The author is an analyst at NH Securities and Investment. He can be reached at [email protected] — Ed.
Refining margins have recently fallen due to concerns over China’s export quota expansion, but we consider the degree of refining margin adjustment to be excessive. The fact that lubricating base oil prices remain strong (despite a recent drop in oil prices) shows that jet fuel and diesel supply remains tight. Led by its battery business, we believe the company’s medium to long-term earnings direction continues to be tilted upwards.
Remains on the path of improving medium/long-term earnings
We are maintaining a buy rating and our 220,000W TP on SK Innovation.
Refining margins fell in September after a press release about China’s expansion of its oil export quotas. As of October 9, Singapore’s refining margin was US$3.8/bbl. Given a still tight supply situation, we believe this degree of refining margin adjustment and the accompanying equity market reaction is excessive. OPEC+ production cuts and winter-induced demand increases are expected to push oil prices higher this winter. The fact that lube oil and base oil prices increased by around 10% in 3Q22, despite lower oil prices, shows that the supply of kerosene and diesel products remains tight. Regarding SK Innovation’s battery business, although it will likely face a short-term cost load again in 1H23 due to the start of operations of the company’s second plant in the United States, expectations for medium/long-term earnings growth remain intact.
3Q22 preview: Earnings will miss the consensus
We expect SK Innovation to record 3Q22 consolidated sales of 19.5 tn W (-2.1% qq) and OP of 655 billion W (-71.9% qq; OPM of 3.4%), both figures being lower than market projections.
The oil division should record in 3Q22 sales of 12.3 tn W (-12.2% tq) and OP of 326.3 billion W (-85.4% tq; OPM of 2.7%), weighed at both through inventory valuation losses and negative lag effects resulting from the downward trend in oil prices. For reference, Dubai’s oil price and Singapore’s refining margin averaged $96.8/bbl (-10.5% qq) and $7.1/bbl (-66, 9% qq), respectively. The Lube Base Oils Division is expected to post Sales of W1.4tn (+14.2% qq) and OP of W304.6bn (+19.4% qq; OPM of 21.7%). Despite lower oil prices, the export price of lubricant base oil in 3Q22 averaged USD 1,377/tonne, up 10% q/q. After widening in 2Q22 due to strong raw material price increases, the battery division’s operating losses likely narrowed in 3Q22 thanks to both a steady ramp-up at the Georgian society and a slowdown in the growth of electricity costs in Europe.
Looking to 4Q22, despite China’s supply burden, SK Innovation’s OP is expected to improve alongside a seasonal increase in demand and no likely inventory valuation losses in 3Q22 (resulting from oil price increases). However, due to regular scheduled maintenance, we expect sales from the oil and chemical divisions to decline slightly qq.