Financing Conditions Deteriorating
Oil refining companies are increasing their commercial paper as well as corporate bond issuance in order to respond to a liquidity crisis attributable to a decline in product demand. They are facing financing difficulties as their Q1 operating losses are estimated at over three trillion won and their credit ratings have been falling steadily.
International credit rating agency Moody’s lowered its credit rating outlook for SK Innovation and SK Global Chemical from stable to negative on April 16. Earlier, on April 13, Korea Ratings lowered its outlook from AA+ to negative in relation to unsecured debentures of SK Energy and S-Oil. This is because their oil refining margins remain below zero and their operating loss estimates have topped one trillion won amid the spread of COVID-19.
The oil refining companies are facing a huge burden as oil prices are falling due to a decline in demand. On April 15, the WTI price per barrel fell 1.2 percent to US$19.87, dipping below US$20 for the first time in 18 years.
The companies have gone through a hard time for years due to the U.S.-China trade war. This year, their short-term liquidity conditions are getting worse and worse. Late last month, SK Innovation and Hyundai Oilbank issued commercial papers worth 875 billion won and 780 billion won, respectively. The large-scale issuance means they are under serious financial conditions in that commercial papers are higher in interest than corporate bonds.
“Jet fuel older than two months must be discarded and our inventory cost burden is increasing rapidly as the jet fuel demand is plummeting due to the pandemic,” said a local oil refining company, adding, “The gasoline price is now lower than the crude oil price due to a decline in vehicle movement and demands for products such as diesel oil are plunging without exception to the point of losses increasing with facility operation.” Under the circumstances, major oil refining companies are trying to reduce their inventory by earlier or longer repair and maintenance. Some already lowered their capacity utilization to about 30 percent.