Refining Margins Deteriorating
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
3Q20 earnings miss market consensus
— S-Oil reported 3Q20 revenue of KRW3.9tn (-37.5% YoY/+13.0% QoQ) and an operating loss of KRW9.3bn (turn to red YoY/remain in red QoQ), missing the market consensus (FnGuide, Sep. 21).
— The disappointing performance is attributable to (1) deteriorating Refining margins caused by contracting demand for jet fuel and gasoline and (2) opportunity costs stemming from typhoon-related suspensions in operations.
3Q20 earnings hurt by contracting Refining margins and routine maintenance
— Refining posted revenue of KRW3.0tn (-38.6% YoY/+15.4% QoQ) and an operating loss of KRW57.6bn (turn to red YoY/remain in red QoQ). Operating income has been in negative territory for four straight quarters, but it narrowed in 3Q20 on the back of improving inventory valuation gains/losses. Earnings were hit by KRW90.0bn in opportunity costs from typhoon-related suspensions and routine maintenance. Also, Refining margins remained below BEP; avg. complex margin (lag reflected) came in at USD2.70 (down USD1.80 QoQ).
— Petrochemical results were disappointing, with revenue at KRW645.2bn (-33.2% YoY/+9.1% QoQ) and an operating loss of KRW48.3bn (turn to red YoY/remain in red QoQ). Earnings were hurt by QoQ drops in PX and benzene spreads, and opportunity costs stemming from routine PP/PO plant maintenance.
— Lube Base Oil turned in revenue of KRW265.6bn (-34.1% YoY/-2.1% QoQ) and OP of KRW96.6bn (+87.2% YoY/-6.5% QoQ). OPM remained high, at 36.4%, thanks to low feedstock prices.
More time needed
— We forecast a slight QoQ improvement in 4Q20 on the back of (1) a jump in diesel margin resulting from strong demand for heating fuel this winter, (2) the completion of routine maintenance and (3) jumps in PP/PO spreads triggered by rebounding downstream demand. However, earnings should begin full-fledged growth in 2Q21 given that Europe may implement lockdowns amid the resurging pandemic. We expect avg. complex margin at USD3.00/bbl, which is still below BEP (USD4.00/bbl).
— Should a COVID-19 vaccine be developed in 1H21, transportation fuel margins (i.e., jet fuel and gasoline) may begin to rebound in 2Q21. It will take some time until earnings assume an upward trajectory.