Industry Conditions to Remain Robust
The author is an analyst of NH Securities and Investment. He can be reached at yk.choi@nhqv.com. -- Ed.
We expect S-Oil’s 4Q22 earnings to prove disappointing on unfavorable turns in both the oil price and dollar/won rate. That said, we note that refining margins (a key barometer of industry conditions) continue to rise. Given continued tight supply, the industry environment is to sustain solid in 2023.
Industry conditions to remain robust in 2023 amid continued tight supply
After averaging US$86.3/bbl in November, the oil price (Dubai crude) fell to US$71.8 on Dec 12. But, we judge this drop as being just a temporary weakness brought about by excessive reflection of economic recession concerns, noting that oil price has bounced back up to US$78.2/bbl as of Dec 29. Meanwhile, refining margins continue to climb. Having been in negative territory in mid-September (due to increased Chinese petroleum product exports), the Singapore refining margin has rebounded to US$10.5/bbl as of Dec 29. Although S-Oil’s 4Q22 earnings will likely disappoint on unfavorable turns in both the oil price and dollar/won rate, we believe that oil refining industry conditions remain solid (compared to the past) in 2023 amid continued tight supply.
To book 4Q22 operating losses on inventory valuation losses, unfavorable forex rates, and OSP hike
We expect S-Oil to show 4Q22 sales of W10.2tn (-8.2% q-q) and operating losses of W89.3bn (TTL q-q; OPM of -0.9%), missing consensus.
[Refining] We estimate 4Q22 sales of W8.2tn (-8.7% q-q) and operating losses of W354.3bn (TTL q-q; OPM of -4.3%). Despite refining margins trending upward, the division still likely saw operating losses on a worsened cost burden stemming from: 1) unfavorable turns in the oil price and the dollar/won rate; 2) forex rate lagging effects (the spot exchange rate applied to selling price was +2.1% q-q, whereas the lagging exchange rate applied to cost was +7.2% q-q); and 3) a higher Official Selling Price (OSP; Arab light crude lagging basis; 3Q22: US$6.7/bbl → 4Q22: US$7.2/bbl).
[Chemical] The chemical division will likely show sales of W1.1tn (-5.2% q-q) and operating losses of W8.7bn (TTL q-q; OPM of -0.8%) on lower spreads for major products (including P-X -19.6% q-q, benzene -42.6% q-q, PP -8.3% q-q, PO -6.7% q-q).
[Base oil] We see sales of W882.8bn (-6.6% q-q) and OP of W273.7bn (-27.4% q-q; OPM of 31.0%). The export price per ton for lube base oil fell 11% q-q from US$1,377 in 3Q22 to US$1,223 in 4Q22. However, the price of marine gas oil (MGO; used as feedstock) fell only 3.7% q-q from US$159/bbl in 3Q22 to US$153/bbl in 4Q22, in turn sapping OPM.