SK Inno Turns to Q2 Loss Amid Refining Margin Decline and Battery Market Downturn

Q2 Sales 18.7 Trillion, Operating Loss 45.8 Billion
Weakened Refining Margin... Impact of Battery Business Operating Rate Decline

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SK Innovation recorded a loss in the second quarter of this year due to a decline in refining margins and a downturn in the battery market.

SK Innovation announced on the 1st that it posted a provisional operating loss of 45.8 billion KRW on a consolidated basis for the second quarter. Compared to the same period last year, the operating loss improved by 57.1%, but it decreased by 670.5 billion KRW compared to the previous quarter, turning into a loss. During the same period, sales amounted to 18.7991 trillion KRW, a 0.4% increase year-on-year but a 0.3% decrease quarter-on-quarter. The net loss was recorded at 63.97 billion KRW.

SK Innovation explained, "Despite solid production performance in oil development business blocks, the second quarter operating profit decreased quarter-on-quarter due to weak refining margins in the oil business and fixed cost burdens from lower battery business operating rates." It added, "In the second half, refining margins are expected to recover, and the battery business is also anticipated to improve performance due to increased forward demand from the expansion of new electric vehicle line-ups."

By business segment, the decline in refining margins in the oil business was prominent. The oil business recorded an operating profit of 144.2 billion KRW, down 446.9 billion KRW quarter-on-quarter, as refining margins fell due to unfavorable macroeconomic conditions such as prolonged high interest rates and delayed economic recovery in China. The chemical business achieved an operating profit of 99.4 billion KRW, down 25.1 billion KRW quarter-on-quarter, as sales volume decreased due to scheduled maintenance during the second quarter despite slight increases in spreads of key products like paraxylene (PX) and benzene.

The lubricants business posted an operating profit of 152.4 billion KRW, down 68 billion KRW quarter-on-quarter, affected by weak demand in China. The oil development business achieved an operating profit of 142.1 billion KRW, down 12.3 billion KRW quarter-on-quarter, despite a slight increase in sales volume, due to a decline in composite sales prices and increased cost of sales.

The battery business recorded an operating loss of 460.1 billion KRW due to decreased plant operating rates and initial cost increases from the start-up of a new plant in Hungary, despite an increase in Advanced Manufacturing Production Credit (AMPC) from sales recovery in the U.S. Sales amounted to 1.5535 trillion KRW, down 130.1 billion KRW quarter-on-quarter. The materials business posted an operating loss of 70.1 billion KRW due to inventory-related profit and loss reflections despite increased sales volume to major customers.

Key to Second Half: Recovery of Refining Margins and Forward Demand in Battery Business

In the second half, the oil business market conditions are expected to support the lower bound of crude oil prices due to continued OPEC+ production cuts and seasonal demand increases from travel and cooling, with refining margins showing signs of recovery. The chemical business is expected to maintain stable paraxylene (PX) spreads due to increased polyester demand for winter clothing, and benzene spreads are anticipated to be higher than last year's average levels, supported by strong demand in the U.S.

The lubricants business is expected to improve profitability as demand for base oils and lubricants increases with macroeconomic recovery following interest rate cuts. The oil development business plans to participate in bids for acquiring promising new blocks in Southeast Asia in the second half and will continue efforts to enhance the value of existing blocks in Malaysia and Vietnam.

The battery business anticipates increased forward demand in the second half due to expanded new electric vehicle line-ups amid expectations of demand recovery driven by stabilized metal prices. Profitability is also expected to improve thanks to ongoing company-wide cost reduction efforts such as production line efficiency enhancements. The materials business expects increased sales volume with the start of shipments to new customers in North America.

Expected Synergies from SK Inno-SK E&S Merger

SK Innovation and SK E&S each held board meetings on the 17th of last month and approved the merger agenda between the two companies. If the merger plan is approved at the extraordinary general meeting of shareholders scheduled for the 27th, the merged entity will officially launch on November 1. The companies plan to achieve additional profitability of approximately 2.2 trillion KRW in EBITDA by 2030 through synergies from the merger. This includes over 500 billion KRW from existing oil/gas businesses and more than 1.7 trillion KRW from electrification businesses.

Specifically, in existing businesses, combining exploration, development, trading capabilities, and infrastructure is expected to increase profitability and reduce costs, generating 100 billion KRW. Combining SK Innovation's LNG demand with SK E&S's purchasing competitiveness is expected to yield 400 billion KRW in profits. Regarding electrification businesses, SK E&S's power solutions and distributed generation technologies combined with SK Innovation's immersion cooling and batteries will provide energy solutions to data centers and other sectors, creating an additional 1.7 trillion KRW in revenue.

Through this, SK Innovation aims to achieve total EBITDA exceeding 20 trillion KRW by 2030 based on synergies from the merger with SK E&S. This includes 2.8 trillion KRW from LNG and power business expansion and growth in new businesses such as renewable energy and hydrogen, 4 trillion KRW from maintaining profitability in existing oil/chemical businesses, 10.3 trillion KRW from electric vehicle battery business growth, over 500 billion KRW from oil and gas business synergies, and more than 1.7 trillion KRW from electrification business synergies.

Jinwon Kim, Chief Financial Officer of SK Innovation, stated, "Through the merger, we aim to strengthen our financial structure and prepare the capacity to respond to the full-scale growth of the upcoming electric vehicle market." He added, "We will do our best to successfully complete this essential merger to resolve immediate challenges and improve shareholder value in the future, and to maximize the expected benefits of the merger."

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