Oil refineries hit by low Q3 crude prices

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Oil refineries hit by low Q3 crude prices


Low crude prices continued to hurt leading Korean oil refiners in the third quarter, earnings reports show, but the companies were able to hold up performance thanks to investments in nonpetroleum businesses including electric-vehicle batteries.

SK Innovation, the holding company of the country’s largest refiner, SK Energy, reported Friday that profit from their petroleum business fell over 600 billion won ($524 million) compared to the previous quarter. Petroleum had accounted for nearly 60 percent of the company’s profit during Q2, but the portion was reduced to 22 percent in the July-September period.

SK Energy posted 91.9 billion won in quarterly profit from 7.025 trillion won in revenue. “Operating profit fell from the previous quarter due to lower refining margins and reduction of gains from inventory,” said Cha Jin-seok, head of the finance division at SK Innovation.

Refining margin refers to the difference between the wholesale price of oil products that a refinery produces and the value of crude oil from which they were refined. While the margin is volatile to various factors including international oil prices and global supply, the margins showed “sluggish trends due to increased [oil product] supply from higher global [factory] utilization rate,” the company said during a call Friday with analysts.

Inventory refers to the oil supply a refinery holds for the two to three months between the import of crude oil and refining. The value of the inventory depreciated in the third quarter based on oil prices in September, which were lower than in June when accounting was done for the second quarter, as well as a stronger Korean won.

S-Oil, another major Korean oil refiner, posted similar third-quarter performance. Its operating profit from refining fell 81 percent from the second quarter to minus-123.4 billion won, marking a loss.

Like SK Energy, S-Oil cited “low refining margin and diminishing inventory gains from the previous quarter” as major reasons for the sluggish performance in oil refining.

The companies are nonetheless projecting an improvement in refining margins following an anticipated drop in global inventory levels and a seasonal pick-up in demand.

“The fourth quarter is usually a favorable season for refiners as oil consumption increases for heating in the winter,” an S-Oil spokesperson said. “We also see little chance of increased utilization of oil-refining facilities [which will help reduce supply].”

In total, holding company SK Innovation posted earnings of 9.7 trillion won and 414.9 billion won operating profit, largely from nonpetroleum businesses. While profit increased 12 percent from last year, it fell by a whopping 62.9 percent quarter on quarter.

As its petroleum businesses are suffering, SK Innovation has announced it will further expand its nonpetroleum ventures by quadrupling the production capacity for electric-vehicle batteries. The plan is to build a second electric-vehicle battery production factory at its Seosan complex in South Chungcheong by 2018.

S-Oil posted 4.14 trillion won in total revenue and 116.2 billion won in operating profit, an increase of 45.1 percent from last year but a slump of 81.9 percent from last quarter. Its operating profit loss in oil refining was offset by gains in its chemical and lubricant businesses.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]
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