S-Oil Corporation (A010950) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to S-Oil First Quarter of 2020 Earnings Conference Call. I would like to thank you all for joining us today. I am Cho Young-II, the Treasurer of S-Oil Corporation. I am glad to be here today to communicate with you through the earnings conference call. Your continuous support will be highly appreciated. IR team leader, Mr. Ko Gwang-cheol, and other hierarchy members are with me here. Before Mr. Ko presents our first quarter financial results, I would like to start with a brief review on business environment and other performance. The first quarter of 2020 was the worst period of time for the company due to outbreak of COVID-19. In the first quarter, the company posted a significant operating deficit due to massive inventory-related loss from the plants in crude oil prices and lingering weakness of our refining margin. COVID-19 pandemic popped unprecedented collapse of global demand for petroleum and refined products, especially transport fuels, such as jet and gasoline. Not only to the refining side, but also all of the downstream indices were affected by the spread of COVID-19. In spite of the depressed downstream demand, most of the petrochemical product spreads improved, thanks to fall in feedstock prices. Similarly, lube base oil spread benefited from price drop in raw materials amid plunging crude oil prices. So business environment is expected to show gradual improvement from second quarter upon the reopening of global economies. Although volatility in the market has sharply escalated and it is hard to predict how long this will last. Various efforts against COVID-19, including aggressive developed measures of major countries will bring global economy back on track. Refining margin and PX spreads would bottom out on the back of the supply-demand balance as the easing COVID-19 lockdown restrictions encourages recovery of the global oil consumption and long cuts and maintenance shutdowns of refineries in the region limit supply. Most importantly, we have already secured enough liquidity to pursue the company's stable operations to win through current adverse market situation. We are prepared, and we put our best efforts on our financial summary. As a countermeasure against uncertain financial markets, the company issued KRW 680 billion of corporate bonds in early March, and thus already secured funds for repayment of all long-term debt maturing in the last of this year. Moreover, the company increased trade financing for stable operations and plans to reduce investment in operating expenses as much as possible by freeing of non-urgent investment and inhibiting nonessential expenditures. Looking back, down cycles have always provided us with the opportunities to strengthen our competitiveness. And we believe that the current down-cycle will be other chance to us. Again, thank you all for joining us today and keeping interest in our company. I would like to conclude my presentation here. From now on, Mr. Ko will take you through a presentation on the first quarter financial results and second quarter business outlook. Mr. Ko, please?

Thank you, Mr. Cho, and welcome all of you to today's conference call. Before I get started, I want to draw your attention to our cautionary statement. The company's 2020 first quarter financial results are provisional, and thus, the results are subject to change according to independent auditor's review. Also, during the course of this conference call, we will make forward-looking statements that is based on our current expectations, assumptions, estimates and projections. We caution you not to place undue reliance on any forward-looking statement, which may involve risks and uncertainties. Now I will start with financial results on Slide 4. We delivered KRW 5.2 trillion in revenue in first quarter, representing around 20% quarter-over-quarter reduction. Sales prices declined 13.4% quarter-on-quarter with crude price drop, while sales volume decreased 7.3%. Operating income was minus KRW 1.007 trillion, decreased by KRW 1.016 trillion from the previous quarter. Dubai crude oil prices collapsed by more than $30 per barrel, which brought us large inventory-related loss of KRW 721 billion. Also, Singapore refining compressed margin did not recover to profitable level, remaining around 0. On the financial market side, concerns of COVID-19 impact drove dollar strength, which caused FX loss of KRW 141 billion, lower operating income line. As a result, the company registered to pretax income of minus KRW 1.209 trillion in the quarter. Moving on to the next slide, to our financial status. Cash holdings increased to about KRW 1.6 trillion from KRW 0.6 trillion a quarter ago despite first quarter being loss. To prepare against the financial market uncertainty under the coronavirus crisis, the company only issued corporate debenture of KRW 680 billion and increased trade financing to more than user level in the first quarter. As a result, the company had secured enough liquidity to repay all the long-term debt maturing this year and to keep stable operations, although net debt increased to KRW 6.8 trillion with net debt-to-equity ratio rising to 122%. Meanwhile, [indiscernible] sent the quarterly profitability and cash flow both into deeply innovative territory. ROE and ROC recorded minus 58% and minus 35%, respectively. EBITDA was minus KRW 1.065 trillion. Now turning to the fourth quarter performance by business segment on Slide 6. The revenue in the refining business declined 22% quarter-on-quarter, while its operating income was minus KRW 1.190 trillion. Amid the very low refining margin market, the steep fall in crude prices was the main culprit for the huge loss. Inventory-related loss in refining business is estimated at KRW 670 billion. On the other hand, nondependent business operating income increased due to price decline of field staff such as naphtha and high-sulphur fuel oil. Petrochemical sector's operating income expanded to KRW 66 billion from KRW 21 billion in the previous quarter because of the spread of petrochemical products improvement was seen quarter-on-quarter. Lube business posted KRW 116 billion of operating income, increased by KRW 20 billion from the previous quarter, while operating margin ratio improved to 27% from 24% a quarter ago. Turning to the capital expenditure and refinery operation. Recently, the company decided to cut annual CapEx project for this year by KRW 163 billion as a way to reduce cash outflow. The available CapEx was -- is about KRW 490 billion. Non-urgent items, including minor constructions and marketing-related expenditures, were postponed or put on hold. For the first quarter, total of about KRW 75 billion was spent, and most of it was used for upgrade and maintenance of our plants. Looking at maintenance plan. The company will carry out turnarounds in the second quarter and third quarter. #2 RFCC and PP/PO will operate from June to July whereas #1 CDU and group 2 base plants be shut down for over 1 month from late August. During the first quarter, the company's major plans were stably and optimally operated near capacity with the exception of CDU. CDU run rate was inevitably lowered for a couple of weeks in February when SPM on offshore facility for Nordion crude oil was repaired. All the upgrading plants utilization rate increased quarter-on-quarter, especially, PP/PO plants were operated at heightened level, 94% for the combined, to capture the improved economics. Next let me explain first quarter market environment and second quarter outlook by each business at Slide 8. To begin, refining business in the first quarter, Singapore refining compressed margin change result quarter-on-quarter, moving around the 0, due to severe demand disruption from the global wide coronavirus outbreak. In the second quarter, we think refining margin would gradually bottom out. Many countries are expected to cautiously start to leave the lockdown and reopened businesses, whereas supply would be restrained due to continued run cuts and shutdown for turnaround by demand. Moving on to aromatics in petrochemical sectors. In the first quarter, demand side worsened due to spread of coronavirus. But this decline in the price of naphtha, feedstock aromatics supported the spreads of our market products. PX spread moved around the previous quarter level posting $249 per ton on average, while Benzene spread became wider quarter-on-quarter to $174 per ton due to different import demand from U.S. Looking ahead, second quarter PX spread would improve as major field plants will be shut down for maintenance in the region, whereas Benzene spread be pressured by high inventory in China. Turning to olefin market on next slide. In the first quarter, PP spread of naphtha was flat quarter-on-quarter, thanks to cheap naphtha price in spite of worsening downstream demand, whereas the PO spread rebounded and supply was tightened by major plants maintenance and naphtha price rebounded. Second quarter PP spread is forecast to improve as demand for anti-coronavirus materials would be stronger, while PO spread to be pressured by downstream weakness from coronavirus. Lastly, turning to lube base oil market at Slide 11. First quarter lube base oil spread continued to expand and the feedstock, high-sulphur fuel oil prices declined further while product prices were relatively flat quarter-on-quarter. Second quarter, the spread is expected to decline since product prices will move down to reflect the lower feedstock price amid weak demand. With that, I'd like to conclude my prepared presentation. Thank you for listening. Now we would be happy to take your questions.

[Operator Instructions] The first question will be given by Baek Young-chan from KB Securities.

[Interpreted] Okay. So this is Baek Young-chan from KB Securities. I have 3 questions. And the first question is about the inventory loss which is about KRW 721 billion, and it is calculated by the lower of cost method. So I would like to have more explanation about this. And the second question is about the FX impact on the operating income. So I would like to have more detailed explanation about the operating income loss caused by the FX. And the last question would be about the run rate of CDU and RFCC. In the second quarter, I believe that there will be a T&I for this upgrade in facilities. And however, as demand decreases, the sale will be decreased. So therefore, I would like to know the run rate of CDU and RFCC.

[Interpreted] So to answer your first question, for the inventory impact, the lower cost methods and also FICO methods are both applied to the inventory impact. However, for the inventory impact, the crude oil price plunge impact will be separately applied. And for your second question, we showed that our operating income was positively impacted by the FX changes. We have about plus KRW 55 billion of FX impact. And the third question is -- in order to answer your third question, I believe that there will -- you said that there will be a decrease in demand and it will cause a decrease in sales. However, we believe that there has been decrease in demand. However, our all plants are now being operated at a full percentage. So at the moment, we have no plan to decrease our run rate of our plants and also there will be, like, T&I for some of the plants that we have. So therefore, there can be some adjustment in the operating rate due to T&I. However, we have no specific plan to adjust our run rate due to margin and demand decrease. So we would like to add some more explanation for number 3 questions. At the moment, we are operating our CDU 100%. And also, we are planning to operate the CDU for 100% for the second quarter. And however, there will be some T&I in the -- at the end of August, it will be less than a month, and it will not impact -- it will not have a huge impact on our operation. And for #2 RFCC, we will have 2 months of T&I from June to July. And for -- during the time, we will have about 2 months of off-line for #2 RFCC. And for #2 RFCC, we produced about 76,000 barrels per day. And for #1 RFCC, there will be no T&I planned at the moment.

The following question is by [Park Se-young] from Nomura Securities.

[Interpreted] I have 2 questions. And for the -- the first question is about the loss generated by the refining business in the first quarter. It is equivalent to KRW 1.2 trillion. However, from my memory, in 2014 in the fourth quarter, the operating loss was about KRW 240 billion. I'm not sure about the inventory impact at the time. But was there any big difference in the inventory impact or inventory valuation? And also, I believe that the oil prices have been dropped by a similar portion. It dropped about $35 this time. And that time, that was about $30. And compared to that period, the margin seems very similar. However, I would like to know why this time the loss was bigger than those times. And #2 question. I believe that there has been a T&I shutdown for RFCC last year. And now you're conducting another T&I for RFCC. Is that for commercial reason or is that because of a mechanical glitch?

[Interpreted] So for your first question, in 2014, during the fourth quarter, there has been the price plunge of the crude. However, your question was, why do we have bigger loss than those time? In 2014, unfortunately, we don't have the accurate documents -- accurate data from 2014 at the moment. However, from my knowledge, I believe that the spread in 2014 was way better than this time. So if you give us a separate question, we will get back to you with the detailed information. To answer your second question, your question was about the RFCC's T&I and was it -- is it for commercial or mechanical reasons. However, we have commented about this question last year and also during the previous conference call. And when we are initially operating the RFCC plant, in order to have smooth operation of the new plant, we had a plan to conduct the T&I divided into 2. So first will be conducted in 2019 and then the later, we will conduct the remaining T&I during the 2020. So the -- it is not because of the economics of the plant. It is previously planned, and it is to have better technical and also we will have to have better opportunities by having this T&I within this year in the second term.

The following question is by Oscar Yee from Citigroup.

My first question is, given the recent plunge in the jet crack, is S-Oil able to adjust your products a little bit by increasing the diesel yield and reducing the jet? And if so, how much are you able to do that? Second question is, given you are still running your refinery at 100% CDU, and I have noticed that in the past few weeks, the cash discount for diesel and jet was very wide, okay? Could I just confirm with you, roughly how much of your volume for these 2 products or -- is sold by a contract versus the spot -- I mean, term contract versus spot? Final question is, could I check with you roughly what is the latest inventory that you have both on the crude and the product side? Is it currently at a very high level?

[Interpreted] We'd like to answer your first question. And the first question was about the adjustment of yield. So we are now trying to optimize our production by adjusting the yield of diesel and naphtha. However, the portion of the adjustment is not significant. So therefore, even though we make an adjustment, the portion is not been meaningful. So in order to answer your second question, we would like to get back to you later after checking our detailed documents. To answer your third question, our inventory level as of the end of first quarter, it is up to 1.5 million. So it is not because we didn't -- we could not sell our products. It's because of the shipment was carried over to the next month because of the shipments and loading facilities -- concentration of the shipments and loading.

The following question is by Nikhil Bhandari from Goldman Sachs.

I have 2 questions. Firstly, you mentioned that the refinery runs will be close to 100% in the second quarter. Given margins are down and I know Saudi crude discounts are down -- have increased as well. On balance, is S-Oil currently making cash profits in the month of April? And is that the expectation even in this weak-demand environment to make a cash profit in the second quarter of the year? My second question is around the FID of the new refinery upgrade program, which was supposed to be -- happen early next year. Considering the gearing, which has gone up further and also likely weak cash flow generation in 2020, are you still looking to go ahead with the new project in terms of FID next year? Or will you look to delay the expansion project?

[Interpreted] To answer your first question, as you have mentioned, currently, the market situation is not favorable to the company. The margin in April is not that good. So therefore, it is hard for us to make profitable results from this month margin. However, as the market announced the OSP was down in -- for the shipment of April and May, so therefore I believe that our margin will be improving in May and June. So therefore, we hope that our performance in the second quarter will be much better than the first quarter, and I believe that we can reach to the breakeven point or even a little bit higher. That's how we are expecting for the near future. And in order to answer your second question, you were questioning about the development of the next project. Currently, we are conducting the feasibility study for this project. So therefore, according to the result, our final decision will be made during next year. However, we need to reflect our financial capability when making a decision on this project. So therefore, it's too early to say that we can delay this project or not. The decision will be made during next year. And also, when we are considering to implementing this project, we have to consider the performance of 2020 and the financial status of the company and the possibility of improvement. And also -- therefore, we would like to make the decision early or later next year.

The following question is by [indiscernible] from BNP Paribas Asset Management.

[Interpreted] So I have 2 questions. First -- in order to go for the first question, please refer to the -- refer to Page 8 on your presentation. So it is showing about the capacity expansion -- global capacity expansion during this year. However, it shows that as the refining margin is going down, there will be a delay in capacity expansion. So please give us more details about the delays of the capacity expansion globally. And the second question is about the demand and market growth in 2021. It's on the same page. And it shows that in 2021, there will be growth and there will be improvement in the market. So when the demand increases I believe that there will be certain products that can be benefiting from the increasing demand. So could you tell us what are those specific products that you have in mind that can benefit from increasing demand?

[Interpreted] In order to answer your first question, we are -- we have been expecting and there will be capacity expansion of 1.1 million barrel per day. However, and up to now, there has been no official announcement of the shutdown or lowering the capacity of the production. And as we have mentioned, there will be 1.1 billion barrel per day of capacity expansion, you have mentioned about the delay in the capacity expansion. However, there will be no delay in the capacity expansion because most of them are already completed the construction. However, there will be some deferment in ramping up process because -- ramping up process. And also, if you look at our chart on the page, there will be less capacity expansion during next year. It will be about 300,000 barrel per day. So how -- because the market is not favorable for refiners, there will be deferment in those expansion capacity during next year. You have questions about the products that will be impacted by the COVID-19 -- after the COVID-19. So in order to answer your question, I would like to talk about this first. In the case of the products, the products that are mostly hit will benefit the most when the COVID-19 pandemic is over. So in the case of the products, I can say that jet and gasoline, Bunker-C and diesel there will be benefiting the most from the end of the COVID-19 situation. However, we have to consider the inventory level of those products when we talk about the products -- which product will benefit from -- benefit the most. So in the case of the middle distillate products, such as diesel, it will benefit the most because we have not much inventory compared to last year or 2 years ago. However, in the case of gasoline and fuel oil, we have higher inventory compared to the inventory level of last year and also 2 years ago. So by looking at the spread of the products, we believe that middle distillate products, such as diesel, will benefit the most. And also until we use up all the inventory of gasoline and Bunker-C, I believe that the recovery will not affect for those products.

Currently, there are no participants. [Operator Instructions] The following question is by Dennis Yoo from HSBC.

[Interpreted] I have a minor question. This is about the destination of your importing products. According to your documents, the importing product -- import -- export, sorry, export volume heading to Taiwan has been significantly decreased. Are there any specific reasons for this?

[Interpreted] During the fourth quarter of last year, there has been a lot of increase in exports -- export volume to Taiwan. It's because of the shutdown of the plant in Taiwan. We took the opportunity to improve our export volume heading to Taiwan. And I believe that their plants have been normalized in the first quarter of this year.

Currently, there are no participants. [Operator Instructions]

[Interpreted] Since we do not have further questions, we would like to wrap up today's conference. However, before we end, I would like to add one comment. During the first quarter, we have recorded the KRW 1 trillion of operating loss. However, it is because of the inventory loss due to the plunging crude prices and also FICO and lagging effects were the main reasons of the operating losses that were created. However, at the moment, our contribution margin is in the positive territory. Even though the market margin is at 0, we are still in the positive margin area. And therefore, we do not have any plans for adjustment of run rate of our plants or we have no issues of sales. So therefore, we would like to have our operation rate at 100% or above in order to maximize our profit. And I believe that the players who have no competitiveness will reduce their production in order to deal with the market situation. In that case, we believe that our spread of refining margin will be improving in the second quarter. So we hope that we will have better performance in the coming quarters. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]