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

Good morning. This is S-OIL Treasurer, [ K.D. Kang ]. First of all, thank you to all the investors at home and abroad for joining the conference call for S-OIL's Q4 2024 results. Also joining us are CFO, J.W. Bang; IR team leader, [ H.D. Jang ], and IR team members. So without further ado, I will go over the highlights of Q4 results. In Q4 2024, the company turned around from the previous quarter to record KRW 260.8 billion in operating income. Refining business turned around, thanks to improved refining margin, but petrochemical business turned red due to narrow spread of major products. Lube business ended Q4 with lower operating income than the quarter prior due to seasonal factors and scheduled maintenance. I'll now turn to the outlook. Although we're facing economic uncertainties at home and abroad, global oil demand is forecasted to show a steady growth this year. At the same time, net capacity expansion will decline and lead to a better marketing environment driven by improved market fundamentals. And finally, GTG project. This is a gas turbine cogeneration project we are undertaking as part of the energy saving initiative. Target mechanical completion is 2026, and total CapEx is approximately KRW 263 billion. Benefits we expect to get out of this project is less carbon emissions and savings in utility costs driven by in-house power generation. For your information, Shaheen Project is cruising smoothly with 51.8% in completion rate, which is slightly ahead of the plan as of end of December last year. Construction work is in full swing as per the plan, and the company will focus all our capabilities into the project to deliver it and meet the expectations of investors. Now I will turn over to Team Leader, [ H.D. Jang ] for details of Q4 results and the rest.

Good morning. This is IR team leader, [ H.D. Jang ] of S-OIL. Before I present the results, please be noted that Q4 2024 financial results are provisional and subject to change according to outside independent auditor's audit and so on. So allow me to first cover Q4 2024 financial performance and outlook. Please go to Q4 2024 financial results on Page 5. The company recorded KRW 8.9171 trillion in Q4 sales revenue, which is slightly higher than the quarter prior and KRW 260.8 billion in operating income, which turned around from the previous quarter. Refining business turned around with a big jump driven by improved refining margin compared to Q3 and higher FX, which was reflected positively in the operating income. Petrochemical business turned red due to narrowed spread of major products, while lube business also ended with lower operating income due to seasonal factors and scheduled maintenance. For your information, inventory impact reflected in Q4, operating income is KRW 68 billion. In finance and other income, FX went up by KRW 150 from the previous quarter, which caused minus KRW 415.7 billion in net FX loss and income before tax recorded minus KRW 208 billion in Q4. For your information, the company has been running FX risk management policy with consistency in which FX impact on operating income is offset by FX gain or loss with a certain time lag to minimize impact on income before tax. Subsequently, part of FX loss incurred as a result of the spike in FX at the end of the year will be recovered as operating income in Q1 with a time lag or if FX goes down, it will be recovered as FX gains. On an annual basis, the company recorded KRW 460.6 billion in operating income. Although Petrochemical business posted operating loss in Q4 last year, it was still in the black on a whole year basis. Lube business went down in operating income in Q4 compared to Q3, but still performed well. Now I will move to financial status. Cash balance as of year-end is KRW 1.957 trillion, which changed little from the previous quarter. Net debt-to-equity ratio went up from 2023 year-end to 69.3%. Despite volatilities in the external environment, the company has stayed very much liquid with stable financial structure by financing at competitive and low interest rate right on time to ensure Shaheen project goes on as planned. So as for profitability indicators, return on equity was minus 1.8%, return on capital employed was minus 0.4% and annual EBITDA was KRW 429 billion. Now I will walk you through by each segment and outlook. First, the refining business. Refining business turned around from the quarter prior to mark KRW 172.9 billion in Q4 operating income, fueled by higher refining margin and FX increase. In Q4, reduced supply arising from turnaround maintenance and regional refineries and higher seasonal demand for heating oil significantly pushed up Asian refining margin. Singapore refining margin increased from $0.40 in Q3 to $2.50 in Q4. The strong dollar placed a downward pressure on oil price, but Dubai benchmark crude remain stable as expectations of China's economic stimulus of curb decline. As for Q1 2025 outlook, we are expecting Asian refining margin to stay steady to strong thanks to reduced exports from China and higher seasonal demand. On the demand side, winter demand for heating oil will continue and demand for transportation and fuel during the Chinese Lunar New Year holidays is forecasted to go up. At the same time, lower natural gas inventory in Europe and subsequent price increase may create gas to diesel demand. Meanwhile, higher than usual turnaround maintenance in China in January and February this year, is likely to create a favorable environment in terms of supply. More details and future outlook will be shared with you later with more data. Next is Petrochemical business. Spread of both aromatics and downstream narrowed in general. And Q4 operating income dropped from the previous quarter to minus KRW 28.1 billion. First, on aromatics products. FX spread over naphtha more within $187 per ton and benzene spread over naphtha marked $245 per tonne in Q4, both of which narrowed from the quarter prior. Gasoline blending demand for feedstock aromatics went down as gasoline was in low season, while startup of new facilities in China brought up supply, which adjusted spread downward. In Q1 this year, we are expecting part of the original supply increase to be offset by demand growth coming from new PTA and styrene monomer facilities starting up. Also, recovery in gasoline blending demand ahead of the gasoline high season will hopefully support aromatics market. Next is olefin downstream. In Q4, PP market slightly improved while PO markets stayed barish. Regional PP supply changed a little while demand picked up, thanks to the Black Friday and Christmas shopping season, which subsequently widened spread compared to the previous quarter. PO spread was adjusted downward from the previous quarter as start-up of PO facilities in China after maintenance turnaround raised supply while downstream demand stayed bearish. In Q1, facilities expansion will continue in China, but we are expecting China's economic stimulus measures to create higher demand in the market. Next, Lube business. In Q4, new business marked KRW 115.9 billion in operating income, which slightly dropped from the previous quarter due to turnaround of #1 lube plant and slightly narrowed spread. Despite the drop in feedstock price and regular turnaround of major facilities in the U.S. and Europe, product spread in Q4 last year slightly fell to $53.6 per barrel from the previous quarter due to off-peak season and subsequently bearish demand. Group II, however, show the relative strength, thanks to tight supply in Asia. This quarter, we are expecting demand to gradually come back with the spring oil change season and the spread to improve as a result. We also expect Lunar New Year holidays in China and various economic stimulus measures by the Chinese government to bring about a general demand recovery for lube, including industrial oil. All these would add up to hopefully keep the margin at a healthy level. Next is key business updates. First is the business environment outlook for this year. Geopolitical and policy uncertainties still remain at home and abroad, but we are forecasting global oil demand to grow in a study form driven by robust economic growth in India and countries in Southeast Asia where demand is going up. We're also seeing China's economic stimulus measures will support oil demand growth. Major institutions outlook on global demand growth this year is 1.2 million bd, which is similar to 2024. Global economic growth is forecasted at low 3%, and this is forecasted to push demand for fuel products to grow evenly across gasoline, kerosene and diesel in 2025. On the supply side, marginal refining facilities were shut down and outlook suggests that net capacity expansion this year is 300 mbd, which will fall short of demand growth. This limited expansion is not limited to 2025 only, but forecasted to continue through 2030. This means facilities expansion will only be limited, while demand grow steadily in the long term according to the forecast. Improvements in the market fundamentals as a result, will hopefully create a healthy marketing environment. Next is the GTG or gas turbine generator project. The company made a final investment decision on GTG project in November 2024. The objective is to respond to rising electric city price in Korea and higher power consumption after we complete Shaheen project. We are targeting mechanical completion in December 2026, and EPC work is underway. We will be building 2 gas turbine generators that treat natural gas to get electricity and 2 waste heat recovery boilers that make high-pressure steam from high-temperature and high-pressure exhausted gas. GTG will generate 121 megawatts of electricity and 160 tonne per hour of high-pressure steam, both of which will be consumed internally. We are expecting this highly energy-efficient facilities to reduce carbon emissions by 116,000 tonnes per year. Total CapEx is KRW 263 billion, IRR, 26.6% and payback period 3.4 years, which makes it a highly profitable project. This concludes my presentation. Thank you. And I would like to ask you to please wait until the Korean presentation is over.

[Interpreted] [Operator Instructions] The first question will be given by Cho Hyunryul from Samsung Securities.

[Interpreted] I am Cho Hyunryul from Samsung Securities. I have 3 questions. First, you mentioned during your presentation that there is a less export from China. And recently, we are hearing more about the increase in the EV sales in China. So how do you expect this to affect refining product demand in China? Will this have impact on the regional market dynamics? My second question has to do with the lube-based oil market. In Q4, it was a bit bearish. However, we have enjoyed healthy margin for 2 to 3 years. So how do you see the outlook into the future for the year 2025 and 2026 in terms of market dynamics and profit? And my third question has to do with the CapEx. Including Shaheen project, how would you share your company-wide CapEx and the status for execution, including a GTG project, too?

[Interpreted] On your first question about China as demand and export, on demand side, we have uncertainties with economies at home and abroad. However, we are forecasting stable demand growth in the region, supported by the solid economy growth of emerging economies that includes India. And as for demand for China, we forecasting demand growth supported by economic stimulus package. And as recent utilization rate of the small [ Kipa ] refineries in China falls far short of the run rate of the major refineries, that will be affecting the export volume. Starting from the first of December last year, Chinese government conducted export tax rebate cut. Additionally, the sanctions against Russia and Iran imposed by the U.S. is expected to adversely affect the margin of small [ Kipa ] refineries in China. As a result, we are expecting this to accelerate restructuring of these teapot refineries. As a result of these factors that affect the market fundamentals, we expect the current situation would work in favor of reasonable market dynamics.

[Interpreted] Let me answer on your second question. On your second question about the lube-based oil market, since the second half of year 2023, we have been enjoying a quite stable lube-based oil spread at around $50 range. And as a result, that had affected positively to our income creation and we are not expecting any big changes to the stable sentiment this year. And this year, capacity addition is scheduled mostly in India and the Singapore centered at Group II facilities. However, as it takes time for this added capacity to affect the market, we are also expecting this market sentiment to continue. As for the outlook into the first quarter of 2025, we are expecting demand to rebound during Lunar New Year holidays in China and the demand recovery due to the stockpiling demand in the face of a spring lubricant replacement season and demand will improve supported by the Chinese economic stimulus package.

[Interpreted] Let me answer your third question on the company's CapEx and Shaheen project. As for the CapEx at the Shaheen project for the year 2025 and in 2026, we are planning KRW 3.48 trillion of CapEx execution for Shaheen project this year. And for the next year, which is our target year for the project mechanical completion, we are planning to execute 16% of the CapEx, which is KRW 1.5 trillion. As for the CapEx of the GTG project is KRW 100 billion for this year, and we are planning KRW 130 billion of CapEx for GTG projects next year. And we are planning a CapEx for other maintenances and however, this plan for the CapEx is subject to the size of T&I for our refinery. So for the details, please refer to our presentation materials. And once any updates are made, we'll share that with you. This concludes my answer.

[Interpreted] The following question is by Lee Jin-Myung from Shinhan Investment Securities. Lee Jin-Myung from Shinhan Investment Securities, please go ahead. Lee Jin-Myung from Shinhan Investment Securities, please ask your question. The following question is by [ Kim Tae Hong ] from Mirae Asset Securities. [Operator Instructions] Currently, there are no question with questions. [Operator Instructions] The following question is by Lee Jin-Myung from Shinhan Investment Securities. The following question is by Cho Hyunryul from Samsung Securities.

[Interpreted] Let me add one more question on your GTG project. In fact, the market is not familiar with the concept of GTG and your final investment decision was made quite recently in November last year. So would you share your background for this project? And I'd like to know whether this project will have advantage for your Shaheen project? I mean will that resulting in a cost effectiveness for Shaheen project for you to take advantage of? And my third question is about the self power generation related to gas turbine generator. And this was quite unfamiliar concept, too. So as for the refining industry, will it make a contribution to the savings of the cost in the mid- to long term?

[Interpreted] We have been discovering items, putting our priority on the maximization of our operational efficiencies and have been pushing forward the items that comes with economy. And the strategic project was initiated from 2021 through energy optimization study that was conducted with Saudi Aramco. Since then, we continued our cooperation with Saudi Aramco is that enables us to go through enough feasibility study and the front-end engineering design. As a result, we could make final investment decision in November last year. The electricity and the steam self generated from this GTG project will be consumed in-house. I mean, in our refinery and the existing process. And our Shaheen project also the similar self-generation system. This is very similar with the concept of GTG. So we achieved the best energy efficiency for Shaheen project, too. Once this GTG is completed, the ratio of self-generated electricity usage will be raised to 45% from current 10% range. This concludes my answer.

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

So follow-up questions on the GTG project. For the natural gas feedstock, where do you plan to source the natural gas from? And will this be long-term oil-linked contract, maybe linked to Henry Hub or spot LNG, what kind of pricing terms are you expecting? Second question is on PX. Can you confirm that your has completely restarted. I see the utilization rate was 57% in fourth quarter. So what is your first quarter 2025 utilization rate outlook? And refining margins have been weaker. So are you seeing potential for any rent cuts? And then the last question is, could you give us an update on your cash flow and dividend outlook? Roughly, when do you think you would be comfortable to hike your dividend payout ratio?

[Interpreted] To answer your first question on the feedstock sourcing for GTG project. As for the current feedstock that we are using, we signed a long-term contract to stably source the gas, which is a hydrogen feedstock and feedstock for our existing process. And as for the GTG project and Shaheen project, and we are pushing for a long-term contract to source our feedstock in a stable manner, too.

[Interpreted] Let me answer your second question on the run rate of #1 and 2 PX. Currently, we are running 2 PX units, which are #1 and #2 PX. As for the #2 PX, we had our incident in July last year. That's why we are -- we adjusted downward the current utilization rate. However, we are #1 PX facility is up and running at the maximum capacity. As for the #2 PX, we are back to no more operation at around April this year. So in the first quarter, we are likely to continue maintain a current utilization rate.

[Interpreted] As for your question on the utilization rate outlook for the refining facilities related to the current refining margin. We believe that we secured enough economies under current refining margin Therefore, in the first quarter, we will run our refining unit at full capacity. To answer your question on dividend payout ratio, Currently, there is no changes in scheduled with our dividend policy. In running our dividend policy, we always put priority on the maximization of the shareholder value a comprehensively considering our business performance and our funding for the sustainable growth. As you are well aware, we are making progress of Shaheen project currently, and we are planning to maintain current dividend payout ratio. However, once funding for the Shaheen project is secured above a certain level and our business result is better, we will look into this payout ratio again. This concludes my answer.

[Interpreted] The following question is by Jeon Yu-Jin from IM Securities.

[Interpreted] I am Jeon Yu-Jin from IM Securities. I have 2 questions. First question has to do with the natural gas. Despite the recent bullish sentiment, we are currently seeing as somewhat quite bearish kerosene and diesel margin. Can you share the background of that? And my second question has to do the capacity addition. You mentioned -- I want to reshare the scheduled capacity expansion mainly for Group II and III for lube base oil facility.

[Interpreted] As for your first question on the spread of diesel and the kerosene margin. As you said, the spread of diesel and kerosene inched down recently. And we understand that the narrow spread is the result of strong oil price rather than the risk decline in product price. And this means that the increase in oil price is not reflected to the price product yet. However, with some time lag, it will reflect later on.

[Interpreted] On your question about the capacity expansion and the lube business and market sentiment. According to the market intelligence, India is scheduled to have 8,000 bd as the addition centered at Group II and III facilities. And Singapore is also scheduling 20,000 bd of capacity addition. However, mentioned before, it will take time for these added capacities to have a direct impact on the market. On the supply side, we are forecasting no big change. And we expect overall demand to rebound across LBO industries, including industrial oil supported by Chinese economic stimulus package. And in the first quarter, we are forecasting inventory stockpiling demand in the phase of the spring lubricant replacement season,and subsequently, we are expecting demand to recover.

[Interpreted] The following question is by Chun Woo-Je from KB Securities.

[Interpreted] I am Chun Woo-Je from KB Securities. I have 2 questions. First is about the FX impact in Q4. You mentioned that there was around KRW 400 billion of FX impact in Q4 and also mentioned that there will be offset by the FX gain in Q1, hopefully. And if there is no change with FX rate in the year 2024, how much do you expect the FX loss will be offset? And my second question have to do with your borrowings related to Shaheen project. And I understand that you have -- you already finished various commitments with competitive interest condition. And would you share the interest rate spread compared to the existing borrowings?

[Interpreted] To answer your first question on FX impact, during my presentation, I mentioned that the FX impact we had due to the significant rise in FX rate at the end of last year, we are hopefully to expect to recover that in the first quarter with some time lag, and we expect that amount to be around KRW 80 billion. As for this figure, KRW 80 billion I mentioned, this is resulting from the crude listing, which was conducted in November and December last year, with the higher FX rate. On your question about the financing cost of the Shaheen project. Currently, we completed around KRW 1 trillion of a facility loan and around $600 million of a shareholder loan. And we already completed the financial contract for those at floating rate, which is linked to CD rate and others Currently, as a result, we are currently applying around 3.6% of interest rates. If the policy rate, I mean, key rate from the government goes down later, this may go down too. And as for the other financial costs, it will be supported by the issuance of corporate bonds from the second half of this year. And we will apply the market interest rate. And given the fact that we recently issued a corporate bond with the rate of 3.5%, we are expecting this to go down further. This concludes my answer.

[Interpreted] Thank you once again for joining today's conference call in 2024 Q4 earnings results. We will be committed to communicate with you transparently and fairly. If you have any further questions, please feel free to contact our IR team. With this, I'd like to conclude the Q4 2020 earnings release. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]