prices.
Although the government has said it will compensate for future losses, the relevant contingency fund at about 4.2 trillion won is approaching the estimated loss amount, making friction in the payment process likely.
Industry estimates put cumulative losses since the introduction of the system at more than 3 trillion won. The industry says it is incurring losses of about 500 billion won per week.
However, differences between the government and refiners over the standards for compensation are causing problems in reimbursement.
The government argues that only physical and accounting costs that can be verified under accounting standards should be recognized, while the refining industry contends that it is virtually impossible to separately calculate costs for only specific products and that international market prices should be reflected.
If international oil prices fall after the second quarter, there are also concerns that shrinking refining margins could be compounded by massive inventory valuation losses.
Refiners have recently been securing crude at a premium to replace Middle Eastern oil, and if international oil prices plunge after the war ends, the currently accumulated high-priced crude inventories could be booked as large losses, the reverse of the first quarter.
Meanwhile, securities industry analysts estimate the combined operating income of the four major refiners in the fourth quarter of this year at around 2 trillion won.
Jung Min-hee
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