Petroleum Industry Turns to Deficit... Credit Rating Downgrade Risk

SK Inno and 3 Others Post 2.85 Trillion KRW Loss
OPEC Production Cut Agreement Only Eased Immediate Crisis
Credit Rating Agencies Reflect Continuous Losses as Downgrade Triggers

[Asia Economy Reporter Minji Lee] Due to concerns over deficits caused by the spread of the novel coronavirus infection (COVID-19) and the sharp drop in oil prices, red flags have been raised on the credit ratings of oil refining companies.

According to financial information provider FnGuide and major securities firms on the 13th, major oil refining companies such as SK Innovation, S-Oil, GS Caltex, and Hyundai Oilbank are expected to turn to deficits in the first quarter. The combined deficit of these four companies is estimated to reach 2.85 trillion won. In particular, SK Innovation is estimated to record an operating loss exceeding 1 trillion won in the first quarter, significantly falling short of the market expectation of 479 billion won. Additionally, S-Oil (-426.8 billion won), Hyundai Oilbank (-478 billion won), and GS Caltex (-700 billion won) are also expected to see significantly lower performance compared to the previous year.

The main reasons for the large-scale deficits are the shrinking refining margins due to the drop in oil prices and the expansion of inventory valuation losses. The refining margin for the first week of April was recorded at -1.4, falling below the break-even point for three consecutive weeks. The refining margin is the value obtained by subtracting crude oil prices and costs from petroleum product prices; when it falls below zero, it means that the product price is cheaper than the raw material cost. Currently, the oil price based on West Texas Intermediate (WTI) has plummeted about 62%, from 61.06 at the beginning of the year to 22.76.

The situation is not expected to improve in the second quarter either. If oil prices remain below $30 per barrel in the second quarter, additional inventory valuation losses are expected to be reflected. Jaesung Yoon, a researcher at Hana Financial Investment, explained, "Considering that the refining margin is worse than in the first quarter, poor performance will continue," adding, "The sluggish market conditions will persist until the impact of movement restrictions completely disappears or oil prices surge."

In the securities industry, although the urgent crisis was averted by the production cut agreement of OPEC+ (a coalition of OPEC and 10 major oil-producing countries), it is expected to be difficult to see a sustained upward trend. This is because the agreed production cuts fall short of the decrease in crude oil demand. Sohyun Kim, a researcher at Daishin Securities, pointed out, "Considering that OPEC+’s production cuts will be implemented from May and that other oil-producing countries such as the United States and Canada are not participating in the cuts, it will be difficult to resolve the oversupply situation," adding, "It is also a concern that, except for Saudi Arabia, other OPEC+ countries had relatively small production cuts during the cut periods from January 2017 to March this year."

Credit rating agencies also plan to reflect continuous deficits in the refining industry as triggers for credit rating downgrades during regular evaluations. Last month, the international credit rating agency S&P downgraded GS Caltex’s rating from BBB+ to BBB and changed S-Oil’s outlook from BBB stable to negative. Mikyung Song, a researcher at NICE Credit Rating, explained, "Considering the deepening demand slump and the possibility of conflicts among oil-producing countries, international oil price volatility is expected to remain high for the time being," adding, "During regular evaluations, credit ratings will be assessed based on each company’s financial burden level, response capacity, and plans to strengthen financial capacity."

However, since oil-related companies are maintaining investment-grade ratings, it is expected that there will be little immediate impact on fundraising through corporate bond issuance. This is because, amid the COVID-19 pandemic, the preference for safe assets has strengthened, leading to issuance and circulation mainly of high-grade bonds in the corporate bond market. Looking at the current long-term credit ratings of companies, SK Innovation (AA+/stable), SK Energy (AA+/stable), GS Caltex (AA+/stable), S-Oil (AA+/stable), and Hyundai Oilbank (AA-/stable) all hold investment-grade ratings of AA- or higher.

This content was produced with the assistance of AI translation services.