S-Oil Corporation ($A010950)

Good morning. This is Kyung-Don Kang, 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 Q1 2026 earnings results. For today's conference call, we have Ju-Wan Bang, our CFO; and IR team leader, [ H. D. Jeong ] and team members. First, I will take you through the highlights of Q1 results. In Q1, crude oil prices and refining margins remained strong, driven by the Middle East war. Strong refining margins were offset by opportunity losses resulting from scheduled maintenance in March and implementation of domestic fuel price cap. However, rising crude prices increased inventory-related gains, lifting the company's Q1 operating income to KRW 1.231 billion, up significantly both year-on-year and quarter-on-quarter. Next is the market outlook and the company's response. Despite heightened uncertainty in global crude oil and refined product supply due to the Middle East war, the company maintains stable crude supply and operations through long-term feedstock sourcing and logistics arrangements with the company's parent company. Next is the progress of Shaheen project. As of the end of April, Shaheen projects EPC progress rate is 96.9% and on track. The company is availing company-wide capabilities to achieve the project's mechanical completion by the end of June 2026. Engineering reached 97.3% procurement, 99.9% and construction 93.6%, with the project entering its final stage. The company is targeting commercial start-up earlier next year after commissioning in the second half of this year. In and proceeding as planned with branch pipeline constructions for key customers in Ulsan. For polyethylene, the company has secured long-term export contracts and it's pursuing customer expansion through premarketing. Now IR team leader, H. D. Jeong, will get into more details for Q1 performance and market outlook.

Good morning. This is S-Oil IR team leader, H.D. Jeong. Before we begin, please note that Q1 2026 financial results are provisional and therefore, subject to change according to outside independent external auditors review results. First, please refer to Page 5 for Q1 2026 financial results. In Q1, the company posted sales revenue of KRW 8.942 billion, up 1.7% Q-on-Q and operating income of KRW 1,230 basis, the company recorded operating income of KRW 420 billion in January and February combined supported by healthy refining margins, while operating income reached KRW 812 billion in March, driven by inventory-related gains from rising crude prices and the lag effect of crude pricing following the Middle East war. If you look at each business segment, operating income from the refining segment rose 455% quarter-on-quarter to KRW 1.396 billion, mainly driven by inventory-related gains of approximately KRW 525 billion from rising crude prices and a KRW 430 billion lagging effect, whereby crude oil price in the lifting month is reflected in cost with a month -- 1-month time lag. In particular, in March, when the impact of the Middle East war began to materialize in full scale, the company effectively posted a loss when excluding oil price-related gains despite strong international refining margins due to scheduled maintenance and the domestic fuel price cap. Petrochemical segment turned to a profit quarter-on-quarter, recording operating income of KRW 25.5 billion, supported by inventory-related gains. Operating income from the Loop segment declined 18% quarter-on-quarter to KRW 166.6 billion as product spreads narrowed due to a sharp spike in feedstock cost and a lagging impact of product prices. For reference, the company recorded KRW 643.4 billion in inventory-related gains in Q1. In financial and other gains and losses, the company recorded net interest loss of KRW 56.2 billion and net foreign exchange loss of KRW 201.2 billion due to foreign exchange increase. Q1 income before tax and net income came in at KRW 991.4 billion and KRW 721 billion, respectively. Moving on to financial status. As of the end of Q1 2026, the company held KRW 1.580 trillion in cash, while net debt-to-equity ratio was 75% -- despite external volatilities, the company continues to maintain sufficient liquidity and stable financial structure through competitive and timely financing at low interest rates to support smooth execution of Shaheen project and proactive working capital management. Q1 EBITDA came in at KRW 1.191 billion. Now I would like to go through market environment and outlook by each business -- refining business segment on Page 7. As mentioned earlier, operating income from Refining segment improved quarter-on-quarter to KRW 1.039 billion, driven by inventory-related gains from rising crude prices and the lag effect of crude pricing. Let me now discuss Dubai crude prices in Q1. Crude prices stayed around USD 60 per barrel earlier in the year as it reflected concerns of oversupply triggered by OPEC+ production increase, but prices surged as the late February Middle East war and the closure of the Strait of Hermes from an average of $62 per barrel in December last year to $128.5 per barrel in March this year. Asian refining margins remaining firm in January and February with kerosene and diesel spreads holding near USD 20 per barrel following Q4, supported by seasonal demand, continued Ukraine drone attacks on Russian refineries and sanctions on Russian crude and petroleum products. In particular, following the outbreak of the Middle East war in late February, kerosene and diesel spreads widened to over USD 100 per barrel in March as crude oil supply disruptions caused Asian refineries to cut their operation and major countries, including China, to restrict exports. As a result, kerosene and diesel spreads averaged around USD 36 per barrel for the quarter, supporting refining margins. Meanwhile, gasoline spreads declined quarter-on-quarter to USD 5.5 per barrel as product prices failed to keep pace with rising crude prices during the seasonal off-peak period. Tight market environment is expected to persist in Q2 amid ongoing crude and product supply disruptions. Although concerns remain over slower oil demand growth due to high product prices, supply disruptions are likely to outweigh demand softness driven by high product prices. Meanwhile, a potential decline in oil prices, depending on the developments in the Middle East war may lead to inventory-related losses, increasing earnings volatility and downside risks. A more detailed outlook for Q2 will be provided in the key business update section with supporting data. Next is petrochemical business segment. Petrochemical segment returned to profit quarter-on-quarter with operating income of KRW 25.5 billion, supported by inventory-related gains. Let me discuss the market environment in Q1. The aromatics market improved overall in January and February. PX spreads over naphtha exceeded USD 300 per ton in January on stronger demand from new PTA capacity ramp-ups in China, while benzene spreads over naphtha also improved USD 160 per ton on average in the first 2 months of the year, driven by higher demand from downstream facilities in China, which showed improved economics. Following the Middle East were naphtha supply disruptions sharply raised feedstock cost, while limited pass-through to product prices narrowed spreads in March. As a result, Q1 average PX and benzene USD 263 per ton and USD 119 per ton, respectively. For olefin downstream products, polypropylene PP weakened after the Middle East war as higher feedstock costs were not fully passed through to product prices, pushing PP spreads over polypylene down to negative USD 25 per ton. PO spreads over polypylene also edged down quarter-on-quarter to USD 156 per ton, but remained relatively firm, supported by improved downstream polyol demand following tax policy changes in China. Let me discuss the outlook for the Petrochemical segment in Q2. Elevated uncertainty over feedstock supply for naphtha, polypylene and price volatility is expected to persist given the prolonged Middle East war. However, Aromatics market environment is expected to be supported by lower supply due to concentrated regional maintenance and the start of the driving season. PP and PO are also seeing reduced operating rates across the region due to feedstock cost pressures, while PO remains relatively resilient in April, supported by improved downstream polyol demand. Next is Lube business segment. Operating income from the Lube segment declined quarter-on-quarter to KRW 166.6 billion in Q1. LPO market, which has been stable in January and February, became much tighter in Q1 as oil supply disruptions following the Middle East war caused refiners to cut their run rate, reduced supply of the lube base oil in order to maximize diesel output. It also restricted lupus oil exports from the Middle East through the street of Hermes. However, lagging impact of LBO prices pushed spreads down Q-on-Q to USD 49.6 per barrel. LBO fundamental is expected to remain firm in Q2, supported by supply disruptions from prolonged Middle East as LBO prices gradually increase following the rise in feedstock cost with a time lag. Next is key business update. Let me now discuss the impact of the Middle East war on global oil supply and demand as well as the company's crude supply situation. As the Middle East war continues, uncertainty in global oil market is increasing due to disruptions in crude oil and refined product supply. First, OPEC crude production fell by approximately 9 million barrels per day from 30 million barrels per day in February 2026 to 21 due to crude export disruptions caused by the Middle East war. In addition to crude oil, disruption in refined product supply was also significant. The closure of the Strait of Hormuz caused shipping disruptions from vessels waiting in the region, while attacks on refining facilities in the Middle East, which represent roughly 10% of global refining capacity led to reduced operations at some plants. Refinery runs were reduced at some Asian refineries, which account for about 37% of global refinery capacity that treats Middle East crude oil as feedstock. Refined product supply was further tightened by export restrictions from China, which exported around 700,000 barrels per day in 2025. Meanwhile, concerns over slowing demand growth are rising amid higher Dubai crude price outlook driven by supply disruptions. Five major institutions revised down their 2026 global oil demand growth outlook from around 1.09 million barrels per day as of February 2026 to 300,000 barrels per day. However, as the reduction in demand growth remains smaller than the decline in OPEC crude production, oil market is expected to stay tight for the time being. Despite heightened uncertainty in oil product supply and demand, the company continues to maintain stable crude supply and operation through its long-term crude sourcing and logistics arrangements. On average, the company secures 10 crude cargoes a month for facility operation. In March and April, the company sourced an average of approximately 7.5 crude cargoes per month due to scheduled maintenance. For the remaining first half of the year in May and June, the company has already secured an average of 10 cargoes per month to support normal operations to support normal operations. This stable crude supply was made possible in large part by a 20-year crude supply contract with parent company, Saudi Aramco and a 10-year VLCC transportation contract with its affiliate, [indiscernible]. Going forward, the company plans to continue stable feedstock supply and operations based on its long-term contracts. Last is the progress of Shaheen project. As of the end of April, the Shaheen project's EPC progress reached 96.9% and is progressing as planned. Engineering, procurement and construction reached 97 99.9% and 93.6%, respectively, bringing the project into its final stage. Engineering has effectively been based on pre mechanical completion with only as-built drawing work remaining in Q2. To provide additional details on EPC progress, Major equipment installation of steam cracker facilities, including cracking heater, tower and pipe rack module has been completed, along with the TCC fired heater and storage tank. Internal installation works for the polymer automated warehouse as well as plant-wide above ground piping and conduit installation and pre-commissioning activities are also underway. On the marketing side, annual supply contracts for olefin monomers have been secured in preparation for the Shaheen start-up with additional contracts underway to expand the user base. Branch pipeline construction for key customers in Olson is also on track to support supplies via pipelines, and they will also be completed in the first half of the year. For PE, the company is pursuing quality evaluations and early customer acquisition from free marketing while also securing long-term expert content. The Shaheen project is scheduled remains unchanged, targeting mechanical completion in the first half of 2026, followed by commissioning in the second half and readiness for a commercial operation thereafter. We will keep you updated on the progress of Shaheen Project. And this concludes our presentation. Thank you.

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

[Foreign Language] First, after the [indiscernible] Workout, can you elaborate us on how it has affected the changes in the crude oil supply and demand? My second question has to do with the strong margin of material seen compared to the [indiscernible]. Could you explain could you explain what is causing the strong margin of diesel and also the cause of a relatively variation margin of the strong margin of kerosene and the relative weakness of the diesel margin at the same time? And my third question has to do with the changes in the refining business environment. in the supply and the demand side after the end of the war. And fourth is about our dividend policy. While overall, the Q1 performance seems to be very good, even though a big part of it is the inventory-related gains since it's a good performance in Q, is there any chance that the company pays interim dividends? And if so, how was that -- how big would that be? .

[Foreign Language] So to your first question on the changes in the crude oil fundamentals after the end of the war. Well, first of all, RPD capacity is 670 and for a normal operation of our facilities, we source on tenfold cargoes on a monthly average basis. In March and April, we saw a monthly average of 7.5 feet cargoes, which is a reduction from the average of 10% last year. This is because we had a major T&I in March and April, which comes every 3 or 4 years, and this is not because of the war in the Middle East. [Foreign Language] And starting from April this year are the facilities that have been under the tent have been completed, and they're all starting up one by one. in May. So we are going to source 10 food cargoes, which is the same as last year. And we also secured the crude oil required for normal operation in June. [Foreign Language] And as for the company's crude oil sourcing, we are reliably sourcing crude through various channels based on very close communication with our majority shareholder, we are sourcing Saudi crude through the Yanbu port in Saudi Arabia. Also, we are utilizing the Fujera port in UAE. The Saudi Cree store in [indiscernible], and we're also leasing the government stockpile oil, and we're also making the most out of the Saharan Blend procurement contract that we have signed. [Foreign Language] This concludes my answer on your first question. [Foreign Language] So to answer your second question on the relatively strong jet fuel margin, well, compared to the diesel margin, the fuel spread has shown relative since they were broken out because of the relative tightness of jet fuel supply. [Foreign Language] So if you look at it from region from a regional perspective, the Europe jet fuel supply is known to be tighter than other regions. As you know, Europe or a big volume of diesel and jet fuel from the Middle and their dependence on the Middle Eastern jet fuel is higher than that of diesel. After the homes got closed, it caused quite disruptions of fuel products in the Middle East and that to have had a bigger impact on jet full supply to Europe compared to diesel supply. [Foreign Language] And the jet fuel supply got even tighter because of China, which is the biggest just fuel exporter and immediately banned fuel product exports after the war broke out. So all these factors added up to give a relative strength to jet fuel spread compared to diesel. [Foreign Language] So all in all, we are expecting the fuel product supply to remain tight for the time being. And also, there is a big chance of the middle display spread to show strength for the time being. However, with regard to the relative strength of jet fuel, we are expecting some volatilities in the market. [Foreign Language] Well, for example, China is showing moves to resume exports of May. On the demand side, the airliners are responding to the high product prices by adjusting their air flights more towards the higher-margin aero schedules and reducing the lower-margin short sinter flights. [Foreign Language] So as I just said, we are seeing changes in how the market players are responding to be high jet fuel spread in terms of both the supply and the demand side. And therefore, we are expecting to see a relatively high level of volatility in the dust fuel market. This is all I have for your second question. [Foreign Language] And to answer your third question on how the end of the war will affect the changes in the refining market based on supply and demand. Well, as you said, the impact on the oil supply and demand will change depending on how long the world last. A lot of the major institutions believe that oil supply will come back to the normal level step-by-step if the world comes to an end, in the not so distant future. However, as you know, during the war, there were some strikes on the oil production and the refining facilities, which cost in direct damages to these facilities. And therefore, it will be only towards the end of the year when oil supply recovers to the pre-war level. [Foreign Language] And speaking on the supply side, the product prices increase because of the disruptive supply will hamper the demand growth. And because of that, the demand growth this year is not forecasted to reach what was forecasted at the beginning of the year based on the outlook. However, IMF did not significantly adjust their forecast on the global economic rate for this year, keeping it at 3.1% and so if the war comes to an end and oil price goes down, that will bring demand back to the normal level, and the low stockpiling demand at the -- during the period will also be returned to the normal level, and therefore, there is a chance that the margin will stay favorable for quite a period of time. [Foreign Language], This concludes my [indiscernible].

[Foreign Language] So to answer your fourth question on the possibility of paying interim dividend. And if so, the amount as was disclosed to the market and our dividend guidelines, our dividend for this year will be 20% or higher of the company's total net income. And we are also considering paying interim dividends because there will be income made in the first half of the year. However, that said, we need to take a more conservative approach when it comes to paying the interim dividends because there are still volatilities and uncertainties surrounding the company's business environment. And if the oil price goes down, there could be inventory-related loss. So all these factors have to be taken into account when making a decision on the interim dividends. But still so on an annual basis, we will be paying over 20% or higher of the company's net income. [Foreign Language] More details of interim dividends will be determined by the Board of Directors to be held in the second half of the year. And once the decision is out, we will communicate it with the market with public disclosure. [Foreign Language] This concludes my answering your fourth question.

[Foreign Language]

[Foreign Language] This is [indiscernible] from Hanwha Investment & Securities. So I have 3 questions to ask. First is about the maximum price cap policy. What is the opportunity loss incurred as a result of this policy? And could you give us any updates on the compensation plans? And second question is rather overlapping with the previous questions. What is the [indiscernible] the war. And what is your outlook on the market supply and demand after the end of the war. And third is, it looks like there is some diversification in the crude sourcing channels. Will this change any production of your refining products in terms of the total product share production share.

[Foreign Language] So to answer your first question on the opportunity loss incurred by the price cap policy, any discussion and any discussions on the compensation. Well, since this policy and maximum price cap was in worse, we were not able to link the nonproduct international prices to the domestic sales price. And as a result of this, we have been facing sizable loss that otherwise would not have been incurred business as usual. [Foreign Language] So this is how it will run the company will ask for compensation of the loss on a quarterly basis through the certified accounting firm, and the government will establish their compensation plan through the Compensation Committee. [Foreign Language] [indiscernible] and also, it will be only when the government makes an official announcement in the notice to on the compensation amount, that will be reflected in the company's profit and loss based on the accounting principles.

[Foreign Language] [indiscernible] In demand after the end of the war. While it is true that some of the refining facilities and logistics infrastructure in the Middle East, have things have come under attack during the war in the Middle East. However, we are limited in having a full grasp of the size of capacity that's been disrupted. This is because some of the facilities are still partially up and running after the strike and others have started up quite quickly after a temporary shutdown. So all this combined, it's not easy for us to gather information on the actual impact of the strikes on a real-time basis. And furthermore, there are also strikes of the storage logistics infrastructure that could also affect the process operation. And according to the fact, which is the price forecast intelligence, the refining capacity [indiscernible]. These numbers all reflect big challenges and disruptions in sourcing the feedstock and also the impact of the strikes as a result of the war. And therefore, there is a very big chance of these numbers be changing and getting revised into how the war plays out. [Foreign Language] And as for the outlook, we have also mentioned that earlier, so that will be used as a substitute. [Foreign Language] And to answer your third question on how the diversified crude sourcing channel is changing the production portion of your refining products. Well, first of all, under normal operation situations, we blend various types of crude oil like [ Aerobid, airmedium and arpsuperlife ] and treat them in our refining facilities to optimize facilities operations. [Foreign Language] And since the war broke out and the straight of hormone got locked up, the company started lifting crude oil from Yanbu for utilizing the vastest pipeline that connects the eastern and the western part of Saudi Arabia, and we've been transporting crude oil via the Red Sea. In which case the portion of Arab light goes up, and therefore, the free type gets a little lighter compared to normal times. [Foreign Language] And these changes in the [indiscernible] the mix could have a partial impact on the CDU operation and also on the production amount of the residue oil that is use of the feedstock to the upgrading facilities and therefore, this may require some adjustments in the operating facilities operation rate. But we will take into consideration these pre types that we're feeding in to our facilities and also the demand for each product in the market to flexibly run our facilities in ways that can maximize our income for the company. This answers the third question.

[Foreign Language] The following question is by [indiscernible] from Shinyoung Securities.

[Foreign Language] So this is [indiscernible] from [indiscernible] the war in the Middle East. How is this affecting your company's business? And how are you responding to this? Second is, could you break down the inventory-related impact by business segment? And third is, what is your forecast and outlook of the refining business in the second half in Q2 and the second half of the year and the company operate plan for operations? And my fourth question is it looks like the petrochemical market is picking up these days. Do you think this will bring forward your chain project completion schedule? And what is your outlook on the project profitability based on the current market conditions?

[Foreign Language] [indiscernible] then what are the strategies that we are employing to respond to them. while these geopolitical issues like the warrant is and the lockdown of the Strait of Hormuz have created unprecedented level of volatility and uncertainty to our business, as you know, A lot of things have changed on the oil price and the product prices and oil supply and the FX.

[Foreign Language] So in response to this very volatile situation, the company instantly launched the enterprise risk management system and everybody from the top management officers and employees have availed all resources to respond to the rapidly changing market environment with agility. One big stream on crisis was at its peak in March and April, we have appropriately responded to the situation through very first conversation with various stakeholders, including our parent company, Saudi Aramco, the South Korean government and the customers. By doing so, we reliably source crude oil and also reliably copy the field products to the domestic market in alignment with the government's policy direction and also appropriately responded to the needs of our customers at come and abroad. [Foreign Language] So going forward, based on reliable sourcing, we will do our best to consistently deliver value to various stakeholders, including the shareholders and also meet their expectations at the same time, we'll also do our best to ensure stable supply of oil to the domestic market and seek maximum income creation for the company based on smooth facilities operation and sales activity. [Foreign Language] So to answer your second question on the inventory related and by business segment. And as was presented earlier in the slide, our total inventory related gains is KRW 643.4 billion and by business segment is at [ KRW 524.8 billion ] for the refining business.

[Foreign Language] So to answer your second question on your outlook of the refining business in Q2 and the second half of the year, Well, we are expecting the disruptions in the supply to remain the refining margin at quite a wholesale level in Q2 and towards the second half of the year. For example, in Q2 in April and May based on the Singapore gasoline spread, it is $25 for gasoline and for diesel, it's about $10. [Foreign Language] And we have already secured the crude required for normal CDU operation in May and June and unless there are any issues popping up in the market, we think we'll be able to run at the normal level in the second of the year. And for your information, we don't have any major T&I plans during the rest of the year.

[Foreign Language] So to answer a question on the petrochemical market outlook and the Shaheen project, while, as you know, the world in the Middle East has a very huge impact on the global petrochemical business and also creating a very huge level of uncertainties. And as for the Chain project, well, the crude oil and the heavy oil that is produced from our refining facilities are fit into and treated into the facilities to maximize the production of naphtha and the naphtha that we get from TC2C and the existing refining facilities are all entirely fit into the steam cracker to get the petrochemical products. So the fact that we are able to internally source all their fees of, including Naphtha for Shaheen project give the high level of reliability to our facilities in terms of feedstock sourcing and operations. [Foreign Language] And as for the schedule, there is no change in the schedule so far. And as we noted earlier, our target is mechanical condition at the end of June commissioning in the second half of the year and commercial operation in early 2027. And as for the profitability in the early operations, while at this moment, it's not easy for us to tell you how big the profitability will be because of the high level of uncertainty we're seeing because of the war in the Middle East. But we do believe that the petrochemical spread will gradually [indiscernible] in the mid to long term and this will eventually have a very positive impact on the company's performance. [Foreign Language] So our scheduled time is up, and thank you for your attention to S-Oil's Q1 performance in 2026. As always, we will engage in transparent and for our communications -- and if you have any further inquiries, please feel free to contact us oil's IR team. Thank you very much.

[Foreign Language] This concludes the fiscal year 2026 first quarter earnings resulted by S-Oil. Thanks for the participation.