Refining gains from oil-price surge offset battery losses
SK innovation says battery deficits narrowed as European EV sales recovered and ESS orders expanded.
SK Innovation swung to a profit in the first quarter of this year, posting operating income in the 2 trillion won (approximately $1.36 billion) range, driven by strong performance in its refining business. Surging oil prices in the wake of the Middle East conflict and the closure of the Strait of Hormuz fueled inventory-related gains and lagging effects that drove the earnings rebound. The battery business continued to post losses but narrowed them through recovering European sales and cost reductions.
SK Innovation announced on May 13 that its consolidated operating income for the first quarter of this year came in at 2.1622 trillion won, marking a turnaround compared to the same period a year earlier. Revenue for the same period rose 15.2% to 24.2121 trillion won. Compared to the previous quarter, revenue increased 23.1% and operating income jumped 632.0%.
The performance improvement was led by the refining business. SK Energy recorded first-quarter revenue of 11.9786 trillion won and operating income of 1.2832 trillion won. SK On, which handles the battery business, posted revenue of 1.7912 trillion won and an operating loss of 349.2 billion won, continuing to operate in the red, but narrowed the deficit through a recovery in European and Asian volumes and cost-cutting effects.
The core driver of the earnings rebound was the inventory-related gains and lagging effects arising from sharp rises in crude oil and petroleum product prices following the closure of the Strait of Hormuz in the wake of the Middle East conflict. Given the characteristic of the refining industry in which a time lag exists between crude oil procurement and petroleum product sales, refining margins and operating income improved as product selling prices rose while crude oil secured at previously lower prices was reflected in costs. Company-wide inventory-related profit and loss came to 1.0249 trillion won, of which SK Energy’s inventory-related gain amounted to approximately 780 billion won.
Joo Young-gyu, Head of Management Planning at SK Energy, said through a first-quarter earnings conference call held that day, “This performance improvement was attributable to inventory-related gains of 780 billion won and oil price lagging effects arising from the sharp rise in oil prices due to the closure of the Strait of Hormuz caused by the Middle East conflict,” and added, “Future oil prices and refining margins are likely to face significant volatility, as they will be determined by how the Middle East conflict unfolds and the extent to which the Strait of Hormuz remains navigable.”
Investment execution and financial structure management are also being pursued in parallel. SK Innovation’s cumulative capital expenditure (CAPEX) for the first quarter stood at approximately 800 billion won, with 300 billion won allocated to the battery business, 200 billion won to the E&S business, and 300 billion won to routine and strategic investments. This represents approximately 23% of the company’s annual CAPEX guidance of 3.5 trillion won. The company plans to stabilize its financial structure and reduce borrowings through portfolio rebalancing, including the disposal of non-core and low-efficiency assets.
The chemical business maintained the need for restructuring despite short-term market improvements. SK Geocentric improved its profitability in the first quarter through a concentration of scheduled maintenance on domestic paraxylene (PX) facilities, the partial resumption of offshore benzene (BZ) sales, and inventory and calendar-spread effects stemming from rising naphtha prices. However, the company determined that the short-term market improvement driven by the Middle East conflict cannot be regarded as a structural recovery.
The restructuring of the Ulsan petrochemical complex is being pursued with the goal of finalizing a plan within the year. SK Geocentric is in discussions on specific implementation measures based on a memorandum of understanding (MOU) signed among participating companies. Although discussions have been somewhat delayed due to differences in positions among stakeholders and uncertainties in cost and supply-demand outlooks arising from the Middle East situation, the company’s determination regarding the need for structural reform has been maintained.
Kim Yong-su, Head of Management Planning at SK Geocentric, said, “While the recent conflict has led to some short-term market improvement, it is difficult to view this as a structural recovery,” and noted that “given the possibility of large-scale facility startups scheduled in the Ulsan area, a continued review of medium-to-long-term supply burdens remains necessary.” He further added, “Our view on the need for structural reform has not changed significantly.”
The battery business is pursuing profitability improvement through recovering European sales and expanding energy storage systems (ESS) amid continued uncertainty in North American electric vehicle demand. SK On explained that European electric vehicle sales in the first quarter of this year reached approximately 1.2 million units, up 28% year-on-year, and that battery sales volume and utilization rates also improved on the back of strong sales of key vehicle models equipped with its batteries.
In contrast, the North American electric vehicle market has low near-term recovery visibility due to interest rate burdens, weakening consumer sentiment, and policy uncertainty. SK On is pursuing the expansion of its ESS business to reduce volatility in its EV-centered business structure. The plan involves converting some EV battery production lines to ESS battery production lines and increasing domestic and overseas orders to diversify its revenue base.
SK On secured 284 MW out of a total of 565 MW in the second round of the ESS central contract market tender, capturing a market share of 50.3%. The company is set to supply lithium iron phosphate (LFP) pouch batteries to three sites in South Jeolla Province. Most of the domestic long-duration ESS volumes are expected to be delivered after 2027, with contributions to profit anticipated from 2027 onward. The company is also targeting a similar level of orders in the third round of the government-issued central contract market tender scheduled for June.
Liquefied natural gas (LNG) has also been identified as a medium-to-long-term strategic pillar. SK Innovation announced that the first LNG cargo produced from the Barossa gas field in Australia, in which it holds a stake, arrived at the Boryeong LNG terminal in South Chungcheong Province. The Barossa gas field plans to supply approximately 1.3 million tons of LNG annually over the next 20 years.
SK Innovation was also selected as the final operator for the Quy Nhon LNG power generation project in Vietnam. The project is valued at $2.3 billion. SK Innovation plans to begin construction of a 1,500-MW gas combined-cycle power plant, an LNG terminal, and a dedicated port in 2027, with completion targeted for 2030.
Seo Geon-gi, Chief Financial Officer (CFO) of SK Innovation, said, “This selection as operator is significant in that it is the first case of transplanting the successful LNG value chain model (the first completed by a private Korean company) into an overseas market,” adding, “We expect this to serve as an important bridgehead for expanding our global LNG portfolio to an annual scale of 10 million tons by 2030 and making a leap forward as a global major LNG operator.”
Jung Min-hee
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