Oil Prices Rise Again but Q2 Earnings Falter... Refiners Aim for Second Half Rebound

Operating Profit Drops 20-30% from Previous Quarter

Lubricants Prove to Be a "Bright Spot" Amid Weak Core Business

Global Supply Shortage Signals Optimistic Full-Year Outlook

Although international oil prices are on the rise again due to heightened tensions in the Strait of Hormuz, the domestic refining industry's operating profit for the second quarter is expected to decline compared to the previous quarter. This is because government regulations and lagging effects are inevitably dampening the short-term performance of the refining sector. However, securities analysts predict that an earnings rebound in the second half is likely, citing an unprecedented structural shortage of global refining capacity.

According to FnGuide on July 15, SK Innovation's consolidated operating profit consensus for the second quarter of this year is projected to be 1.4123 trillion won, down 34.7% from the previous quarter. During the same period, S-Oil is also expected to record a 24.1% decrease to 933.9 billion won. Despite this temporary decline in the second quarter, the annual operating profit for this year is estimated at 5.095 trillion won for SK Innovation, up 1,035.5% from last year, and at 3.5778 trillion won for S-Oil, up 1,418.4% year-on-year.

The decrease in operating profit for refiners in the second quarter compared to the previous quarter is due to a decline in profitability in their core refining businesses, caused by the government's price ceiling policy and export restrictions. The negative impact of being unable to adequately raise domestic sales prices even during a period of rising oil prices has been fully reflected in the results. There are also concerns that if the government enforces a strict cost-based calculation method for the price ceiling moving forward, the scale of losses could increase even further.

However, the lubricants business, which is a non-refining sector, is expected to act as a buffer to offset the decline in revenue. Geopolitical conflicts have disrupted the global supply chain for premium base oil (Group III), pushing export prices sharply higher. The securities industry estimates that both SK Innovation, which owns SK Enmove, the world's top supplier, and S-Oil are expected to have recorded operating profits in the 400 to 500 billion won range in their lubricants segments for the second quarter, significantly offsetting the reduction in refining earnings. Given the oligopolistic nature of the premium base oil market, the boom due to supply shortages is expected to continue at least through next year.

In particular, for S-Oil, as Saudi Aramco, its largest shareholder, recently made a significant cut to the Asian Official Selling Price (OSP), the company has now entered a period of direct cost savings. In addition, the capital expenditure for the large-scale petrochemical project (Shaheen Project) that has been ongoing for several years is now entering its final stages, greatly reducing financial burdens. It is also noted that these improvements in cost structure and reduced investment strain could increase the company's capacity for shareholder returns, such as securing resources for dividends.

Lee Chung-jae, analyst at Korea Investment & Securities, stated, "It is unprecedented that 10–15% of the world’s refining facilities are facing operational issues," and added, "No one knows when the global refining supply and demand situation will be resolved, and the same goes for the Group III base oil supply disruptions."

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