The rating outlook on two refiners lowered by S&P

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The rating outlook on two refiners lowered by S&P

S&P Global Ratings revised outlooks from stable to negative on two Korean oil refiners, citing a sluggish global economy and weak oil prices.

It changed the outlook on S-Oil to negative on Monday, forecasting a weak performance in 2020 and an uncertain 2021.

“The negative outlook reflects our view that S-Oil will face significant earnings pressure with weakening financial metrics over the next 12 months given the high uncertainty in macroeconomic conditions, weak demand and volatile oil prices,” S&P said in a statement.

Even before the coronavirus outbreak slowed global trade and transportation, the domestic oil industry was suffering from low oil refining margins.

S&P forecast that the low margins, mainly due to weak demand for refining products, are expected to persist over the next six months.

Another negative factor weighing on the company was heavy investments by S-Oil made in 2016 to 2018 on downstream petrochemical facilities, which increased the company’s debt to 6 trillion won ($4.9 billion) in 2018. The coronavirus had limited the company’s debt reduction before the factory started significant earnings from the investment.

S&P maintained S-Oil’s rating on long-term issuer credit at BBB, unchanged, on grounds that the company’s weakness was largely offset due the shareholding of Saudi Aramco, which would likely support the domestic oil refiner. It said S-Oil was a “strategically important subsidiary of Saudi Aramco […] given the group’s commitment to diversify its business portfolio globally.”

The new downstream complex is a part of Aramco’s portfolio diversification as it works to reduce its dependence on the upstream business.

The rating of SK Innovation was revised February to negative from stable.

Despite weakening operating conditions, the S&P forecast that SK Innovation will increase investment this year to strengthen competitiveness in electric vehicle batteries and to upgrade oil-refining facilities.

SK Innovation’s long-term issuer credit rating was maintained at BBB, but its senior unsecured notes were pulled down a notch to BBB-.

Uncertainties will persist in the meantime. The virus has just started spreading to dangerous levels in other countries. Chinese refiners are reportedly starting to increase operations. Saudi Arabia and Russia have failed to reach an agreement to cut production.

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