[Click eStock] SK Innovation Reports 1Q Operating Loss of 1.8 Trillion KRW... Largest in Company History

Operating Loss of 1.6 Trillion KRW in Petroleum Sector
Direct Hit from Oil Price Plunge and Demand Drop
"Full Effort to Secure Competitiveness in Electric Vehicle Batteries"

[Asia Economy Reporter Minwoo Lee] SK Innovation recorded the largest operating loss in its history in the first quarter of this year. Analysts attribute this to massive inventory valuation losses caused by the sharp drop in international oil prices, as well as a critical decline in demand in the petroleum and chemical sectors due to the COVID-19 pandemic. As a result, the company is expected to focus all efforts on securing competitiveness in the rapidly growing electric vehicle battery market.

SK Innovation announced on the 6th that it posted provisional consolidated results for the first quarter of this year with sales of 11.163 trillion KRW and an operating loss of 1.7752 trillion KRW. Sales decreased by 12.6% compared to the first quarter of last year, and operating profit turned into a loss. This operating loss is the largest in the company's history, exceeding four times the previous worst record of 421.7 billion KRW in 2014. It is more than twice the market forecast of 831.8 billion KRW. Although a favorable exchange rate effect of about 60 billion KRW occurred, benefiting export-oriented sectors, most business divisions suffered inventory valuation losses due to the plunge in oil prices.

By division, the petroleum sector recorded an operating loss of 1.636 trillion KRW, a significant increase from the operating loss of 6 billion KRW in the same period last year. This poor performance was due to negative margins caused by product prices such as jet fuel and gasoline falling below crude oil prices. Dongwook Lee, a researcher at Kiwoom Securities, explained, "Inventory-related losses decreased by 955.4 billion KRW compared to the previous quarter due to the sharp drop in oil prices," adding, "The demand slump caused by COVID-19 also led to a sharp decline in gasoline, diesel, and kerosene cracks."

The chemical sector also turned to an operating loss of 89.8 billion KRW, compared to an operating profit of 320 billion KRW in the same period last year. Lee said, "Despite improvements in olefin and benzene spreads due to adjustments in operating rates of regional competitive facilities, inventory-related losses decreased by 143.7 billion KRW compared to the previous quarter due to the sharp drop in raw material naphtha prices," adding, "PX spreads remained weak due to the operation of new PX facilities in China and other countries." Additionally, the lubricants sector recorded an operating profit of 29 billion KRW, down 38% from the same period last year. The petroleum development and other sectors also saw operating losses more than double to 78 billion KRW.

Kiwoom Securities expects SK Innovation to aggressively expand its electric vehicle battery production capacity. Lee said, "Despite the performance slowdown in the core refining and chemical businesses, the global economic downturn caused by COVID-19, and ongoing lawsuits with competitors, the company plans to aggressively expand battery production capacity," adding, "Last month, the company also announced an investment of 890 billion KRW to build the second-largest electric vehicle battery factory in the United States." The production capacity of this factory is 11.7 gigawatt-hours (GWh) and is scheduled to begin mass production in 2023. Once operational, SK Innovation's battery production capacity is expected to increase to 60 GWh in 2022 and 71 GWh in 2023.

Based on these factors, Kiwoom Securities maintained a 'Buy' rating on SK Innovation and set a target price of 170,000 KRW. The closing price the previous day was 100,000 KRW.

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