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

Good morning. This is [ Katie Bang ], Treasurer of S-OIL. I'd like to extend my gratitude to our investors and analysts in and out of Korea for joining S-OIL's conference call for Q3 2025 earnings results. For today's conference call, we have CFO, J.W. Bang; IR team leader, H. D. Jeong; and team members. First, I will take you through the highlights of the Q3 results. In Q3, the company recorded operating income of KRW 229.2 billion, which is a significant increase from Q2 and year-on-year. Refining business swung back to flat, thanks to the significant improvement in operating income resulting from strong spread of major products and the elimination of one-off factors from Q2. Petrochemical business witnessed reduced loss backed by continuous recovery in PX spreads and the operating income of Lube business inched up from the previous quarter. Next is market outlook. In Q4, seasonal demand for heating oil is expected to drive a steady global oil demand. On supply side, however, we anticipate operational glitches of global refining facilities and the shutdown of obsolete facilities to tighten supply. As a result, refining margin is expected to remain strong in Q4, mainly for diesel and kerosene. Next is the progress of Shaheen project. Shaheen project is 85.6% complete as of October 22, according to the plan. We are at the final stage of engineering and procurement with progress at 27 -- with progress at, sorry, 97% and 96%, respectively. Construction is 73% complete. We're also working on long-term supply contracts with customers to accelerate market entry. Branch pipeline connection to key customers in Ulsan is ongoing and installation of main pipeline for product sales is already completed. For polyethylene, premarketing activities are underway, and we are reinforcing polyethylene technology development and research foundation of TS&D center to support customers. We'll leverage all our capabilities to ensure successful delivery of the project and live up to the expectation of investors. Now Team Leader, H. D. Jeong will get into more details for Q3 performance with the following slides.

[Interpreted] Good morning. This is S-OIL IR Team Leader, H. D. Jeong. Before we begin, please be noted that Q3 financial results are provisional, and therefore, subject to change according to outside independent external auditors' audit results. First, please refer to Page 5 for Q3 financial results. The company's Q3 sales revenue climbed up from the previous quarter, recording KRW 8,415.4 billion. Returned to profit with a significant increase in operating income that stood at KRW 229.2 billion. If you look at each business segment, operating income of refining business surged from the previous quarter to KRW 115.5 billion, turning positive. This is driven by faded one-off negative factors from Q2 and strong spread of key products. Petrochemical segment's loss narrowed from the previous quarter, recording minus KRW 19.9 billion in operating income as PX saw continued recovery of spread. As for Lube business, demand that remained steady led to a slight increase in operating income compared to the previous quarter, recording KRW 133.6 billion. For your reference, inventory-related impact reflected to Q3 operating income is minus KRW 4.8 billion. In finance and other income, we had minus KRW 59.8 billion of net interest gain and minus KRW 90.2 billion of net FX gain due to increased FX rate. Q3 income before tax and net income recorded KRW 81.5 billion and KRW 63.2 billion, respectively. Moving on to financial status. The company's cash balance as of Q3 end is KRW 1,317 billion and net debt-to-equity ratio is 78.2%. Despite volatilities in the external environment, the company has maintained enough liquidity and stable financial structure by financing at competitive and low interest rate right in time to ensure smooth execution of the Shaheen project. Cumulative EBITDA for the first 3 quarters this year stood at KRW 466 billion. Now I'll go through market environment and outlook by each business segment. First is the Refining business segment on Page 7. Despite output increase by OPEC+, Dubai crude price remained steady at around $70 during Q3 due to geopolitical risks and sanctions on Russian crude imposed by the U.S. In Q3, spread of refining products, mainly diesel and kerosene in Asia regional market went up as disrupted operation of Russian refining facilities affected by drones and shutdown of Lindsay refinery in U.K. tightened supply. We are expecting healthy refining margin to continue into Q4, driven by limited supply resulting from operational failure of the Dangote refinery in Nigeria and El Segundo refinery in California. The shutdown of obsolete facilities, including Phillips 66 in L.A. is also expected to support the trend. Moreover, demand for heating oil in high season is anticipated to further push spread of diesel and kerosene. I'll share more details on the outlook in key business updates with specific data. Next is Petrochemical business segment. Q3 operating income narrowed from the previous quarter, recording minus KRW 19.9 billion as a result of a continued upward trend in PX spread. If you look at Q3 market conditions for aromatic products, PX market continued its bullish run driven by start-up of new PTA facilities in China and steady downstream demand. As a result, PX naphtha spread recorded $252 per ton in Q3. By contrast, benzene market remained bearish as imposition of a reciprocal tariff, lowered the U.S. import demand and start-up of a new benzene facility in China added supply. Q3, benzene naphtha spread stood at $138 per ton. Moving on to olefin downstream, both PP and PO market weakened due to increased regional supply and the delayed demand recovery caused by uncertainties arising from tariff tension between the U.S. and China. Next is Q4 outlook of Petrochemical business segment. First, on aromatics, while new downstream facilities in China may create more demand for both PX and benzene, we anticipate that to be offset by oversupply during gasoline off-season. For olefin downstream, we expect market condition to improve with seasonal demand for PT and PO backed by Black Friday and Christmas. Next is Lube business segment. Operating income of Lube business in Q3 went up from the previous quarter to KRW 133.6 billion. Market conditions remain at similar level to the previous quarter, thanks to healthy demand. We project a stable market in Q4 as well despite the seasonal low since there will be regular T&I of several facilities and firm demand mainly from India. Next is key business updates. First is outlook on the business environment. We have a healthy refining margin outlook for Q4 due to seasonal demand for heating oil amid the firm global oil demand and supply contraction caused by facility closures and operational disruption. Starting from demand side at the left bar graph, we project net refining capacity reduction for this year as closures of aged global refining capacity will outpace new capacity expansion. Already, fire in U.S. El Segundo refinery and the disrupted operation of Russian refineries caused by drone attacks have tightened supply. We foresee a favorable business environment from demand side as well. Let's look at Q4 global demand outlook at the right graph, that is expected to grow compared to Q3, supported by higher demand, mainly in Asia and Middle East. As Northern Hemisphere enters winter season, we project to see further improvement in diesel and kerosene spread. Next is the progress of the Shaheen Project. Its progress rate as of October 22 is 85.6%, going smoothly as planned. Engineering and procurement progress rate is nearing completion at 97% and 96%, respectively. Construction is 73% complete. As for EPC, we completed the installation of a pipecrack module of steam cracker. Furnace and TC2C heater installation is in progress. We are also building automated warehouse as planned and have already completed the installation of the key polymer units. Additionally, test for process control system is ongoing after completing installation. As for market activities, we are discussing long-term contracts with customers to ensure smooth product sales. We'll use main pipeline from Onsan, where our refinery is located to Ulsan Petrochemical Complex to support sales to customers in Ulsan. Currently, we are working on branch pipeline connection to key customers after completing the construction of main pipeline. Pre-marketing activities for PE products have started to secure customers and TS&D Center is enhancing its readiness to provide technical support for PE. Target mechanical completion for Shaheen Project is the first half of 2026, commissioning in the second half of the same year and commercial operation in 2027. We'll keep you updated on the progress of Shaheen Project. This concludes my presentation. Thank you. The Korean presentation is still ongoing, so please wait for a moment. The Q&A session will start shortly.

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

[Foreign Language] [Interpreted] This is Cho Hyunryul from Samsung Securities. I have 2 questions on the fuel market. First is with regard to the refining margin. Lately, the refining margin has been quite bullish, whereas the oil price remains bearish, and I attribute this to some supply disruption. How do you foresee the refining margin continuing until 2026? My second question has to do with the fact that although the oil price is bearish these days, it looks like the OSP from the Middle East is on a bullish mode relatively speaking. What is the background behind this? And how do you see this continuing until 2026? What is your outlook?

[Foreign Language]

[Interpreted] So to answer your first question, in October, the international oil price exhibited quite a big fluctuation and volatility. This is because of OPEC+ output rate and also U.S. sanctions against Russia, which caused India to stop importing crude from Russia. And because of the dynamic changes in the trade flow of Russian crude oil, we're expecting to see the volatility of oil price continuing for the time being.

[Foreign Language]

[Interpreted] So institutions are forecasting the Dubai benchmark index to stand in the upper $60 level towards the end of the year. And as for the OPEC+, the output raise took place rather quickly, but there is the news that they will be discontinuing the output raise for -- on a temporary basis in the first quarter of next year. And given the fact that the breakeven price of the U.S. shale producers is in the early to mid-$60 level, we're not seeing -- we're not expecting the oil price to keep falling down. We're expecting its fall to be quite limited.

[Foreign Language]

[Interpreted] And as for the refining margin, we're seeing factors working both on the supply and the demand side. First, speaking of the supply side, the old facilities are being shut down or being shut down. Some of them include the Phillips 66 facilities in the United States and the Lindsay refinery in the United Kingdom. Second is about the Dangote refinery in Nigeria and El Segundo refinery in California, the United States, where there have been some shut some operational glitches and disruptions. Third is also disruptions in the Russian refining facilities caused by the drone attacks and add to this some export restrictions.

[Foreign Language]

[Interpreted] And on the supply side, as you know, the Northern Hemisphere is entering into the high heating oil season. According to the market intelligence, most of the inventory surplus has been exhausted starting from October. And add to this, the cold winter -- the cold weather in the winter season, and there is a forecast that Europe will see higher sales of heating fuel going forward. In the U.S. East Coast and Europe, the average temperature in October was lower than the last 5-year average, and this is also expected to have a positive impact on demand for heating oil.

[Foreign Language]

[Interpreted] So we're seeing quite a strong refining margin driven by tight supply and just solid demand. Speaking of the demand side, as for the facilities that are in operational glitches, we do not know when they will start up because there has not been any clear-cut announcement. So it's difficult for us to have a grasp of all the little details. But it appears that the degree of operational glitch is rather sizable, and therefore, with cautiousness, we don't think the latest tight situation will ease in a short period of time.

[Foreign Language]

[Interpreted] So we are expecting the target market situation continue [Technical Difficulty] 2026. And according to the data, the capacity net expansion -- the capacity expansion will be 800 MBD, whereas the demand will be 1 million MBD which means again, a very tight -- again, a tight market situation in 2026.

[Foreign Language]

[Interpreted] To answer your second question, in Q3, although OPEC+ continued to unwind output, Dubai benchmark price rose, and this is attributable to solid oil demand, including stockpiling demand despite higher crude supply.

[Foreign Language]

[Interpreted] So we also see the strong OSP lately driven by healthy demand. We'll share the OSP announcement for December listing soon and the market forecast, it will be lower than the previous month because of OPEC+ continuing output raise.

[Foreign Language]

[Interpreted] So given the situation, OSP is likely to show a downward trend, but how much it will fall will be dependent on how much sanctions in Russia affect demand for Middle East crude oil and OPEC+ output raise.

[Interpreted] The following question is by Jeon Yu-Jin of iM Securities.

[Foreign Language] [Interpreted] I am Jeon Yu-Jin from iM Securities. I have 2 questions. The EU is going to enforce the 18th sanctions package against Russia with regard to this. So following this, it looks like EU will not be importing Russian crude oil. Do you think this will have a positive impact on S-OIL, including -- or do you think you will gain out of this like higher exports to Europe? Second question is the government requested the petrochemical companies to come up with the petrochemical restructuring plan before the end of the year. Have you discussed this? And is there anything up for review on your side? And third is, when do you expect to reflect the performance of Shaheen project? Will it be in 2026?

[Foreign Language]

[Interpreted] So to answer your first question, as you said, the EU announced the 18th sanctions package, which will expand import of fuel products refined with Russian crude oil. And it lately announced the 19th sanctions package banning transactions with Russia's energy majors and also imposing further sanctions on additional 100 vessels of Russia's shadow fleet.

[Foreign Language]

[Interpreted] As for its impact on the company's business, we do not directly export fuel products to Europe. However, because we are seeing less product supply from Russia to EU, the prices of fuel in Europe, especially kerosene and diesel went up, and this prompted the refiners in India and the Middle East to push more volume out to the European continent. And this in turn improved the overall market fundamentals in Asia and widened the spread of fuel products. And for your information, Europe has seen the highest import of jet fuel and diesel in the last 2 years and the changing dynamics of the trade flow has been working in favor of the spread of major fuel products in the region.

[Foreign Language]

[Interpreted] On top of EU's sanctions package, the United States also announced an additional sanctions against Russia's major energy company who mostly export to India and China. This means that once the sanctions are applied, the countries who have been sourcing crude oil from Russia will have -- will see some negative impact on operation of their facilities. So this, in turn, will have a positive impact on the overall market fundamentals of fuel products in the region. And this will also advance the cost advantage of the refiners that have not been sourcing crude oil from Russia.

[Foreign Language]

[Interpreted] So to answer your second question on the government's restructuring plan of the petrochemical industry, the company is closely working with the government and related industries to ensure that the voluntary agreement and industrial restructuring for a new petrochemical renaissance makes the domestic petrochemical industry more competitive and bring about a turning point for a new renaissance in the petrochemical industry.

[Foreign Language]

[Interpreted] So the government is driving the restructuring of the industry mainly for 2 reasons. First is to cut down on the old and obsolete facilities that are low in proficiency and advance the industrial structure around the high-efficiency facilities and thereby, advance the overall competitiveness of Korea's petrochemical industry.

[Foreign Language]

[Interpreted] As you know, the company is executing Shaheen Project, and this is a project that is aligned with the government's policy direction. It comes with distinct process technology and high cost competitiveness by creating cost competitive feedstock. And it's also very outstanding in terms of reducing carbon emissions by maximizing the energy efficiency. The mechanical target completion is June 2026, and it is going well.

[Foreign Language]

[Interpreted] So we are executing the project to prepare ourselves for a global energy transition and take S-OIL's vertical integration between refining and petrochemical to a higher level and bring about a renaissance in Korea's petrochemical industry. We are also -- we also think this project is vitalizing the local economy and creating jobs.

[Foreign Language]

[Interpreted] In Ulsan, where we are executing the project, the petrochemical intermediates such as ethylene and butadiene are in short. But once the new facilities have been run from the project, the domestic production will substitute this import volume, thereby advancing the overall competitiveness of petrochemical complex -- Ulsan petrochemical industrial complex.

[Foreign Language]

[Interpreted] So this concludes my answer on the second question, and let me move to the third question.

[Foreign Language]

[Interpreted] So with regard to your third question, again, our mechanical target completion is June 2026, and we're planning test run in the second half of 2026 and commercial operation in the early part of 2027. So we're expecting the new facilities from the project to be completed somewhere in the first quarter of 2027. That concludes my answer.

[Interpreted] The following question is by of Lee Yong-Wook of Hanwha Investment & Securities.

[Foreign Language] [Interpreted] I am Lee Yong-Wook from Hanwha Securities and I have 3 questions. First is regarding the refining market. Well, you said the market fundamentals are tight, but there are some capacity expansions in Asia. But if you just consider those shutdowns and the capacity expansions overall, what is your take on the long term? Second is about Shaheen Project. You said that Shaheen, the new facility will contribute to the company's performance starting from 2027. How much do you think Shaheen Project will contribute to the company's overall profitability? And number 3 is what is your CapEx from this year until 2027?

[Foreign Language]

[Interpreted] So to answer your first question, the institutions are varied in terms of their outlook on the global refining capacity expansion and shutdown. But according to the outlook by the institution that we take as a reference, this year, it will be 370 MBD net decrease, next year 800 MBD net increase, and 2027, 620 MBD net increase. From 2028 to 2030, it will be an annual average of 200 MBD. And then after that, the net expansion will slowly taper down.

[Foreign Language]

[Interpreted] But the actual net increase in 2026 and 2027 is likely to be less than the forecast because many times, the capacity expansion fall behind their schedule, and we've been hearing some announcements of old facilities shutting down.

[Foreign Language]

[Interpreted] Going forward, we're expecting to see the global refining market balance to be in a healthy mode structurally because from 2025 to 2030, the total ethylene expansion is roughly 1.7 MBD while demand will grow by roughly 3.1 MBD during the same period. That's all I have.

[Foreign Language]

[Interpreted] So to answer your second question about the profitability of Shaheen project, as you know, the ethylene naphtha spread is squeezed at the moment. We're expecting the ethylene naphtha spread to improve in 2028 when the steam cracker expansion in Asia led by China peak. But we also -- the period could also be brought forward depending on how the restructuring in Korea's petrochemical industry plays out.

[Foreign Language]

[Interpreted] But however, Shaheen Project will be very good in cost competitiveness in 3 aspects. First is the feedstock and second is energy efficiency and third is operational efficiency. And according to the outlook by some of the outside institutions, the Shaheen Project IRR is expected to record a 2-digit number.

[Foreign Language]

[Interpreted] So as for the CapEx in 2026 and 2027, while nothing has been finalized yet, so it's a little premature to share it with you, but we're estimating the 2026 CapEx to be roughly KRW 2 trillion, which includes KRW 1.5 trillion for Shaheen Project. And for 2027, we do not have any firm project for 2027. So if there is a CapEx, it will mostly be for maintenance, regular maintenance. That's all I have.

[Interpreted] The next question will be given by [indiscernible] Securities.

[Foreign Language] [Interpreted] So I have 2 questions. First is about the global refining facilities operation rate. You said that the overall market balance is quite tight. So what is the operation rate globally for this year? What is your outlook on next year? And what is your take on the global refining industry outlook? And second is about the emerging cooling fluid oil market. Could you walk me through the market outlook?

[Foreign Language]

[Interpreted] Well, in the third quarter, the global refining facilities operation rate was 82%, which was not -- which did not differ much from the previous quarter.

[Foreign Language]

[Interpreted] In Asia, the average operational rate was 84%, which was the same as the previous quarter. In India, it dropped from 113% to 109%, whereas in China, it slightly uptick from 73% to 80%. In the U.S., because of the seasonal high season in Q3, it was 95%.

[Foreign Language]

[Interpreted] And in the U.S. West Coast, there was a fire in the El Segundo refinery. And as a result, the average operation rate in the U.S. dropped to 76% and the U.S. overall was 87%, which is lower than the previous quarter. And in Q4, it is going to be rather volatile depending on the situation of Russia's crude oil sanctions.

[Foreign Language]

[Interpreted] So to walk you through the global refining facility capacity expansion in 2026, we're going to see a net increase of around 800 MBD next year, whereas demand will be roughly 1 million MBD. So we are expecting to see a stable and steady market fundamental.

[Foreign Language]

[Interpreted] With regard to your question on the emerging cooling fluid, late October of 2024, we launched S-OIL e-Cooling Solution, which is an emerging cooling fluid [Technical Difficulty].

[Foreign Language]

[Interpreted] And this year, we signed MOU with smart grid company and Korean battery pack manufacturer and we commercialized and sold immersion cooling fluid for ESS first time and our main customers are government offices and companies.

[Foreign Language]

[Interpreted] We recently passed all performance and reliability [Technical Difficulty].

[Foreign Language]

[Interpreted] We are also in the process of earning qualification for [indiscernible] certification will qualify [indiscernible] and there by lay the foundation to enter into [indiscernible] market.

[Foreign Language]

[Interpreted] We are also accelerating our movement in emerging cooling fluid business. At this time, we are working together with different partners who are engaged in ESS, automobile and commercial battery businesses and this is our market preferences early on and also future potential customers. This concludes my answer.

[Foreign Language]

[Interpreted] Allow me to once again share my gratitude to all the investors and analysts for showing your keen attention and support for S-OIL. As always, we will do our best to communicate with the market in all transparency and fairness. And if you have any further questions about the company's third quarter performance, please feel free to contact the company's IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]