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

Good morning, everyone. This is [ K.D. Bang ], the Treasurer of S-Oil. I would like to extend my gratitude to investors and analysts for your attention to S-Oil's conference call for Q4 2002 (sic) earnings results. For this conference call, CFO, J.W. Bang, IR Team Leader, J.W. [ Ahn ], and team members joined. First, I will take you through the highlights of our fourth quarter results. S-Oil recorded a negative KRW 157.5 billion in operating income and KRW 332.6 billion in income before tax in Q4 last year. Throughout the whole year 2022, the company achieved KRW 3,408.1 billion in operating income and KRW 2,901.5 billion in income before tax, which are the highest record in the company's history. KRW 157.5 billion in Q4 is one-off operating loss generated mainly due to inventory effects on the back of reduced international oil price. The Refining and Lube margin, which have been driving the company's profitability lately, remained healthy in Q4 and into this year as well. On the non-operating side, the company posted a huge FX gain despite fluctuating $1 rate in the second half of last year, thanks to consistent FX risk management. Based on this, S-Oil could generate a decent level of income before tax in this quarter. As for future business outlook, international Refining margin remained high in Q4 due to strong heating oil demand, but increased export of fuel products from China during the period limited the further growth. Global Refining product market continues its bullish run into this year due to tight supply outlook of kerosene and diesel products, on the back of EU's sanction against the Russian oil product which will take effect on February 5, coupled with expected rapid rebound in China's domestic fuel demand along with post-COVID reopening progress. Once increased economy activities and traffic in China contribute to such recovery, our bundle shipping from China is highly likely to reduce. As global refining industry's shutdown of obsolete facilities and decrease in new investment after the pandemic resulted in refining facilities shortage, Refining margin is maintained at a higher level compared to the business cycle of the past. Repeated sluggish supply due to Russia and the demand recovery in China are expected to rebuild facility shortage and put upward pressure to regional refining margin. Under such favorable refining market condition, the company made a final investment decision on Shaheen Project last November to drive a sustainable future with a huge growth engine. With mechanical completion target in the first half 2026, EPC work for the project is ongoing as planned after the company signed EPC agreement with domestic top-tier engineering and construction companies with world-class construction capabilities. Despite global energy transition trends, demand growth for petrochemical products is projected to be maintained in the long term, as well as expansion into petrochemical business through Shaheen Project based on industry-leading competitiveness in cost competitiveness and energy efficiency will enable yet another leap forward in the company's profit generation capacity. The company will pursue balanced shareholder return during project execution period. Moreover, our officers and employees will muster up strength to maximize the shareholder value in the long term through successful delivery of the project. We'll keep communicating with the market on Shaheen Project and its updates. J.W. [ Ahn ] will get into more details with the following slides.

Good morning. I'm J.W. [ Ahn ], the leader of IR team. Before we begin, please be noted that Q4 financial results are provisional, and those results are subject to change after external auditors' audit. Let me start with Q4 2022 performance and outlook for 2023. Please refer to Page 5 for Q4 financial results. In Q4, the company's revenue stood at KRW 10,594 billion, down by 4.8% from the previous quarter due to the reduction in international oil price. Operating income swung back to red with KRW 157.5 billion in operating loss. This was mainly due to one-off impact caused by the decrease in oil price, which resulted in KRW 379.6 billion of operating loss in Refining business and Petrochemical business, that also suffered a small amount of loss on weak product spread. However, Lube business posted outstanding operating income of KRW 279.5 billion. In Q4 operating income, decline in oil price led to inventory-related loss of KRW 433.8 billion. Also, crude oil was purchased at higher $1 FX rates and then sold at lower rates, which resulted in negative FX impact of KRW 143 billion. Other than these one-off impacts, solid contribution of a healthy Refining and Lube margin to income generation continued from Q4 to date. International oil price is showing stable and gradual growth after hitting bottom in last December. Thus, strong product margin is expected to be reflected in the company's performance in the coming months without being offset by reduced oil price. As for financial and other gain and loss, income before tax in Q4 stood at KRW 332.6 billion due to KRW 516.4 billion of FX gains caused by reduced $1 rate. Next is financial results for the full year 2022. Thanks to sharp increase in international Refining margin, which hovered largely above the highest point in previous business cycles after Q2 and over KRW 1 trillion of operating income generated by Lube business, the company could achieve KRW 3,408.1 billion in operating income and KRW 2,901.5 billion in income before tax. Despite negative KRW 355.3 billion in net FX loss for the full year on the nonoperating side, overall net FX impact was positive as FX impact from operating income offset FX loss. This is the result of the company's excellent and consistent efforts risk management policy amid uncertainties in foreign exchange market. Next, financial status. Cash balance in 2022 end stood at KRW 1,461 billion, down by around KRW 500 billion from a year ago despite sizable income generation due to the increase in working capital caused by oil price increase, payout of interim dividends, payment of tax, which the government deferred in 2021, and the partial repayment of borrowing. In addition, net debt-to-equity ratio remained healthy, recording 44.3%, owing to equity gain resulting from increase in retained earnings and decrease in short and long-term borrowings. In terms of profitability, ROE and ROCE recorded 27.2% and 23.3% respectively at high level, thanks to record high performance in 2022. EBITDA on annual basis went up by KRW 1 trillion from 2021 to KRW 3,440 billion. Moving on to performance and outlook for each business. First, Refining business. Q4 operating income for Refining business turned negative, posting KRW 379.6 billion of operating loss. The trend is mainly due to one-off inventory impact caused by the price per Dubai, which went down to $77 in December, the lowest level last year after falling from $91 in September, on worries over recessionary demand slowdown and the resurgence of COVID cases in China. However, average refining margin in Q4 remained healthy at $8.4 per barrel, up by $0.5 from the previous quarter. Regional Refining margin in Asia was supported by demand surge for heating oil in Northern Hemisphere due to cold [ snap ] in winter and the demand recovery for jet fuel in areas other than China. But the rising light fuel export by Chinese refiners, after additional element of export quota by the government, limited further increase. As for 2023 outlook, regional Refining margin is projected to maintain an elevated level over the past cycle before 2022, when the war between Russia and Ukraine exceptionally raised the margin. Regardless of worries over recessionary demand slow down, net capacity expansion might still fall short of demand growth, which is expected to support Refining margin. We'll provide more details on this in the later part of the presentation. Imminent EU's import ban on Russian refining products, that is scheduled to be effective on February 5, may cause some global diesel shortage as it did in the last year. The embargo [indiscernible] to reduce the output of Russian refining products significantly, as Russia will have hard time finding other diesel importers that are able to replace EU and they ensure not subject to the sanction. Recent average of data released by major institutions show that the output of Russian refining product will go down by around 0.8 million B/D range to 4.9 million B/D in Q1, and 4.7 million B/D in Q2 after recording 5.5 million B/D in Q4 last year. Please refer to Page 18 for annual outlook of Russian refining production. Additionally, recovery of China's domestic demand after reopening and global jet fuel demand are anticipated to additionally support refining margins throughout the year. Impact of China's reopening will be explained further at the later part. Moving on to Petrochemical business. Operating loss of Petrochemical business in Q4 recorded KRW 57.4 billion. For Aromatics, PX spread in Q4 inched down from the previous quarter, recording $305 as demand recovery was hampered by increased number of confirmed cases due to the resurgence of COVID and added supply from UPS capacities in China. In 2023, scheduled largest scale capacity addition in China is likely to put downward pressure on PX spread. But PX spread is expected to remain healthy in 2023 too, supported by large-scale PTA capacity expansion and downstream product demand recovery driven by eased COVID-19 restrictions in China. For Olefin Downstream products, demand for PP and PO in Q4 remained weak caused by stagnant end users' buying sentiment amid the deteriorating global economic conditions. Especially, PO spread was further pressured down by supply glut from new plants that started up in China in late November. In 2023, new PP and PO capacity addition exceeding the previous year is scheduled, but demand is expected to recover gradually along with the recovery in domestic consumption after COVID infection peaked out. Overall demand for downstream chemical products is anticipated to grow in line with the full-fledged recovery in domestic and international travel and improved consumer sentiment after Chinese New Year holidays. As the Chinese government repeatedly rebuild its willingness to boost the economy, there is a possibility of demand improvement when visible stimulus package comes out during the year. Turning to Lube business. Operating income of LBO business in Q4 stood at KRW 279.5 billion. For market dynamics in Q4, LBO fundamental moderated due to seasonally softer demand, but demand for high-quality products remained at a firm level. LBO spread stayed at a robust level under lowered feedstock cost, which contributed to the company's great quarterly performance despite the seasonally weak trend. LBO fundamental in this year is forecast to stay at the robust level, which is similar to last year's level with no new capacity addition. Under such tight market fundamentals, LBO spread is anticipated to widen significantly due to strong demand ahead of a spring lubricant change season and summer driving season. Thus, LBO spread is expected to maintain a solid level as well next year. Next, let me update major business results of the company. Please refer to Page 11. First, let me further explain China's post-COVID reopening. China's export of light fuel, which maintained at a low level of around 0.5 million B/D in the first half last year, surged to well above 1.2 million B/D on average in Q4, which is the level prior to first half of 2021, as China issued a sizable volume of export quota twice in September last year and January this year. Sluggish domestic demand caused by zero-COVID policy was the biggest reason behind the Chinese government's expansion of export quota. Demand for light fuel, including gasoline, jet fuel, kerosene and diesel in China, fell around 0.7 million B/D to 7.7 million B/D in 2022 from 8.4 million B/D in 2021. However, China ended zero-COVID policy on January 8 after it changed its related quarantine rules in December 27 last year. Additionally, COVID-19 wave that passed its peak already and the growth in moving demand during Chinese New Year holidays served positive influence faster than expected. Though outlook released by institutions varies on the details, demand recovery for Refining product is projected for the full year and the next year with the progress of reopening, which is likely to have a positive impact on Refining margin by reducing China's capability of outbound shipping to the regional market. As light fuel export from China in January went down significantly from the previous months due to increased movement during New Year holidays, impact of the domestic demand growth on export is already apparent. According to the outlook from several institutions, China's export volume were reduced by over 40% at the end of this year from 1.2 million B/D in Q4 last year. Moreover, domestic demand recovery may result in less allocation of export quotas by the Chinese government, which needs to be seen from to-be-issued export quota in Q2. Next, Page 12, Refining Facility Shortage. Industry outlook continuously suggest probability of long-term shortage of global refining facilities, owing to changes in market trends such as the shutdown of major obsolete refining facilities during the pandemic and contraction in new investment on the back of efforts to reduce GHG emission and the energy transition trend. As the risk of a global recession and worries over its effect exists, we would like to deliver comprehensive outlook for supply-demand balance for 2023 released by major institutions. Outlook for global oil demand growth in 2023 ranges between 1 million B/D and 2.4 million B/D. Data provided by each institution differs much, as it is impossible to accurately project the timing of China's reopening-driven demand growth and impact of a global recession on sluggish demand. However, given reopening is exerting positive influence faster than expected as was mentioned, we believe that demand in this year will grow more than numbers in the lower bracket of the outlook. For supply side, effective throughput from new facilities based on scheduled start up in 2023 is anticipated to hover far below 1.2 million B/D which is not capacity addition. Especially, expected start up time line of 6.5 million B/D Dangote refinery in Nigeria varies from one institution to the other, ranging between first half this year to year-end. Some even say it's hard to expect a meaningful supply addition this year. All in all, capacity shortage is forecast to persist in 2023 despite the near-term macroeconomic uncertainties. Next, Shaheen Project. The company made a final investment decision on Shaheen Project in BoD held November 16 last year, and have a special disclosure and briefing to give investors more details. After this, we started project execution in full swing, with EPC work ongoing as planned. We will continue to share the progress of the project with investors in detail. Shaheen Project will construct the world's largest refinery-integrated steam cracker and relevant facilities, which is energy-efficient and eco-friendly with a forward-looking design. Shaheen Project targets synergy from refining and chemical integration in feedstock, facility and operation, maximize chemical yield from new TC2C technology, industry-leading energy efficiency and carbon intensity, and the first quartile cost competitiveness in Northeast Asia. After the mechanical completion of Shaheen Project, which is scheduled in first half 2026, we expect the company's EBITDA margin to increase by more than $4.5 per barrel with great competitiveness. Through the successful delivery of RUC/ODC project, the company enhanced its profitability, a recorded great test to performance in 2021 and 2022. We are confident that the completion of the Shaheen Project will take our income generation capability to the next level. The company will make all of their efforts for long-term growth and shareholder value with this performance improvement. With this, I'd like to wrap up our Q4 earnings results. Thank you.

The Q&A session will begin shortly. Please wait for a moment until Korean presentation finishes. Thank you.

[Operator Instructions] The first question will be given by Lee Jin Ho from Mirae Asset.

[Interpreted] I have two questions. First is about the refining margin. Throughout the whole year of 2022, the refining margin stayed at a very elevated level, hovering above $30. Do you expect this margin level to stay the same going forward, and what is your outlook on the overall refining market fundamentals? Second question has to do with the turnaround. You have shown in your presentation slides the plans for the T&I throughout the year of 2023. Could you share with us on a quarterly basis?

[Interpreted] So first, to answer your first question on the diesel margin. As you know, in Q4, the diesel margin averaged at $41. Although because of the moderate weather conditions in the European continent, there was a slowdown in demand for gas to oil switch and there was more exports of diesel from China. However, these were offset by the fact that demand for heating oil was high due to the winter season, and there was also a move by the EU to replenish the inventory before the winter season comes in advance of the imminent EU sanctions against the Russian refining products. So overall, there's some offset, the positive factors and tightening the overall market fundamentals. So for the -- for 2023, we are expecting the diesel margin to stay bullish because of the EU sanctions on Russia and the refined oil -- refining products and accelerating reopening of the China market. So if you look at the forecast and outlook by the major institutions around the world, their average throughout the year is in the mid-20s to mid-30s level. So if you average out, it's around $30, which is far higher than the pre-pandemic levels of $10 or slightly higher than that. So we believe in 2023, diesel will be the key factor driving up the refining margins. So for the T&I plan in 2023, we have the regular T&I for the #2 RFCC and PP plants in March and April. And we have the regular T&I for the #3 CDU, CFU hydrocracker and #2 PX in June and July. However, the specific and exact schedules are subject to vary depending on the internal and external situations. So before and after the T&I, we plan to stockpile our inventory and also optimize our operations to make sure the opportunity loss is kept to a minimum. This is my answer. Thank you.

[Interpreted] The following question is by Lee Jin-Myung from Shinhan Investment Securities.

[Interpreted] And I have two questions. First is about the -- your forecast on oil price for 2023. I know the oil price movements highly benefited the company in 2022. Please share with us on how you look at it for this year? And second is, could you break down the inventory impact by business segment?

[Interpreted] So on the overall outlook of oil prices for this year, we do not internally make a forecast of the oil price because of the fact that oil price has a very huge influence on the macroeconomic indicators, and because of the fact that the crude oil futures market is highly volatile. But if I may refer to the institution's forecast for this year, their price stand stands at $80 to $87 on an annual average basis. This is for the Dubai benchmark crude, so -- which is fairly consistent with the prices that we have been seeing in January. So this means the current -- if the forecast is right, the current price level will remain more or less the same. On the market fundamentals, the EU import ban on Russian seaborne crude oil will tighten the supply, and the China's reopening policies could drive up the demand. At least a combination of these two factors on the supply and the demand side could be supporting factors of the oil. So this is to break down the inventory impact by business segment. If you look at Q4 alone, it was minus KRW 400 billion for the Refining business, minus KRW 29 billion for the Petrochemical business and minus KRW 4 billion for the Lube-based oil business, which is largely owing to the decline in the oil prices. If you look at the whole year of 2022, it is KRW 210 billion for the Refining business, KRW 7 billion for Petrochemical business and KRW 110 billion for our Lube-based oil business, totaling at roughly KRW 327 billion. That's my answer.

[Interpreted] The following question is by Parsley Ong from JPMorgan.