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

[Foreign Language] [Interpreted] Good morning. This is [ Ki 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 Q4 2025 Earnings results. For today's conference call, we have CFO, JW Bang; IR team leader, YR Tang; and team members. First, I will take you through the highlights of Q4 results. In Q4, the company's operating income significantly improved from the previous quarter and year-on-year, recording KRW 424.5 billion. Operating income of refining and lube businesses surged, thanks to strong product spread. Petrochemical business also witnessed reduced loss supported by continued recovery in PX spread. Next is market outlook. In 2026, we're expecting favorable market condition driven by global demand growth that outpaces net refining and PX capacity expansion. Refining margin is projected to remain stable, thanks to less cost burden resulting from lower oil prices and OSP. Next is the progress of Shaheen project. EPC progress of Shaheen project is 93.1% as of January 14, and we are making progress as planned ahead of the mechanical completion in the first half of this year. We are at the final stage of engineering and procurement, progressing at 97% and 99%, respectively. Construction is 86% complete. Our goal is to start commercial operation early next year after going through commissioning in second half this year. We are also working on annual term supply contract with olefin monomer customers based on the upcoming start-up of Shaheen project. Pipeline connection to key customers in Ulsan is ongoing as well. For PE, premarketing activities are -- sorry, for PE, premarketing activities are underway to expand our PE customer base, and we are in discussion to make term export agreement. We'll leverage all our capabilities to ensure the successful delivery of the project and live up to the expectations of customers -- expectations of investors. Now Tim Leader, YR Chang will get into more details for Q4 performance with the following slides.

[Interpreted] Good morning. This is Sy IR Tim Leader, YR Chang. Before we begin, please be noted that Q4 2025 financial results are provisional and therefore, subject to change according to outside independent external auditors' audit results. First, please refer to Page 5 for Q4 2025 financial results. The company's Q4 sales revenue recorded KRW 8,792.6 billion, up 4.5% from the previous quarter. Operating income jumped by 85% quarter-on-quarter to KRW 424.5 billion. If you look at each business segment, operating income of refining business surged from the previous quarter, recording KRW 225.3 billion, backed by strong spread of major products. Petrochemical business witnessed its operating income narrowed to minus KRW 7.8 billion as PX spread continued to recover. Operating income of lube business also went up by 55% from the previous quarter, recording KRW 209 billion, driven by widened product spread. For your reference, inventory-related impact reflected to Q4 operating income is minus KRW 87.4 billion. In finance and other income, we had minus KRW 56.9 billion of net interest gain and KRW 73.5 billion of net FX gain due to increased FX rate. Q4 income before tax and net income recorded KRW 317.9 billion and KRW 265 billion, respectively. On an annual basis, the company's 2025 operating income inched down year-on-year, recording KRW 288.2 billion. However, we swung sharply back into black, posting KRW 225.8 billion and KRW 216.9 billion in income before tax and net income, respectively. Moving on to financial status. The company's cash balance as of 2025 end is KRW 1.843 billion and net debt-to-equity ratio is 67.9%. Despite volatilities in the external environment, the company has maintained enough liquidity and stable financial structure by financing at competitive interest rate rise and time and managing working capital proactively to ensure smooth execution of the Shaheen project. Cumulative EBITDA on a whole year basis stood at KRW 979 billion. Now I'll go through market environment and outlook by each business segment. First is refining business. Dubai crude price declined during Q4 due to concerns over added supply resulting from OPEC+ output increase falling from an average of $70 in September to $62 in December. In Q4, operational glitches of global facilities tightened supply in the Asian refining market. Nigeria's new facility, Tangote Refinery, El Segundo refinery in California and Al-Zour refinery in Kuwait all experienced operational disruption. Ukraine's drone attack disrupted the operation of Russia's refining facilities and shutdown of Phillips 67 refinery in California affected market fundamentals as well. In addition, sanctions on Russia imposed by the U.S. and EU added worries over product supply interruption at a time when demand for diesel and kerosene remained healthy because of the high heating season in the Northern Hemisphere. As a result, spread of diesel and kerosene rose sharply to $25 per barrel on average, driving refining margin improvements. Despite downward adjustment in the end of the quarter following the fire negotiations between Russia and Ukraine, diesel and kerosene spread is still maintained at a healthy level of roughly $20 per barrel. In Q1 2026, we're expecting limited supply to continue due to continuous operational disruption of the Dangote refinery and Russian refineries as well as scheduled closure of a Valero refinery in California amid firm demand of products, including diesel and kerosene. As we enter into regular T&I season in the region from late March, demand for inventory buildup may provide additional support to refining margin. I will share more details on 2026 annual outlook in key business update with specific data. Next is Petrochemical business segment. Operating income of petrochemical business narrowed in Q4 from the previous quarter, recording minus KRW 7.8 billion as a result of upward trend in PX spread over naphtha and PO spread over propylene. If we look at Q4 market conditions, PX market continued its bullish run backed by start-up of new PTA facilities in China that drove up PX demand and robust downstream polyester demand. As a result, PX naphtha spread recorded $266 per ton in Q4. Even though Q4 is off season, strong demand is keeping PX spread high at above $300 since mid-December. By contrast, benzene market continued bearish sentiment as imposition of tariffs lowered U.S. import demand and benzene downstream facilities, including style monomore operated at a low level. In Q4, benzene naphtha spread stood at $103 per ton. As for Olefin Downstream, PP spread over propylene recorded $30 per ton, down from the previous quarter as supply increased after the completion of regular T&I in the spread went up from the previous quarter to $176 per ton due to disrupted supply of major PO manufacturers in China and seasonal demand supported by Black Friday and Christmas. Next is Q1 2026 outlook of our Petrochemical business segment. We project PX market to stay bullish based on expectations for tight market fundamentals and regular T&I of PX production facilities in the region that will reduce the supply. We'll further explain tight market -- tight supply-demand balance outlook in key business update with the specific data. As for benzene, PP & PO, we are forecasting supply to increase continuously for all products due to new facilities starting up mainly in China. [indiscernible] G&I in the region is expected to partially offset supply increase of benzene. At the same time, demand for PP and PO is anticipated to improve gradually as uncertainties around global trading environment start to ease. Next is Lube business segment. Operating income of roof business in Q4 went up from the previous quarter to KRW 207 billion. Despite seasonal demand slowdown, LBO spread rose quarter-on-quarter due to lagging effect driven by lower feedstock cost, recording $55.2 per barrel. Q1 this year, inventory buildup ahead of spring lubricant change season is projected to support market sentiment, offsetting added supply caused by regional capacity expansion. Though we are expecting highly volatile LBO spread affected by price fluctuation of feedstock, including crude, we'll make utmost effort to maximize our income are responding swiftly to changing market conditions. Next is key business updates. First is outlook on the business environment. We project bullish market sentiment as global demand growth for oil and PX will outpace net addition from capacity expansion. Starting from the left bar graph, global oil demand is expected to grow by 1 million BD, exceeding net addition of 790,000 BD generated both from capacity expansion and closure of refining facilities. This tight market fundamentals will go beyond 2026 and supply will fail to catch up with the demand, which is expected to support a favorable business environment for refining business. Moving on to the bar graph at the center. PX demand growth outlook in 2026 stands at 3.75 million tons. In contrast, net PX capacity expansion will be limited to 1 million tonnes. Moreover, market expectations on tight supply-demand balance of PX are running high for this year as market intelligence suggests added capacity will start up at the end of this year. In addition to strong, we also expect lower oil price and OSP for Saudi Arab crude to ease cost burden on the company. The graph on the right shows OSP trend for Saudi Arab light crude. OSP for crude that will trade in Q1 2026 stands below past 5-year average, which means it will likely have a positive impact on the company's refining margin. Last is the progress of Shaheen project. EPC progress rate as of January 14 is 93.1%, going smoothly as planned. Engineering and procurement progress rate is nearing completion at 97% and 99%, respectively. Based on pre-mechanical completion, engineering is complete and all that remains is as built drawing work scheduled in Q2. As for the progress of EPC in further detail, we completed the mechanical installation of steam cracking furnace, installation of TC2C high-pressure heat exchanger and construction of a polymer automated warehouse. We are also working on installation of storage tank aboveground pipeline and conduit. As for marketing activities, we are discussing annual ton contracts with major customers considering Shine project start-up. Currently, we are building branch pipeline to support sales to our key customers in Ulsan and targeting completion in the first half of this year. Speaking of PE, we are carrying out quality evaluation and supply to customers through premarketing. We are also securing more customers and discussing term export contracts. There is no change in project schedule. We are targeting first half of 2026 for mechanical completion and second half for start-up to be ready for commercial operation. We'll keep you updated on the progress of the Shaheen project. This concludes my presentation. Thank you.

[Operator Instructions] The first question will be given by Yang from Shinhan Investment Securities.

[Foreign Language]

[Interpreted] This is Eung- Jung Lee from Shinhan Investment Securities. I have 2 questions. First is on the global supply interruptions or disruptions in the first quarter of this year. How big will that be in this quarter? And second question has to do with the global expansion schedule for 2026 and 2027. I would like you to break it down into the expansions and the shutdown.

[Foreign Language]

[Interpreted] So to answer your first question on the global supply disruptions, as I said during my statement, in Q4, there were several factors that caused the supply disruptions. The Dangote refinery in Nigeria had a shutdown and also the U.S. West Coast also had a permanent shutdown. And there was also the attacks by Ukraine against Russian refineries.

[Foreign Language]

[Interpreted] So starting with the shutdown in the U.S. West Coast, the 160 MBD Phillips 66 refinery based in Los Angeles started the phase shutdown from October last year, and we understand that they had a full and complete shutdown at the end of December. And for the 150 MBD Valero refinery, which was announced to shut down this year, it is planning to have a phase shutdown from February this year, and their plan is to have most of the shutdown by April this year.

[Foreign Language]

[Interpreted] And as for the El Segundo refinery in the United States and Al-Zour Refinery in Kuwait, both of which had supply disruptions, operational glitches in Q4 last year, are known to have started up again at the end of last year and the beginning of this year. And for the Dangote refinery in Nigeria, which had operational glitches throughout 2025, started the T&I of its RFCC, is in the middle of T&I of its RFCC in January this year.

[Foreign Language]

[Interpreted] And as for the Russian refineries, the Ukraine continued their intensive tax on the refining facilities in Russia from the second half of last year. So based on the CDU capacity, about 500,000 BD in November last year and about 300,000 BD in December last year were affected in terms -- because of the operational glitches. And not only the refining facilities, but the offshore oilfield facilities in Russia and the export port terminals are also targeted by the drone attacks, which is also resulting in operational glitches as well.

[Foreign Language]

[Interpreted] And as for the global T&I, it is going to enter into the T&I season in spring and will gradually pick up to reach 7.8 million BD in April this year. This concludes my answer.

[Foreign Language]

[Interpreted] And as for the global expansion schedule in 2026 and 2027, for this year, the net increase of the refining capacity is 790 MBD out of -- so if I break it down, the capacity expansion is 1.5 million BD and the shutdown is 800 MBD. And most of these new capacity expansions are clustered in the second half of the year.

[Foreign Language]

[Interpreted] And as for the new expansions, we understand that most of it will take place in India, but there is a tendency in India for these capacity expansions to be delayed to some extent. So some of it will be delayed to the end of the year or even next year.

[Foreign Language]

[Interpreted] And as for 2027, the net increase is only 50 MB. If I break it down into the expansion and the shutdown, the expansion is 140 MBD and the shutdown 90 MBD. For 2028, the capacity expansions and the shutdown will almost balance out each other, which means there will be no net increase expansion, 300 MBD and shutdown 300 MBD as well.

[Foreign Language]

[Interpreted] And as a result, we're expecting the demand increase to outpace the supply increase, which will create a favorable market fundamentals to the company in the longer term. That's the end of my answer.

[Interpreted] The following question is from Lee Yong-Wook from Hanwha Investment Securities.

[Foreign Language]

[Interpreted] Good morning this is Lee Yong-Wook from Hanwha Investment Securities. I have 3 questions. First is we're seeing the OSP downward trend. Could you tell us what is causing this downward trend? And how do you see its outlook? Second is what is SOL's T&I plan and schedule for 2026? And third is, could you update us on the Shaheen project schedule?

[Foreign Language]

[Interpreted] So to answer your first question on why OSP is coming down, it has been coming down since November last year. Based on a light, the December lifting OSP was $1 per barrel, January lifting $0.60 per barrel and February lifting $0.30 per barrel.

[Foreign Language]

[Interpreted] So this downward trend of the OSP is working in favor of the company in terms of the cost structure. And this lower and [indiscernible] OSP will be reflected in the company's Q1 performance in a meaningful way. We attribute the latest downward trend of OSP to a number of factors. The cease-fire talks between Russia and Ukraine is raising the possibility of end of the war, and the global market has -- ample supply of crude at the moment.

[Foreign Language]

[Interpreted] So considering these various market indicators, there's also a possibility of the OSP falling below 0. However, there are a number of factors that could escalate the volatility of OSP such as the tariff issues stemming from the United States and other geopolitical issues. And therefore, we plan to constantly monitor the OSP trend going forward.

[Foreign Language]

[Interpreted] So to answer your second question on the company's T&I plans for 2026, we are going to have a turnaround for the #2 CDU, #1 PX, #2 RFCC, PO & PP plan starting from March this year, and it will last for a month or two.

[Foreign Language]

[Interpreted] the details of schedules are subject to change depending on the circumstances and to stockpile the inventory and optimize the process operations in a way that maximizes the company-wide margin. And by doing so, we plan to keep the opportunity cost to minimum and maximize profitability. This answers your question.

[Foreign Language]

To update you on the Shaheen project schedule, as we stated earlier, we have the empty target mechanical completion target in the first half of the year. And in the second half of the year, we are going to do the commissioning and commercial operation at the beginning of [indiscernible] Other than that, I would like to give you elaborate more on our investment balance and our marketing plan as well.

[Foreign Language]

[Interpreted] So the total investment for Shaheen project is KRW 9.258 trillion. And until the end of last year, we executed KRW 7.6 trillion, and the balance for this year is KRW 1.64 trillion.

[Foreign Language]

[Interpreted] So on the marketing plan for Shaheen project after the commercial operation, we've actually signed a number of MOUs with our customers in Ulsan Industrial Complex to sell our products. That was -- and the MOUs were all signed after the FID of our project. And from -- we are also discussing with our customers to sign the annual supply contract with them starting from the second half of this year.

[Foreign Language]

[Interpreted] And as for the pipeline connection with our customers, we've also constructed -- we have all constructed the U, the pipelines that will connect Ulsan and Ulsan. And for the branch pipelines that will take all our products to our customers in Ulsan area, we plan to complete them in the first half of this year.

[Foreign Language]

[Interpreted] And as for the premarketing of the company's polyethylene, we have purchased the products that have the equal specification that we will be getting from our new PE plants. We purchased them, and we've supplied them to our customers in [ Ulsan ] and the quality test is underway. And also, there are discussions with our customers overseas to sign term export contracts as well. This answers your question.

[Interpreted] the following question is from Cho Hyunryul from Samsung Securities.

[Foreign Language]

[Interpreted] I am Cho Hyunryul from Samsung Securities. I have 4 questions. First is since Q4 last year, the kerosene and diesel margin is quite strong. What is the background behind this? And what is your outlook? Second question is, how do you think the latest geopolitical events such as the ones in Venezuela and Iran will have on the company's business? And third is, what is behind the strong PX market these days? And what is your outlook? And fourth is the company's 2025 performance seems to be -- 2026 performance is likely to be better than the last year. Do you think this will have an opportunity to expand the company's dividend?