Hitting Rock Bottom...? Struggling Relay of Four Major Refiners, Will the Second Half Be Different?

Continuous Oil Price Decline for 4 Quarters
SK Inno and GS Caltex in Deficit
Refining Margins Expected to Gradually Improve

The gloomy Q2 earnings announcements of the four major domestic oil refiners concluded with GS Caltex. Two companies returned to losses, and the operating profits of the other two decreased by more than 90% compared to the previous year. Crude oil prices were a major obstacle. As refining margins, which are directly linked to the profitability of refiners, are rebounding, there are expectations that earnings will improve in the second half of the year. Refining margin refers to the profit after deducting costs such as crude oil prices from petroleum products like gasoline and diesel.

GS Caltex announced on the 7th that it recorded an operating loss of 19.2 billion KRW in Q2 this year. This marked a turnaround to a loss compared to Q2 last year (2.1321 trillion KRW). The situation is similar for other refiners that previously announced their results. SK Innovation, the industry leader whose operating profit reached 2.3292 trillion KRW in Q2 last year, posted a loss of 106.8 billion KRW this year. The third-ranked S-Oil and fourth-ranked HD Hyundai Oilbank also recorded operating profits of 36.4 billion KRW and 36.1 billion KRW, respectively, down 97.9% and 97.4% from the previous year.

The main cause was inventory valuation losses related to petroleum products due to the decline in international oil prices. International oil prices fell for four consecutive quarters amid concerns over demand contraction caused by the global economic downturn. HD Hyundai Oilbank explained, “Refining margins fell due to the decline in oil prices and weak petroleum product market conditions,” adding, “The kerosene market also showed weakness due to seasonal off-season and sluggish demand.”

SK Innovation Ulsan Complex panorama
[Photo by SK Innovation]

Outside of refining, the chemical and lubricant businesses made progress, which helped reduce the deficit to some extent. All four companies saw increased operating profits in these two sectors compared to the previous quarter. GS Caltex’s petrochemical and lubricant business profits increased by 195% and 47%, respectively.

There are expectations that the second half of the year will yield better results than the first half. This is because refining margins are rising due to the recent increase in international oil prices. Last week, the Singapore complex refining margin recorded $11.5. The refining margin, which had fallen to the $2 range in April this year, stayed in the $4 range in May and June and has been gradually rebounding since last month. The refining industry considers a refining margin of $4 to $5 as the breakeven point.

SK Innovation stated in its Q2 earnings conference call, “We expect refining margins to gradually improve in the second half due to additional production cuts by OPEC+, a coalition of major non-OPEC oil-producing countries including Russia, continued tight supply, and increased demand centered on jet fuel.”

Financial circles also expect refiners to return to profitability in the second half. Financial information provider FnGuide forecasted that SK Innovation will turn profitable in Q3 with 642.2 billion KRW and achieve an operating profit of 748.9 billion KRW in Q4, while S-Oil is expected to record operating profits in the 400 billion KRW range. Hwang Seong-hyun, a researcher at Eugene Investment & Securities, said, “The poor Q2 results of domestic refiners are expected to turn profitable as international oil prices, refining margins, and operating rates rise together.”

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