Oil refiners teeter on edge of collapse

An SK Innovation plant in Ulsan. / Courtesy of SK Innovation

Four Korean firms suffer ballooning losses amid COVID-19

By Baek Byung-yeul

Korean oil refiners SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank are expected to post an “earnings shock” in the first quarter, due to a mixture of low oil prices and falling sales of their oil products amid the COVID-19 pandemic, according to industry analysts Sunday.

While refiners are suffering from a sharp decline in oil prices amid the growing tension between Saudi Arabia and Russia, demand for oil and oil products has been weakened significantly due to the rapid spread of the virus.

Given this, local brokerage houses have lowered earnings forecasts for the oil refiners for the first quarter.

They expect combined operating losses of the four companies in the January-March period will hover around 2.5 trillion won ($2 billion). They said that because their refining margins have been declining, it is inevitable that their deficits would increase further in the following April-June period.

SK Innovation, the largest oil refining firm here, is expected to post an operating loss in the first quarter of more than 1 trillion won, the largest among those major four companies. The brokerages also estimated the company will log sales of 10.5 trillion won, a drop of about 17 percent year-on-year.

Hana Financial Investment estimated the operating loss of SK Innovation in the first quarter would be 1.08 trillion won, significantly lower than market consensus of 472.9 billion won.

“The operating loss of its oil business will be at 955.8 billion won. This figure reflects 750 billion won of inventory losses it will book due to the decline in oil prices,” the report said.

Brokerage houses estimated GS Caltex, a refinery unit of GS Holdings, would post a consolidated operating loss of around 580 billion won in the first quarter. GS Caltex is unlisted.

S-Oil is also expected to suffer an operating loss of around 780 billion won during the same period, according to Hana Financial Investment. As seen in SK Innovation, the brokerage said lower oil prices caused an inventory loss of around 400 billion won.

Another unlisted firm, Hyundai Oilbank, will post an operating loss of around 478 billion won, according to an investment report from Daishin Securities.

“The first quarter performance of Hyundai Heavy Industries Holdings will be below market consensus as its refining unit Hyundai Oilbank, which accounted for the largest part of its consolidated sales, has to report inventory losses due to a sharp decline in oil prices and its refining margin also plummeted due to COVID-19,” the report said.

Industry analysts said their weakened performance mainly stemmed from increased inventory losses because they bought raw material at a higher price.

The price of Dubai oil was around $65 per barrel earlier this year but fell 65 percent to $23 a barrel at the end March. To respond to the falling oil price, refiners have lowered the utilization rate of their refineries to reduce capacity, but the coronavirus outbreak ruined such efforts.

Hana Financial Investment forecast the refining industry cycle would show a similar curve to that in 2014 and 2015 when the industry was recovering slowly after being hit a triple whammy such as low oil price, lower demand for oil products and a falling exchange rate.