Oil refiners see steep decline in profits but outlook is optimistic

A customer pumps gas at a station in Seoul. [YONHAP]

After a record half-year, oil refiners saw a steep decline in profits weighed down by falling oil prices and shrinking refining margins. But the outlook for the upcoming months remains somewhat optimistic, as energy demand is expected to stay strong through the winter.

SK Innovation’s net profit fell 65.5 percent on year to 175.1 billion won ($123.1 million) in the third quarter, according to a regulatory filing Thursday.

The figure fell short of the market consensus of 188.1 billion won compiled by FnGuide.

Operating profit was 704 billion won, up 5.3 percent compared to the same period a year earlier, but down 69.8 percent on quarter. Sales rose 82.5 percent on year to 22.8 trillion won.

“Despite the lubricants business logging a record quarterly operating profit and the profit margin increase in the battery business, the decline in oil prices and refining margins — caused by the global recession woes — brought down the total operating profit significantly,” said SK Innovation in a press release Thursday.

Oil refining and petrochemicals sales took 89.9 percent of the total, or 20.5 trillion won, while the battery and raw materials business logged 2.3 trillion won in sales.

In terms of operating profit, oil refining business generated 316.5 billion won, down 1.9 trillion won from the previous quarter. SK On, the battery subsidiary, reported an operating loss of 134.6 billion won.

Kospi-listed S-Oil reported a net loss of 9.6 billion won for the third quarter, compared to a net profit of 334.5 billion won in the same period last year. Its net profit was 1.01 trillion won in the second quarter.

Hyundai Oilbank, 74 percent owned by HD Hyundai, reported a net of 43.6 billion won, down 27.1 percent on year and down 93.5 percent compared to the previous quarter.

Lower oil prices and refining margins, hampered by concerns over the global economy slowdown, pushed down the bottom line.

Dubai crude traded at $96.9 per barrel on average during the July-September period, down 11.2 percent from the previous quarter.

As China pushed up its oil product export quota and central banks around the world sped up monetary tightening, the refining margin has been on a downtrend through the third quarter.

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 refining margin peaked at $29.5 per barrel by the fourth week of June, driven by the war in Ukraine. The figure dropped to zero in the third week of September, and bounced between $2 to $4 through October, according to data compiled by SK Innovation.

The refining margin is forecast to rebound through the remainder of the year due to strong energy demand during the winter season. Yet uncertainty still looms big in the longer term, according to analysts.

“The profit decline in 2023 is inevitable, as the winter season demand increase is likely to be offset by China’s oil product export expansion through the first quarter next year,” said Choi Go-woon, analyst at Korea Investment & Securities.

But Choi added that local oil refiners may benefit from “oil demand boosted by the gas price hike, the European Union’s ban on Russian oil products and the possible restriction on oil export in the United States.”

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