Good morning. This is Kyung-Don Kang , Treasurer of S-Oil. I'd like to extend my gratitude to our investors and analysts in and out of Korea for joining S-Oil's conference call for Q1 2026 earnings results. For today's conference call, we have Joo-Wan Bang , our CFO, and IR Team Leader, Yeri Jung, and team members. First, I will take you through the highlights of Joo-Wan Bang . In Q1, crude oil prices and refining margins remained strong, driven by the Middle East war. Strong refining margins were offset by opportunity losses resulting from scheduled maintenance in March and implementation of domestic fuel price caps. However, rising crude prices increased inventory-related gains, lifting the company's Q1 operating income to KRW 1 trillion 231 billion, up significantly both year-on-year and quarter-on-quarter. Next is the market outlook and the company's response.
Despite heightened uncertainty in global crude oil and refined product supply due to the Middle East war, the company maintains stable crude supply and operations through long-term feedstock sourcing and logistics arrangements with the company's parent company. Next is the progress of Shaheen Project. As of the end of April, Shaheen Project's EPC progress rate is 96.9% and on track. The company is availing company-wide capabilities to achieve the project's mechanical completion by the end of June 2026. Engineering reached 97.3%, procurement 99.9%, and construction 93.6%, with the project entering its final stage. The company is targeting commercial startup earlier next year after commissioning in the second half of this year. In preparation for Shaheen startup, the company is pursuing annual supply contracts to expand its olefin monomer customer base and proceeding as planned with branch pipeline construction for two customers in Ulsan.
For polyethylene, the company has secured long-term extra contracts and is pursuing customer expansion through pre-marketing. Now, IR Team Leader Yeri Jung will get into more details for Q1 performance and market outlook.
Good morning. This is S-Oil IR Team Leader, Yeri Jung. Before we begin, please note that Q1 2026 financial results are provisional and therefore subject to change according to outside independent external auditors' review results. First, please refer to page five for Q1 2026 financial results. In Q1, the company posted sales revenue of KRW 8 trillion 942 billion, up 1.7% quarter-on-quarter, and operating income of KRW 1 trillion 231 billion, up 231% from the previous quarter.
On a monthly basis, the company recorded operating income of KRW 420 billion in January and February combined, supported by healthy refining margins, while operating income reached KRW 812 billion in March, driven by inventory-related gains from rising crude prices and the lag effect of fuel pricing following the Middle East war. If you look at each business segment, operating income from the refining segment rose 455% quarter-on-quarter to KRW 1,039 billion , mainly driven by inventory-related gains of approximately KRW 525 billion from rising crude prices and a KRW 430 billion lagging effect, whereby crude oil price in the listing month is reflected in cost with a one-month timeline.
In particular, in March, when the impact of the Middle East war began to materialize in full scale, the company effectively posted a loss when excluding oil price-related gains despite strong international refining margins due to scheduled maintenance and the domestic fuel price cap. Petrochemical segment turned to a profit quarter-on-quarter, recording operating income of KRW 25.5 billion, supported by inventory-related gains. Operating income from the lube segment declined 18% quarter-on-quarter to KRW 166.6 billion, as product spreads narrowed due to a sharp spike in feedstock costs and a lagging impact of product prices. For reference, the company recorded KRW 643.4 billion in inventory-related gains in Q1. In financial and other gains and losses, the company recorded net interest loss of KRW 56.2 billion and net foreign exchange loss of KRW 201.2 billion due to foreign exchange increase.
Q1 income before tax and net income came in at KRW 991.4 billion and KRW 721 billion, respectively. Moving on to financial status. As of the end of Q1 2026, the company held KRW 1,580 billion in cash, while net debt to equity ratio was 75%. Despite external volatility, the company continues to maintain sufficient liquidity and stable financial structure through competitive and timely financing at low interest rates to support smooth execution of Shaheen Project and proactive working capital management. Q1 EBITDA came in at KRW 1,191 billion. I would like to go through market environment and outlook by each business segment. First is refining business segment on page seven.
As mentioned earlier, operating income from refining segment improved quarter-on-quarter to KRW 1,039 billion, driven by inventory-related gains from rising crude prices and the lag effect of crude price gains. Let me now discuss Dubai Crude prices in Q1. Crude prices stayed around $60 per barrel earlier in the year as it reflected concerns of oversupply triggered by OPEC+ production increase. Prices surged as the late February Middle East war and the closure of the Strait of Hormuz escalated concerns around global oil supply disruption. Accordingly, Dubai Crude oil price rose from an average of $52 per barrel in December last year to $128.50 per barrel in March this year.
Asian refining margins remaining firm in January and February, with kerosene and diesel spreads holding near $20 per barrel following Q4, supported by seasonal demand, continued Ukraine drone attacks on Russian refineries, and sanctions on Russian crude and petroleum products. In particular, following the outbreak of the Middle East war in late February, kerosene and diesel spreads widened to over $100 per barrel in March as crude oil supply disruptions caused Asian refineries to cut their operations and major countries, including China, to restrict exports. As a result, kerosene and diesel spreads averaged around $36 per barrel for the quarter, supporting refining margins. Meanwhile, gasoline spreads declined quarter-on-quarter to $5.5 per barrel as product prices failed to keep pace with rising crude prices during the seasonal off-peak period. Tight market environment is expected to persist into Q2 amid ongoing crude and product supply disruptions.
Although concerns remain over slower oil demand growth due to high product prices, supply disruptions are likely to outweigh demand softness driven by high product prices. Meanwhile, a potential decline in oil prices, depending on the developments in the Middle East war, may lead to inventory-related losses, increasing earnings volatility and downside risks. A more detailed outlook for Q2 will be provided in the key business update section with supporting data. Next is petrochemical business segment. Petrochemical segment returned to profit quarter-on-quarter with operating income of KRW 25.5 billion, supported by inventory related gains. Let me discuss the market environment in Q1. The aromatics market improved overall in January and February.
PX spreads over naphtha exceeded $300 per ton in January on stronger demand from new PTA capacity ramp-ups in China, while benzene spreads over naphtha also improved modestly to above $160 per ton on average in the first two months of the year, driven by higher demand from downstream facilities in China, which showed improved economics. Following the Middle East war, naphtha supply disruptions sadly raised feedstock costs, while limited pass-through to product prices narrowed spreads in March. As a result, Q1 average PX and benzene spreads partially gave back earlier gains in January and February, reaching $253 per ton and $119 per ton, respectively. For olefin downstream products, polypropylene PP, weakened after the Middle East war, as higher feedstock costs were not fully passed through to product prices, pushing PP spreads over polyethylene down to -$25 per ton.
PO spreads over polyethylene also edged down quarter-on-quarter to $156 per ton, but remained relatively firm, supported by improved downstream polyol demand following tax policy changes in China. Let me discuss the outlook for the petrochemical segment in Q2. Elevated uncertainty over feedstock supply for naphtha, polyolefin, and price volatility is expected to persist given the prolonged Middle East war. However, aromatics market environment is expected to be supported by lower supply due to concentrated regional maintenance and the start of the driving season. PP and PO are also seeing reduced operating rates across the region due to feedstock cost pressures, while PO remains relatively resilient in April, supported by improved downstream polyolefin demand. Next is lube business segment. Operating income from the lube segment declined quarter-on-quarter to KRW 156.6 billion in Q1.
LBO market, which has been stable in January and February, became much tighter in Q1 as oil supply disruptions following the Middle East war caused refiners to cut their run rates, reduce supply of the lube base oil in order to maximize diesel output. It also restricted lube base oil exports from the Middle East through the Strait of Hormuz. However, lagging impact of LBO prices pushed spreads down Qo Q to $49.6 per barrel. LBO fundamental is expected to remain firm in Q2, supported by supply disruptions from prolonged Middle East war. LBO spread is showing signs of recovery as LBO prices gradually increase following the rise in feedstock cost with a time lag. Next is key business updates. Let me now discuss the impact of the Middle East war on global oil supply and demand, as well as the company's crude supply situation.
As the Middle East war continues, uncertainty in global oil market is increasing due to disruptions in crude oil and refined product supply. First, OPEC crude production fell by approximately 9 million bpd from 30 million bpd in February 2026 to 21 million bpd in March due to crude export disruptions caused by the Middle East war. In addition to crude oil, disruption in refined product supply was also significant. The closure of the Strait of Hormuz caused shipping disruptions from vessels waiting in the region, while attacks on refining facilities in the Middle East, which represent roughly 10% of global refining capacity, led to reduced operations at some plants. In addition, refinery runs were reduced at some Asian refineries, which account for about 37% of global refinery capacity that treats Middle East crude oil as feedstock.
Refined product supply was further tightened by export restrictions from China, which exported around 700,000 bpd in 2025. Meanwhile, concerns over slowing demand growth are rising amid higher Dubai Crude price outlook driven by supply disruptions. Five major institutions revised down their 2026 global oil demand growth outlook from around 1.09 million bpd as of February 2026 to 300,000 bpd. However, as the reduction in demand growth remains smaller than the decline in OPEC crude production, oil market is expected to stay tight for the time being. Despite heightened uncertainty in oil product supply and demand, S-Oil continues to maintain stable crude supply and operation through its long-term crude sourcing and logistics arrangements. On average, the company secures 10 crude cargoes a month for facility operations.
In March and April, the company sourced an average of approximately 7.5 crude cargoes per month due to scheduled maintenance. For the remaining first half of the year in May and June, the company has already secured an average of 10 cargoes per month to support normal operations. This stable crude supply was made possible in large part by a 20-year crude supply contract with parent company, Saudi Aramco, and a 10-year BOCC transportation contract with its affiliate, Bahri. Going forward, the company plans to continue stable feedstock supply and operations based on its long-term contracts. Last is the progress of Shaheen Project. As of the end of April, the Shaheen Project's EPC progress reached 96.9% and is progressing as planned. Engineering, procurement, and construction reached 97.3%, 99.9%, and 93.6%, respectively, bringing the project into its final stage.
Engineering has effectively been completed based on pre-mechanical completion, with only as-built drawing work remaining in Q2. To provide additional details on EPC progress, major equipment installation of steam cracker facilities, including cracking heater, tower and pipe rack module, has been completed along with the TC2C fired heater and storage tanks. Internal installation works for the polymer automated warehouse as well as plant-wide above ground piping and conduit installation and pre-commissioning activities are also underway. On the marketing side, annual supply contracts for all of the monomers have been secured in preparation for the Shaheen startup, with additional contracts underway to expand the customer base. Branch pipeline construction for key customers in Ulsan is also on track to support supplies via pipelines, and they will also be completed in the first half of the year.
For PE, the company is pursuing quality evaluations and early customer acquisition for pre-marketing, while also securing long-term export contracts. The Shaheen Project schedule remains unchanged, targeting mechanical completion in the first half of 2026, followed by commissioning in the second half and readiness for commercial operation thereafter. We will keep you updated on the progress of Shaheen Project. This concludes our presentation. Thank you.
[Non-English content]
Q&A session will begin. Please press asterisk and one. That is asterisk one, if you have any questions. For cancellation, please press asterisk two. That is asterisk and two on your phone.
[Non-English content]
The first question will be given by Cho Hyun-yeol from Samsung Securities. Please go ahead.
[Non-English content]
Thank you overall. First thing is after the war broke out, can you elaborate us on how it has affected the changes in the crude oil supply and demand? My second question has to do with the strong margin of mature steam compared to diesel. Could you explain what is causing the strong margin of diesel and also the cause of the strong margin of kerosene and the relative weakness of the diesel margin at the same time? My third question has to do with the changes in the refining business environment and on the supply and the demand side after the end of the war. Fourth is about our dividend policy.
While overall the Q1 performance seems to be very good, even though a big part of it is the inventory related gains, since it's a good performance, is there any chance that the company pays interim dividends? If so, how big would that be?
[Non-English content]
To answer your first question on the changes in the crude oil fundamentals after the end of the war. First of all, our CDU capacity is 670 KBPD. For normal operation of our facilities, we store some 10 crude cargoes on a monthly average basis. In March and April, we stored a monthly average of 7.5 crude cargoes, which is a reduction from the average of 10 last year. This is because we had a major T&I in March and April, which comes every three or four years, and this is not because of the war in the Middle East.
[Non-English content]
Starting from April this year, other facilities that have been under the T&I have been completed and they're all starting up one by one in May. We are going to store 10 crude cargoes, which is the same as last year. We also secured the crude oil required for normal operation in June.
[Non-English content]
As for the company's crude oil sourcing, we are reliably sourcing crude through various channels based on very close communication with our majority shareholder. We are sourcing Saudi crude through the Yanbu port in Saudi Arabia. We are utilizing the Fujairah port in U.A.E., the Saudi crude stored in Ulsan, and we're also leasing the government stockpile oil, and we're also making the most out of the Saharan Blend procurement contract that we have signed.
[Non-English content]
This concludes my answer on your first question.
[Non-English content]
To answer your second question on the relatively strong jet fuel margin. Well, compared to the diesel margin, the jet fuel spread has shown a relative strength since the war broke out because of the relative tightness of jet fuel supply.
[Non-English content]
If you look at it from a regional perspective, the Europe jet fuel supply is known to be tighter than other regions. As you know, Europe imports a big volume of diesel and jet fuel from the Middle East, and their dependence on the Middle Eastern jet fuel is higher than that of diesel. After the Hormuz got closed, it caused supply disruptions of fuel products in the Middle East, and that seems to have had a bigger impact on jet fuel supply to Europe compared to diesel supply.
[Non-English content]
The jet fuel supply got even tighter because of China, which is the biggest jet fuel exporter in the region, immediately banned fuel product exports after the war broke out. All these factors added up to give a relative strength to jet fuel spread compared to diesel.
[Non-English content]
All in all, we are expecting the fuel product supply to remain tight for the time being, also there is a big chance of the middle distillate spread to show strength for the time being. However, with regard to the relative strength of jet fuel, we are expecting some volatility in the market.
[Non-English content]
Well, for example, China is showing moves to resume exports of products that have high margin. For example, they permitted the export of 500,000 tons of products in May. On the demand side, the airliners are responding to the high product prices by adjusting their air flights more towards the higher margin air schedules and reducing the lower margin short distance air flights.
[Non-English content]
As I just said, we are seeing changes in how the market players are responding to the high jet fuel spread in terms of both the supply and the demand side. Therefore, we are expecting to see a relatively high level of volatility in the jet fuel market.
[Non-English content]
This is all I have for your second question.
[Non-English content]
[Non-English content]
To answer your question on how the end of the war will affect the changes in the refining market based on supply and demand. As you said, the impact on the oil supply and demand will change depending on how long the war lasts. A lot of the major institutions believe that oil supply will come back to the normal level step by step if the war comes to an end in the not-so-distant future. However, as you know, during the war, there were missile strikes on the oil production and the refining facilities, which caused indirect and direct damages to these facilities, and therefore it will be only towards the end of the year when oil supply recovers to the pre-war level.
[Non-English content]
Speaking on the supply side, the product prices increase because of the disrupted supply will hamper the demand growth. Because of that, the demand growth this year is not forecasted to reach what was forecasted at the beginning of the year based on the outlook. However, IMF did not significantly adjust their forecast on the global economic rate for this year, keeping it at 3.1%. If the war comes to an end and oil price goes down, that will bring demand back to the normal level. The low stockpiling demand during the war period will also be returned to the normal level, and therefore there is a chance that the margin will stay favorable for quite a period of time.
[Non-English content]
Yes, concludes my answer on your third question.
[Non-English content]
To answer your fourth question on the possibility of paying interim dividend, and if so, the amount. As was disclosed to the market in our dividend guidelines, our dividend for this year will be 20% or higher of the company's total net income, and we are also considering paying interim dividends because there will be interim date in the first half of the year. However, that said, we need to take a more conservative approach when it comes to paying the interim dividends because there are still volatilities and uncertainties surrounding the company's business environment. If the oil price goes down, there could be inventory related loss. All these factors have to be taken into account when making a decision on the interim dividends. Still so on an annual basis, we will be paying over 20% or higher of the company's net income.
[Non-English content]
More details of the interim dividends will be determined at the board of directors to be held in the second half of the year. Once the decision is out, we will communicate it with the market through public disclosure.
[Non-English content]
Yes, concludes my answer on your fourth question.
[Non-English content]
The following question is by Yeo Chang-hwan from Hanwha Investment & Securities . Please go ahead.
[Non-English content]
This is Yeo from Hanwha Investment & Securities. I have three questions to ask. First is about a maximum price cap policy. What is the opportunity loss incurred as a result of this policy, and could you give us any updates on the compensation plans? Second question is rather overlapping with the previous questions. What is the size of refining capacity in the Middle East that's been disrupted by the war? What is your outlook on the market supply and demand after the end of the war? Third is, it looks like there is some diversification into crude-sourcing channels. Will this change any production of your refining products in terms of the total production share?
[Non-English content]
To answer your first question on the opportunity loss incurred by the maximum price cap policy and any discussions on the compensation. Well, since this policy of maximum price cap was enforced, we were not able to link the international prices to the domestic sales price. As a result of this, we have been facing sizable loss that otherwise would not have been incurred business as usual.
[Non-English content]
This is how it'll run. The company will ask for the compensation of the loss on a quarterly basis through the certified accounting firm, and the government will establish their compensation plan through the compensation committee.
[Non-English content]
However, there's nothing been determined about the basis that will be used to determine the amount of loss and the methodologies. Also, it will be only when the government makes an official announcement and the notice on the compensation amount that will be reflected in the company's profit and loss based on the accounting principles.
[Non-English content]
To answer third question on the size of refining capacity that's been disrupted and your outlook on the supply and demand after the end of the war. Well, it is true that some of the refining facilities and logistics infrastructure in the Middle East have come under attack during the war in the Middle East. However, we are limited in having a full grasp of the size of capacity that's been disrupted. This is because some of the facilities are still partially up and running after the strike, and others have started up quite quickly after a temporary shutdown. All these combined, it's not easy for us to gather information on the actual impact of the strikes on a real-time basis. Furthermore, there are also strikes of the storage and logistics infrastructure that could also affect the process operation.
According to the FACTS, which is the price forecast intelligence, the refining capacity size in April is 2.7 million bpd, and their forecast for June and August is 2.4 million bpd and 1.6 million bpd. These numbers all reflect the challenges and disruptions we've seen sourcing the feedstock and also the impact of the strikes as a result of the war. Therefore, there is a very big chance of these numbers changing and getting revised depending on how the war plays out.
[Non-English content]
As for the outlook, you've also mentioned that earlier, that will be used as a substitute.
[Non-English content]
To answer your third question on how the diversified crude sourcing channels is changing the production portion of your refining products. Well, first of all, under normal operation situations, we blend various types of crude oil like Arab Light, Arab Medium, and Arabian Super Light, and treat them in our refining facilities to optimize facilities operation.
[Non-English content]
Since the war broke out and the Strait of Hormuz are locked up, the company started lifting crude oil from Yanbu Port, utilizing the East-West Pipeline that connects the eastern and the western part of Saudi Arabia, we've been transporting crude oil via the Red Sea. In which case, the portion of Arab Light goes up, therefore the crude slate gets a little lighter compared to normal times.
[Non-English content]
These changes in the crude slate and the mix could have a partial impact on the CDU operation and also on the production amount of the residue oil that is used as a feedstock to the operating facilities. Therefore, this may require some adjustments in the operating facilities' operational rates. We will take into consideration these crude types that we're feeding in to our facilities and also the demand for each product in the market to flexibly run our facilities in a way that can maximize our profits, our income for the company.
[Non-English content]
That answers your third question.
[Non-English content]
The following question is by Shin Hong-joo from Shinyoung Securities. Please go ahead.
[Non-English content]
This is Shin Hong-joo from Shinyoung Securities, and thank you for giving me the opportunity to pose questions. I have four questions. There are a lot of uncertainties triggered by the war in the Middle East. How is this affecting your company's business, and how are you responding to this? Second is, could you break down the inventory-related impact by business segment? Third is, what is your forecast and outlook of the refining business in Q2 and the second half of the year and the company's operations? My fourth question is, it looks like the petrochemical market is picking up these days. Do you think this will bring forward your Shaheen Project completion schedule? What is your outlook on the project's profitability based on the current market conditions?
[Non-English content]
Well, we had asked a question on how the war in the Middle East is affecting the company's business, and what are the strategies that we are going to respond to them. Well, these geopolitical issues, like the war in the Middle East and the lockdown of the Strait of Hormuz, have created unprecedented level of volatility and uncertainty to our business. As you know, a lot of things have changed on the oil price or the product prices and oil supply and the FX.
[Non-English content]
In response to this very volatile situation, the company instantly launched the enterprise risk management system. Everybody from the top management to officers and employees have availed all resources to respond to the rapidly changing market environment with agility. When prices were at its peak in March and April, we have appropriately responded to the situation through very close communication with various stakeholders, including our parent company, Saudi Aramco, the Korean government and the customers. By doing so, we reliably sourced crude oil and also reliably supplied the fuel products to the domestic market in alignment with the government's policy direction, and also appropriately responded to the needs of our customers at home and abroad.
[Non-English content]
Going forward, based on reliable resourcing, we will do our best to consistently deliver value to various stakeholders, including the shareholders, and also meet their expectations. At the same time, we will also do our best to ensure stable supply of oil to the domestic market and seek maximum income creation for the company based on smooth facilities operation and sales activity.
[Non-English content]
To answer your second question on the inventory related impact and by business segment, as was presented earlier in the slide, our total inventory related gains is KRW 643.4 billion, and by business segment is KRW 524.8 billion for the refining business, KRW 87.1 billion for petrochemical business, and KRW 31.5 billion for Lube Base Oil business.
[Non-English content]
To answer your second question on your outlook of the refining business in Q2 and the second half of the year. Well, we are expecting these disruptions in the supply to remain the refining margin at current also level in Q2 and towards the second half of the year. For example, in Q2, in April and May, based on the Singapore gasoline spread, it is $25 for gasoline, and for diesel, it's about $10.
[Non-English content]
We have already secured the crude required for normal CDU operation in May and June. Unless there are any issues popping up in the market, we think we'll be able to run at the normal level in the second half of the year. For your information, we don't have any major turnaround plans during the rest of the year.
[Non-English content]
To answer your question on the petrochemical market outlook and the Shaheen Project. Well, as you know, the war in the Middle East has a very huge impact on the global petrochemical business and also creating a very huge, high level of uncertainties. As for the Shaheen Project, well, the crude oil and the heavy oil that is produced from our refining facilities are fed into and treated into the QCC facilities to maximize the production of naphtha. The naphtha that we get from QCC and the existing refining facilities are all entirely fed into the steam cracker to get the petrochemical product. The fact that we are able to internally source all the feedstocks, including naphtha for Shaheen Project, gives a high level of reliability to our facilities in terms of feedstock sourcing and operation.
[Non-English content]
As for the schedule, there is no change in the schedule so far. As we mentioned earlier, our target is mechanical completion at the end of June, commissioning in the second half of the year, and commercial operation in early 2027. As for the profitability in the early operations, well, at this moment, it's not easy for us to tell you how big the profitability will be because of the high level of uncertainty we're seeing because of the war in the Middle East. We do believe that the petrochemical spread will gradually widen in the mid to long term, and this will eventually have a very positive impact on the company's performance.
[Non-English content]
Our scheduled time is up, and thank you for your attention to S-Oil's Q1 performance in 2026. As always, we will engage in transparent and fair communication with the market. If you have any further inquiries, please feel free to contact S-Oil's IR team. Thank you very much.