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

Good morning, everyone. Welcome to S-OIL's Fourth Quarter 2021 Earnings Conference Call. I am Ju-Wan, CFO of S-OIL Corporation. I wish you all Happy New Year, and I would like to express my sincere gratitude to you for joining us today. For today's conference call, Treasurer, Mr. Cho Yong-kuk; IR Team Leader, Mr. Gwang-cheol and other IR team members are with me today. Before Mr. Ko presents the company's fourth quarter financial results and market environment, I would like to make a short remark on the company's performance for 2021 and the company's growth road map on sustainable growth. First of all, I am very glad to say that the company achieved record high financial performance in 2021. Looking back to 2021, we started the year with huge challenges and of uncertainties around COVID-19 pandemic. However, all the staff of the company did their best in their role to overcome the challenging business environment. Thanks to stable operation of RUC/ODC complex, we could maintain maximum operation of major production facilities throughout the year in order to capitalize favorable market improvement. In addition, we constantly sharpen our competitiveness further, through #1 RHDS revamping project and throughput increase of #2 RFCC and pure plant. Record breaking domestic market share of retail lightweight products, lube based oil and olefin downstream products enlarged our presence in the market and contributed to financial performance. In addition, several economies have revived, as the vaccination rate continued to increase, leading to pushing of the oil demand. Consistent demand recovery of the oil products pushed up crude oil prices and refining margins. Lube based oil spreads stayed at a record high level throughout the year, thanks to strong demand for high-quality products amid tight supply. Moreover, strength of pure product spreads continued to high -- contributing to high profitability of [indiscernible] complex. Thanks to aforementioned efforts and favorable market conditions, we posted the annual record high operating profit of KRW 2.3 trillion and income before tax amounting to KRW 2 trillion. Second, let me update the progress of Shaheen Project, which is our new growth engine. We resumed front-end engineering and joint work from July last year, and its progress is on the right track and ready for completion of field work in June. We expect we can get final investment decision in the second half of this year, with the critical completion target of 2026, as scheduled. Third, we achieved 10 million hours of [indiscernible] last year, which is a dream number in our industry. Our journey to make the safest workplace in the world will be continued in the future. Fourth, the company has established a road map on ESG and green initiatives for the sustainable growth. The company has established a new target to reduce carbon emission up to 35% by 2030, with ESG framework and green initiatives, which consists of energy efficiency improvement, low carbon electricity, carbon capture and utilization, and offset by clean development mechanism. Recently, the company signed MOUs with Saudi Aramco to post a collaboration in blue hydrogen business, crude to chemical technology for Shaheen project, venture investment in new energy and decarbonization and R&D on low carbon energy solutions. In coming 2022, the steady recovery of the oil demand outpacing refining capacity additions will be strong tailwinds for the improvement of refining margins, which is expected to post the operating income together with strong demand for high-quality lube base oil. However, there are a lot of uncertainties and challenges this year. We will make our utmost efforts to make the year 2022 another successful year and a strong foundation for the sustainable growth. I would like to request your continued support for S-OIL's sustainable growth. Now, I'd like to close my remarks and hand over to Mr. Mr. Ko.

Thank you, Mr. Bang, and let me add my welcome to all of you joining today. Before we begin, I'd like to remind everyone to our first quarter and full year results of 2021 are provisional and thus subject to change, as to assessment of costs externally, to review et cetera. First of all, this conference call will contain forward-looking statements that is based on our current expectations, assumptions, estimates and projections. We caution about price on new reliance on any forward-looking statement, which may involve risks and uncertainties. Now, I will give you the presentation of our fourth quarter financial results on Slide 4. Fourth quarter revenue hit KRW 8.3 trillion, up 16% quarter-on-quarter on the increase in selling prices and sales volume. Average selling prices increased by 10% quarter-on-quarter, in line with moving up of crude oil prices. Innovation sales volume expanded by about 6% as our company actively sold profitable products ahead of year-end. Operating income was KRW 556 billion, posting outstanding quarterly performance for four quarters in a row. Regional refining margin improved by as mush as 3% quarter-on-quarter, overshadowing narrowed petrochemical margin and driving the good results in fourth quarter amid a consistent high margin in lube based oil. Inventory-related gain was KRW 84 billion, closer to KRW 88 billion in the previous quarter on the continued overall trend of crude oil prices. Annually, operating income marked a record high of KRW 2.3 trillion, successfully make a big turnaround from the record lows in the previous year. Below operating income line, FX impact was almost neutral with the exchange rate of Korean won versus U.S. dollar moving stably. As a result, fourth quarter pre-tax income was KRW 555 billion, increased by KRW 81 billion compared to third quarter. Moving on to financial status, next slide. All-time high earnings largely expanded year-end cash balance and product strength in the balance sheet in 2021. US cash balance was augmented to around KRW 2 trillion from KRW 1 trillion a year ago, despite the increase in working capital requirements due to higher crude oil price. Debt balance decreased to KRW 3.9 trillion, while net debt-to-equity ratio significantly dropped to 55% from 88% a year ago. Profitability also improved remarkably. ROE and ROC for 23% and 18%, respectively. EBITDA reached KRW 2.5 trillion. Moving on to the fourth quarter performance of [ ET ] business on Slide 6. In Refining, the sales revenue increased 21% quarter-on-quarter and operating income recorded KRW 347 billion, 87% expansion from the previous quarter. Improvement in refining margin led to a profit [indiscernible] with refining plants fully operating. In particular, [indiscernible] lowest regional product margin, annual operating income in refining business exceeded KRW 1 trillion for the first time in the past decade. As the company could upgrade any matter of a high-secure oil to high-value products, thanks to operational value sheet plan. Petrochemicals segment saw surge in revenue increase of 6% quarter-on-quarter, recorded a loss of KRW 30 billion as aromatic spread was increased due to demand slowdown in China and inventory loss of KRW 20 billion of growth. On the other hand, [indiscernible] business maintained high earnings or rating 17% from a record high in the previous quarter, posting operating income of KRW 239 billion, on the back of a strong demand for high-quality products. Turning to the CapEx expenditure and refinery operation. Last year, Capital expenditure was just KRW 178 billion, as the volume was conservatively planned and cautiously [indiscernible] given uncertainties in business environment from COVID-19 pandemic. But from this year, CapEx will be gradually normalized. The budget for this year is established at KRW 685 billion. Out of volume KRW 487 billion is origin for operating and maintenance to reflect planned regular turnaround and minor innovation and modification in plants to enhance [ anti properties ], safety, et cetera. For others, KRW 148 billion is volatile, including expansion of technical service and development center. Depreciation for the last year was KRW 591 billion, while that for this year is similarly estimate at KRW 596 billion. As for the management's plan, this year, we will have regular turnaround on some plants from #2 CDU to normal electricity to #1 PX and peer plant. Mostly, this case second half with 1 month of longer worked period as usual. The company will minimize a possible loss of opportunity from the planned maintenance through advanced inventory build-up and overall adjustment of operational rate. Meanwhile, during the fourth quarter, all plants other than PX for operated at capacity or all to take full advantage of favorable market situation. These plants were operated at below 90% in that, the company produced more gasoline with higher margins. Next, let me explain fourth quarter market environment and 2022 outlook by each business at Slide 8. Singapore refining compress margin meaningfully improved to $2.2 per barrel from minus 0.7% in the previous quarter. Continuous demand recovery that has reduced global inventories to multi load eventually pushed reserving margin into [indiscernible] territory in fourth quarter. We believe demand and recovery will continue this year, as COVID-19 impact on global economic activities and people's mobility becomes weaker and weaker. Expected demand recovery more than 3.5 million barrels per day or dominantly outweighed new capacity and addition, 1.3 million barrels per day. Which will increase the market tightness on the multiyear low inventory and will drive margin of trends throughout the year. Moreover, Chinese airport to limit carbon emissions will reduce its oil product export which would likely support regional refining margin. Moving on to polymer and petrochemical sectors. Propylene oxide spread of propylene declined quarter-on-quarter, affected by start-up of new PO plants in China have made a slow demand amid the resurgence of the COVID-19 variants, while still remained at robust level $169. On the other hand, PP spread consecutively expanded, porting $159 per ton on average, as the demand was steady while heightened coal and propane price lower the operation rate of CTO period plant in China. This year fuel spread is expected to be lower compared to record revenue in last year due to supply increase from new plants to come online in China. However, the spread would likely stay at well over pre-COVID level [indiscernible] in Dubai sustain the demand in downstream sectors. It is [indiscernible] forecast to be pressured by new capacity, but to be supported by solid demand growth from automotive and packaging sectors. Turning to Aromatics, next slide. In the first quarter, PX spread product dropped to $120 per ton on average, caused by weakened the downstream demand and increased operation of a new PX plant. Benzene spread also continued to decrease, posting $200 per ton on the long [indiscernible] benzene derivatives plant and supply increase from new aromatics plants. Looking ahead into 2022, the spread would recover gradually, as demand for polyester improves due to easing up-downs worldwide, while the price pressure from new capacity is mitigated by shutdown or operation cost of unprofitable plants. Benzene price is expected to be adjusted down, caused by competitor issuance in China but to maintain is on level by steady demand growth from new downstream plants. Lastly, looking at lube base oil market at Slide 11. Lube base oil spread over high super fuel oil consecutively went down from second quarter record high level made easy supply tightness. Product spread remained at a solid level, $58 per barrel on average on the back of a healthy demand for high-quality products. In this year, lube base spread is anticipated to continuously maintain robust level, supported by strong demand for high-quality products even though supply would increase due to higher operation rate of provisions. Thank you for listening. Now, we would be happy to take your questions.

[Operator Instructions] The first question will be given by Parsley Ong from JPMorgan.

Congratulations on the strong results. I see that as you mentioned, your equity ratio has fallen a lot to 55%. This is basically the lowest since 2017. So, given the very strong earnings and cash flow outlook and limited CapEx, do you see a potential return to, let's say, greater than 50% payout ratio in either 2022, 2023? The second question is regarding the Shaheen project. You mentioned that you're planning for FID in second half 2022. Would you be able to share some details on the potential CapEx, capacity and some of the key chemical products? Is it going to be like polyethylene or some other better products? And when do you expect the bank loan to come in? And I guess, the third question is for -- I think you mentioned that [ chemical product ] will be done in second half with longer maintenance here than usual or something like that. Could you give us an idea of how many months? And what -- why longer than usual? And is there any improvement in the profitability after the maintenance?

[Interpreted] Let me answer your question. I'm CFO, Bang Ju-Wan. And on your question about the payout ratio and our plan for this year, the company published the guideline of our payout ratio in November last year. Back then, we gave guidelines for our payout ratio at 30% or above of our net income. We will give and pay our dividend based on our financial structure and income outlook and the internal reserve for the investment and shareholder returns. The final decision will be made for the Directors' meeting and the General Shareholders' Meeting. As we are preparing for the mega project, the payout ratio will be decided within the range of our guideline. So for the future growth engine of the company, we are preparing for a mega project, which is called Shaheen, and this is aimed at maximizing the shareholder value in the long term. So to remove some uncertainties with the project, we need to maintain our payout guideline until we reserve enough investment. There, we -- once we procure enough money for our project and when we have enough cash flow, and some uncertainties are removed, we can possibly increase our payout ratio during the project. On your second question about the details of Shaheen Project, we restarted our front-end engineering design or feed in July last year, and the project -- the feed work is ongoing smoothly. And it is scheduled to be completed in June this year. And our final investment decision is scheduled for the second half of this year. Once that's completed, we are targeting the first half of 2026 for the mechanical completion of this project. Since there is a feed work ongoing, we'll communicate with the market on the size of CapEx and other details once that's completed.

[Interpreted] On your questions about the T&I plan for this year. As was covered in our slide presentation, we had no T&I last year. However, this year, we will gradually implement our T&I schedule.

[Interpreted] In detail, we'll go over the T&I over a month for #2 CDU and among our upgrading facilities, we'll have T&I for #1 RFCC. In addition, there will be T&I for #1, PX2. And lastly, we'll have T&I for PO plant 2. For the effective scheduling of the T&I, we will run our schedule efficiently. So most the T&Is are concentrated in the second half of this year. For our scheduled T&I, we will make almost effort to minimize our opportunity loss by building up the inventory of a profitable product. And after the completion of T&I, we'll try to catch up the loss in our opportunity by increasing and improving our operation rates. Thank you.

The following question is by Yun Hong from Hana Financial Investment.

[Interpreted] I'm [indiscernible] from Hana Financial Investment. I have a -- three questions. First, it looks like that the kero and the diesel inventory around the world, especially in Europe, is decreasing. Is this relevant with the soaring LNG price? And I'd like to know your outlook for the diesel crack. And my second question is the regulations on Chinese refineries. Do you have any updated information for that? And what would be the exporter trend of China? And my third question is on the capacity expansion of NCC. Around the world, including the U.S., the major refiners are entering into the renewables. And is there any plan for your company to enter into that kind of business?

[Interpreted] On your first question of the dwindling inventory in kero and diesel in Q4. Yes, it actually went down. And you also asked about the outlook for diesel spread. In Q4, the kero and diesel inventory went down pretty rapidly. And one of the reasons is the soaring LNG price. And because of that, the demand went up in kero and diesel to replace the LNG with kero and diesel. However, it's hard for us to come up with the exact volume of the replacement. And on your question for diesel crack, it's hard for us to provide the accurate outlook for that. However, the diesel crack is going above $15 in January. As was mentioned in the outlook for this year, the COVID-19 is likely to have less impact on the market this year. And the economy activities will be improved and restrictions and movement will be eased. That's why the situation will -- is likely to improve compared to last year. In this sense, we are expecting the big demand growth in the kero and the diesel product. As for the jet fuel, the demand recovery -- on the demand recovery, it was recovered to the -- recovered by just 70% of the pre-COVID level. However, this year, there will be less moving restrictions, which will push up the demand in trouble. So we expect that the demand for jet fuel will also be recovered to the 85% of 2019 level. In this sense, diesel and kero demand recovery is expected. That's why we expect the diesel crack will go above $15 this year.

[Interpreted] Late last year, we set the green initiatives for the company and these initiatives consist of the expansion of petrochemicals and seeking the opportunities of a green new business. And among the green new business, there is hydrogen, biofuel and renewables and plastic recycling. When President Moon visited Saudi Arabia recently, S-OIL signed an MOU with Aramco, Saudi Aramco. And that includes the R&D corporation. The important items, which will be included in that MOU will be plastic recycling technology. Among other technologies, we put more importance on plastic recycling, and try to lay the foundation for the entry into the recycling market. The details and the other plans cannot be provided accurately, because we forged a nondisclosure agreement with our partner company. Once it is more elaborated, we'll communicate with the market. On your question for the update of export outlook for China and the regulation trend in the country. As you are well aware, from the second half of last year, Chinese government is imposing regulations on the fuel industry in an effort to upgrade its fuel business. And this year -- early this year, the Chinese government imposed export quota on fuel product. And the quota was reduced by more than 50% year-on-year. This policies are driven by Chinese targeting net zero. And in an effort to achieve that, the Chinese government is trying to rationalize as the fuel industry. That's why the Chinese government is -- Chinese government believe that they don't have to improve the operation rate for the export. Given the situation, the export quota, the limited export quota for China will maintain for a bit. This limited export quota is already affecting the market. As was said in the previous question, the inventory level of kero and diesel is going down. And one of the reasons behind that is this limited export quota. So it's harder to find kero and diesel product in the market now. This less export from China will help improve the refining margins. Thank you.

The following question is Baek, Young-chan from KB Securities.

[Interpreted] I'm a Baek, Young-chan from KB Securities. My question is on the spread reduction in lube-based oil business. This year, it has said that there will be less capacity addition in the market. So on annual basis, compared to 2021, how do you expect the actual performance and growth of 2022 in the lube-based oil market?

[Interpreted] As you just said, after hitting the highest, the spread of lube based oil product went -- after hitting the highest in Q2, the spread of lube based oil product went down in the third and the fourth quarter. And that's because of the ease tightness of the supply. As global refiners resumed their operation after the T&I of major units, this happened. The major refineries started the operation of their facilities after the T&I late last year, and that operation is likely to continue through this year. That's why we expect that the supply will go up. However, fortunately, there will be less capacity addition this year. Compared to last year's capacity addition by around 30,000 BD in Group II and III, only 5,000 BD of capacity addition is expected for this year. That's why there will be less concerns on the supply glut in the market. And however, we expect there will be a healthy demand in the lube based oil market. We had a pretty good performance with this lube based oil sector last year. It was the highest record. However, given the product and supply and demand balance, we want to expect the level of good profit this year, too.

The following question is by Oscar Yee from Citigroup.

Happy New Year. I hope everything is well with you. I actually just have a follow-up question about your MOU with Saudi Aramco. Of course, it is still very early stage, but could I check, what sort of role do you plan to participate? Are you just taking a really sort of minority, sort of share light what you've invested in some of the hydrogen and biofuel, in even Korea so, small amount? Or are you looking to sort of more active role? For example, when you talk about the blue hydrogen and blue ammonia, is there a plan for S-OIL to actually invest in a plant in Saudi Arabia?

[Interpreted] Let me answer your question. I'm Treasurer of S-OIL. Thank you for your question. On our MOUs with Saudi Aramco, the corporation in hydrogen business is an important part. And we were also thinking about and doing -- thinking about doing business and the import and distribution of blue ammonia and blue hydrogen. And for the domestic distribution and the import of this, we separately made an MOU with Samsung C&T, and we'll be partnering in that factor, too. And as for more specific details, Saudi has -- Saudi Arabia has a great environment for producing electricity in a green way. The hydrogen and ammonia can be produced with low carbon emission in the environment of Saudi Arabia. So going beyond the hydrogen and ammonia, we will try to import the green hydrogen and ammonia and distribute that in the domestic market. In doing so, Saudi Aramco will play an important role, and we are expecting to have a great partnership with that company. Once more details are set up, and we have more schedules, we will communicate with the market.

Next question, please.

[Operator Instructions] The following question is by Cho, Hyunryul from Samsung Securities.

[Interpreted] I'm Cho Hyunryul from Samsung Securities. And my question is on the inventory gain. And based on your presentation, petrochemicals segment posted a loss. I think this is part of because of the spread of Omicron variant. And I think that inventory gain per business segment would be different. So compared to Q3, the inventory gain of Q4 was not that bad. So can you provide the details? I mean, the breakdown of inventory-related gain purpose in the segment?

[Interpreted] In Q4 last year, we had overall KRW 84 billion of inventory-related gains. And as you mentioned, the inventory-related gain posted different results by each segment. For fuel business sector, the vendor-related gain was KRW 94 billion with increasing product price. Though for petrochemical business, we posted KRW 20 billion of inventory-related loss due to the declining product price. For the lube based oil business segment, we had inventory-related gain of KRW 10 billion. So in the operating profit of petrochemical business, we had negative KRW 30 billion of operating profit. And most -- we believe that most of that part is taken by inventory-related loss. Thank you. Since there is no additional question, I'd like to conclude that this earnings release for Q1 this year. Thank you for taking your time out of busy schedule. Happy New Year, everyone. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]