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

[Foreign Language]

[Foreign Language]

[Interpreted] Net debt to equity fell to 38%. So this is the lowest since 2017. Could you share with us the implication for your interim dividend? Could we potentially expect maybe 20% to 30% payout ratio? And also for your Shaheen Project, given your improved balance sheet, what kind of borrowing cost would you be expecting? Or maybe like a cost saving versus the market rate? The second question is on your maintenance. I see that you have CDU/CFU/PX maintenance coming up. Could you share with us the exact month this is happening? And given the recent refining margin fall, are you considering [ recut ]? And the third question is on lubricant. Lubricant margins have been strong for quite a long time. What do you think were some of the reasons? And do you think we are in a structurally stronger for longer lubricant margin environment? Or do you see potential for the lubricant margin to fall back down to 2020 level?

[Interpreted] Thank you for your question. This is the CFO. Regarding your first question on debt ratio, we lowered the debt ratio to 38% for the Shaheen Project. And we are expanding our financial capability and the soundness based on our making progress of the Shaheen Project. Even paying out the balance of dividend during the project period, we can maintain the soundness of our financial structure. So no big changes with our current dividend policy is expected. And for the incurring dividend, the payout ratio for that will be a decision for our Board of Directors. So I cannot disclose the details. However, as was mentioned, we do not expect the big changes with our dividend policy. Later in the second half of this year, once business environment changes, we'll try to update our dividend policy and communicate with the market.

[Interpreted] Regarding the financing cost of the Shaheen Project into this year, due to the stabilization of financial market, our interest rate was stabilized at a lower range. So this will have a positive impact on our financing of Shaheen Project. Currently, the company is discussing with our major shareholders and financial institutions on bank loan. For us, we are planning to finalize this financial agreement with financial institutions and our major [ sharehold ] on competitive condition, which is better than market interest rate.

[Interpreted] On your second question for the regular maintenance, in June and July, #3 CDU/CFU hydrocracker, #2 PX and relevant facilities will have regular maintenance. So such maintenance will have an impact on our income. That's inevitable. However, as market situation is volatile, we can minimize the opportunity loss based on the inventory buildup and optimizing that. However, in the second half of this year, major T&I is not scheduled for our major units. So we will be able to enjoy the margin situation and maximize our profit.

[Interpreted] On your question of the adjustment of our utilization rate, due to the refining margin reduction, some refiners in Taiwan adjusted their operation rates downward in May. However, the company is equipped with competitive facilities. So such adjustment is not always necessary for our company. But as was mentioned in the second quarter, we will have regular maintenance for CDU and upgrading facilities. So we -- there will be some adjustment in our utilization rate.

[Interpreted] Regarding your request for the outlook for lube base oil market, in the mid- to long term, the plan for capacity addition for LBO facility is now witnessed. And we expect that a meaningful capacity addition will take place around 2025. So for this year and next year, we expect the LBO market dynamics to remain strong due to tight supply. This concludes my answer.

[Interpreted] I have 3 questions. First, refining margin is plummeting very fast lately, despite the recovery of the Chinese demand. So would you share your outlook on the refining margin? And second, would you share the breakdown of inventory-related impact? And my third question is on the shareholder return. Are you considering any other options, excluding the cash dividend for the shareholder return?

[Interpreted] On your question about the falling refining margin, in April, there were rumors that the Chinese export quota -- I mean additional quota will be issued the volume, which is higher than expected. Due to this rumor, the spread reflects this, and this resulted in the reduction in the refining margin. However, for diesel spread, the market observers see that this has reached to the bottom.

[Interpreted] And so we expect that in the second quarter, the margin will be adjusted downward, and we are expecting the recovery. In April, before the demand pick up, when rumor of additional quota spreads, the market was easily influenced. However, ahead of peak season and regular maintenance, we expect that this weak bearish market will turn to the improvement stage.

[Interpreted] Regarding the inventory-related impact during the first quarter, on a business basis, first, overall inventory impact was negative KRW 123.4 billion. And for refining business, it was negative KRW 79 billion. And for petrochemical, it was a positive KRW 18 billion. And for LBO, inventory-related impact was negative KRW 63 billion.

[Interpreted] On your third question for the dividend policy other than cash dividend, there are other options for shareholder return, which are stock dividend and the share buyback.

[Interpreted] First option on the stock dividend, it reduces the financial structure for the company in terms of cash flow. However, when too many shareholders sell out, they receive the shares in the market, it will have a negative impact on our share price. As the company is making progress for the larger-scale business, we may consider this option. However, we can maintain our financial soundness even paying out the balanced cash dividend, and we secured -- we already secured the financing option. So this -- we are not considering this.

[Interpreted] Another option is the share buyback. It reduces the number of shares in the stock market. And as a result, it reduces the share price. However, due to the reduction in equity, it has negative impact on our credit rating and financial soundness. And the company is making progress for a larger-scale project. However, we believe that the maximizing shareholder return is to maintain our financial soundness and minimize our financing costs, and we don't have a problem with this. And so we are not considering this option either. But when the situation matures and when we finalize the financing for the project, we will try to review other options. This concludes my answer.

[Interpreted] The following question is from Lee Jin Ho of Mirae Asset Securities.

[Interpreted] I have 2 questions. And as was mentioned earlier, refining margins fell recently. And do you see this is because of low price of Russian crude? And would you share your opinion on this? And my second question has to do with the spread of LBO. Rather than the range of reduction, operating income reduction was not influenced that much. And how do you see the reason behind this?

[Interpreted] First, regarding the Russian crude impact on the refining margin, the discount price of Russian oil may increase the income of some refineries. However, in case of the large consumer of Russian oil, India, which mainly influenced by the domestic demand growth. And another large consumer of Russian oil is China. And we believe that the refining margin is linked to the remaining volume for the export when the China consumed the Russian oil and the -- such oil for the domestic demand. So it's partially influenced by the Russian crude. However, overall balance is decided by the market dynamics.

[Interpreted] Regarding the impact on the operating income of lube base oil, the inventory-related impact for lube base oil was more than KRW 60 billion. I think this can be provided as an answer, for your information. This concludes my answer.

[Interpreted] The following question is by Oscar Yee from Citi.

First question is, could you comment a little bit on the sort of OSP trend going forward? Given the surprised OPEC production cut, do you see a structurally higher OSP at least for the end of the year? And we've also noticed that the discount for the heavy, medium crude versus like extra-light has disappeared. Will it affect the contract refiners' competitiveness, like S-Oil? And second question is, could I just check with your Group 3 loop plan also be shut during your hydrocracker turnaround because of the lack of feedstock? And thirdly, do you have -- could you provide roughly what is the April sort of month-to-date, the indicative lube spread so far comparing to your first quarter average?

[Interpreted] On the OSP trend, we did not -- the seller did not disclose the logic behind the decision-making of OSP, but we can share the analyst view.

[Interpreted] Arabian light OSP in -- and once oil prices stabilizes, it went down to the mid-$3 level in January of this year. In the second quarter, OSP is at the lower range of $2, which is lower than that of Q1.

[Interpreted] And we believe that the OSP will move together with oil price, which is affected by the output cut of OPEC+ and the demand recovery. However, as the high spread between OSP and the July futures remains at $1 range in April, we don't see any big reasons for the OSP increase.

[Interpreted] Regarding your questions on the regular maintenance, out of your busy schedule, to call in our earnings release. And we will be always open to the market and provide information. Feel free to ask further questions to our IR team. Thank you, everyone.

[Interpreted] This concludes the fiscal year 2023 first quarter earnings results by S-Oil. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]