Major oil refiners post stronger-than-expected Q1 profit of combined $3.3B

Four major Korean oil refiners posted stronger-than-expected operating profits to combine for more than 5 trillion won ($3.3 billion) in the first quarter of this year as crude prices soared due to the Iran war.

While companies outperformed the January-March period last year by more than threefold, however, the industry is bracing for the delayed effect on pricing of the Iran war.

SK Innovation earned 24.21 trillion won in revenue and 2.16 trillion won in operating profit in the first quarter, according to the company's disclosure on Wednesday. That figure marked an increase of 1.87 trillion won from the previous quarter, driven by the strong performance of its refining subsidiary, SK Energy.

SK Energy, which is not a publicly listed company, reported 1.28 trillion won in operating profit in the first three months of the year, up 354 percent from the previous quarter.

The earnings boom was mirrored across the rest of the oil refining industry.

GS Caltex posted a quarterly operating profit of 1.64 trillion won, up 151 percent from the prior quarter.

HD Hyundai Oilbank made 933.5 billion won in operating profit between January and March, a 90 percent increase over a single quarter.

S-Oil posted 1.23 trillion won in operating profit from January to March this year, a 231 percent jump from the previous quarter.

Together, the four refiners — SK Energy, GS Caltex, HD Hyundai Oilbank and S-Oil — generated a combined operating profit of 5.09 trillion won in the first quarter of this year.

Despite the massive profits, the refining industry is hardly celebrating.

Much of the profit was driven by the so-called lagging effect, as refiners benefited from cheaper crude bought earlier and higher inventory valuations following a spike in oil prices.

SK Energy attributed about 780 billion won of its first quarter operating profit to inventory gains, representing nearly 60 percent of the total. S-Oil also said 643.4 billion won in its quarterly operating profits came from inventory gains.

Refiners have little choice but to keep buying crude at rising prices to keep their plants running.

That leaves the industry vulnerable if oil prices decrease after the conflict — a scenario known as “reverse lagging.”

In such situations, refiners are forced to absorb steep losses in the value of crude bought earlier at elevated prices, leading to an earnings downturn.

“The profits from the lagging effect and inventory gains are temporary accounting anomalies, and could shrink or disappear altogether if oil prices decline,” an SK Innovation representative said.

Another major uncertainty is how much compensation refiners will ultimately receive for losses tied to the government’s fuel price cap policy.

The price cap system, which took effect on March 13, is expected to begin weighing more heavily on second quarter earnings.

While industry sources expect refiners to start receiving compensation for losses caused by government price controls from the third quarter, the timeline for ending the policy and the details of compensation remain unclear.

“The biggest variable is the scale and timing of compensation related to the price cap system,” said Lee Jin-ho, an analyst at Mirae Asset Securities. “That could significantly swing refiners’ performance in either direction during the second half of the year.”

Korea’s petrochemical companies, which also benefited from the war-driven spike in energy prices, are seeing a recovery in their earnings.

Lotte Chemical swung into the black in the first quarter of this year with operating income of 73.5 billion won after posting a 433.5 billion won loss in the previous three-month period, marking its first quarterly profit in 10 quarters.

After reporting an operating loss of 413 billion won in the fourth quarter of last year, losses in the first quarter of this year amounted to 49.7 billion won.

Hanwha Solutions’ chemical division returned to the black with an operating profit of 34.1 billion won in this year’s first quarter after recording a 102.1 billion won loss the previous quarter.

The petrochemical industry’s improved performance is also driven by a lagging effect and a subsequent increase in inventory valuations as the war disrupted naphtha supplies.

Industry watchers say earnings could improve further in the second quarter if instability in the Middle East continues. But concerns are growing over a possible reverse lagging effect later this year.

“If tensions in the Middle East ease, falling naphtha prices would inevitably hurt the industry,” a source at a petrochemical company said. “There are also concerns about oversupply if Chinese products pour into the market.”

Brokerages have increasingly issued neutral ratings on petrochemical companies.

Positive lagging and inventory effects could continue into the second quarter, but there is little indication of momentum continuing beyond the second quarter,” said Cho Hyun-ryul, an analyst at Samsung Securities.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.

BY NAM YOON-SEO [[email protected]]