For Korea's oil refiners, Q2 was a golden period

A gas station in Seoul [YONHAP]

Oil refiners reported strong profits in the second quarter fueled by rising demand and a supply shortage caused by the war in Ukraine. But refining margins are falling at a steep pace.

The four largest refiners in Korea — SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank — reported strong earnings in the April-June period after racking up record profits in the first quarter. Russia’s invasion of Ukraine cut fuel supplies at the same time that demand rebounded after pandemic restrictions were eased or ended, pushing up prices at pumps worldwide and profit margins for refineries.

SK Innovation reported a whopping 589.8 percent jump on year in net profit to 1.34 trillion won ($1.03 billion) in the second quarter, beating a market expectation of 1.09 trillion won compiled by market tracker FnGuide.

Sales rose 76.9 percent on year to 19.9 trillion won, in line with analyst estimates, a record for a quarterly revenue figure. Operating profit was 2.33 trillion won, up 318.9 percent, exceeding an expectation of 1.6 trillion won.

In a release, SK Innovation cited “global energy supply insecurity, improved refining margin in the post-pandemic era, additional profits made with crude inventories due to recent crude price hikes, and optimization of production facilities” for the strong performance. The company emphasized that an increase in petroleum exports helped its bottom line.

Of the 2.33 trillion won operating profit, 71 percent was earned from overseas exports, and the rest in Korea. The company’s refined petroleum product exports jumped 41.4 percent on year to 65 million barrels in the first half of this year.

The oil refining business contributed 2.23 trillion won of the operating profit in the second quarter, while chemicals, lubricants and oil development businesses earned the rest. The battery business reported an operating loss of 326.6 billion won in the April-June period, said SK Innovation.

Kospi-listed S-oil reported Thursday a 147 percent increase in net profit to 1.01 trillion won in the April-June period, beating a market expectation of 899 billion won. Revenue was 11.44 trillion won, up 70.5 on year, a quarterly record.

Operating profit jumped 201.6 percent year on year to 1.72 trillion won, also a record, with the oil refining business accounting for 1.45 trillion won. Lubricants and petrochemicals accounted for the rest.

Hyundai Oilbank, 74 percent owned by HD Hyundai, reported Friday a net of 818 billion won, up 390 percent on year.

GS Holdings, which owns 100 percent of GS Energy, is set to report its quarterly earnings next month. GS Energy owns 50 percent of refiner GS Caltex, with the rest held by the American company Chevron.

GS Holdings is expected to report a net profit of 386 billion won, up 87.6 percent on year, and revenue of 6.06 trillion won, according to FnGuide.

Driven by high fuel prices and demand, Korea’s exports of refined petroleum products — which include gasoline, diesel, jet fuel and petrochemicals — hit a record of $27.96 billion in the first half of this year, up 97.6 percent compared to the same period last year, according to Korea Petroleum Association. The figure was an all-time-high for a half-year. The previous record was $27.7 billion in the second half of 2012.

Refined petroleum products were the second biggest export product for Korea after semiconductors in the Jan-June period.

Shares in oil refiners, however, are trading lower than a month ago, as investors expect earnings to take a downturn.

SK Innovation traded at 187,500 won on Friday, down 23.8 percent from a recent peak of 246,000 won on June 9. S-Oil plunged from 121,000 won to 91,800 won through the same period, a 24.1 percent fall.

Hyundai Oilbank called off an initial public offering originally scheduled for the latter half of this year, citing rising inflation and an unfavorable market.

Refining margins have been declining significantly, along with crude prices.

The refining margin is the difference between the selling price of a finished product and the costs to produce it except for the refining cost. A margin of $4 to $5 per barrel is considered the break-even point in the industry.

The war in Ukraine elevated the refining margin to a record of $29.50 per barrel by the fourth week of June, but that figure dropped to $3.90 per barrel in the third week of July, according to data compiled by SK Innovation.

Crude prices also began to fall. Dubai crude traded at $105.5 per barrel Thursday, bouncing between the $90 and $100 level through July after hitting $118.9 on June 10.

“Oil refineries have been enjoying a record boom due to inevitable supply disruptions and demand recovery caused by the post-pandemic economic reopening, but the upturn will be gradually adjusted downward in the latter half of this year,” said Jeon Yu-jin, an analyst at Hi Investment & Securities. “And it is unrealistic to expect a better market situation than this in foreseeable future.”

Nevertheless, some analysts say demand will continue to stay relatively strong in the short term despite economic contractions, especially in the fourth quarter, due to supply insecurity.

“The energy crisis isn’t over yet,” said Choi Go-woon, an analyst at Korea Investment & Securities.

“The transition to exiting from carbon[-based energy] and resource nationalism is systemically worsening the imbalance between supply and demand,” said Choi. He stressed that the global oil refining capacity declined last year for the first time in some 30 years.

“We should continue to monitor a possible decline in demand caused by economic slowdowns," he said. "But delayed consumption after [pandemic] reopening, in such areas as jet fuel consumption, will help the oil refining business stay strong even in the worst situation.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]