S-OIL Posts Third Consecutive Quarterly Loss Due to COVID Impact... Plans to Cut Capital Expenditure Next Year (Comprehensive)

Reduced Losses in Refining Business but Operating Losses for Third Consecutive Quarter
Chemical Business Also Turns to Deficit

[Asia Economy Reporter Hwang Yoon-joo] S-OIL recorded losses for the third consecutive quarter, unable to overcome the challenges posed by the novel coronavirus disease (COVID-19). Although the operating loss in its core refining business significantly decreased, the chemical division turned to a loss, dragging down overall performance.

◆ Refining Posts Losses for 3 Consecutive Quarters... Chemicals Turn to Loss Due to PX Margin Shrinkage

On the 28th, S-OIL announced a consolidated operating loss of 9.3 billion KRW for the third quarter, marking a turnaround to a loss compared to the same period last year. Sales during the same period dropped 37.4% to 3.8992 trillion KRW. The cumulative operating loss for the first three quarters reached 1.1809 trillion KRW. However, the deficit narrowed by 94.4% compared to the second quarter.

S-OIL explained, "Despite expanded regular maintenance of plants and continued negative refining margins in the regional market, the gradual recovery in demand, inventory-related gains, and the company's proactive profit improvement activities reduced the operating loss by 155 billion KRW compared to the second quarter."

By business segment, only lubricants (96.6 billion KRW) recorded a profit, while the main refining division (-57.6 billion KRW) posted losses for the third consecutive quarter. The chemical division, which was profitable in the first half of this year, turned to a loss (-48.3 billion KRW), pulling down overall results.

International oil prices remained around 40 dollars per barrel, reducing inventory losses and enabling a return to profitability. However, the refining business could not avoid losses due to weak refining margins, which are critical to profitability. The Singapore complex refining margin averaged 1.2 dollars in the third quarter (July to September), recovering from negative territory but still far below pre-COVID-19 levels. Considering the breakeven refining margin is around 4 to 5 dollars per barrel, refiners lose money the more products they produce.

In particular, paraxylene (PX) products were affected by sluggish spreads due to new capacity expansions in China and reduced demand caused by COVID-19, significantly impacting the chemical division's performance decline.

◆ Refining Operating Rate to Increase to Maximum in Q4... Facility Investments and Projects to be Reduced or Delayed

Profitability is expected to return in the fourth quarter. During the third-quarter earnings conference call, S-OIL stated, "We plan to operate the refining division at maximum capacity in the fourth quarter," adding, "Although refining margins are not favorable, this is due to the recovery in demand for some products."

However, "The petrochemical division's spreads are not good, so the operating rate is expected to remain around 80%, not reaching 100% from the current 70% level," the company said.

Due to the COVID-19 impact being larger than expected, the company decided to reduce the scale of facility investments planned for next year. S-OIL said, "Due to poor performance this year, we are cutting back on planned facility investments. The scale of facility investments next year will be lower than this year."

The second-phase petrochemical investment project is also expected to be delayed compared to the original plan. S-OIL stated, "The second-phase petrochemical investment project is currently experiencing some delays in the engineering process due to COVID-19," adding, "We expect the final investment decision to be made in the second half of next year or, at the latest, early in the second half of the following year."

S-OIL is the first among the four major domestic refiners to announce its earnings. Since S-OIL posted losses contrary to the securities firms' consensus (average estimate of 141.7 billion KRW), concerns are rising that other refiners' results may also fall short of expectations. According to the securities information provider FnGuide, SK Innovation is estimated to record 102.8 billion KRW in the third quarter.

Park Yeon-ju, a researcher at Mirae Asset Daewoo, analyzed, "Due to weak refining margins and paraxylene (PX) spreads, the third and fourth quarter performances are expected to be sluggish," adding, "Market recovery is likely to occur after mid-2021, when demand for jet fuel and chemical fibers recovers."