Morning. This is Katie Bang, Treasurer of S-Oil. I would like to extend my gratitude to our investors and analysts in and out of Korea for joining S-Oil's conference call for Q4 2025 earnings result. For today's conference call, we have CFO JW Bang, IR Team Leader YR Jang, and team members. First, I will take you through the highlights of Q4 results. In Q4, the company's operating income significantly improved from the previous quarter and year-on-year, recording KRW 424.5 billion. Operating income of refining and lube businesses surged thanks to strong product spreads. Petrochemical business also witnessed reduced loss, supported by continued recovery in PX spread. Next is market outlook. In 2026, we are expecting favorable market condition driven by global demand growth that outpaces net refining and the PX capacity expansion.
Refining margin is projected to remain stable thanks to less cost burden resulting from lower oil prices and OSP. Next is the progress of the Shaheen Project. EPC progress of Shaheen Project is 93.1% as of January 14th. We are making progress as planned ahead of a mechanical completion in the first half of this year. We are at the final stage of engineering and procurement, progressing at 97% and 99%, respectively. Construction is 86% complete. Our goal is to start commercial operation early next year after going through commissioning in second half this year. We are also working on annual term supply contract with olefin monomer customers based on the upcoming startup of Shaheen Project. Pipeline connection to key customers in Ulsan is ongoing as well.
For PE, pre-marketing activities are underway to expand our PE customer base. We are in discussion to make term export agreement. We'll leverage all our capabilities to ensure the successful delivery of the project and live up to the expectations of investors. Now, Team Leader YR Jang will get into more details for Q4 performance with the following slides.
Good morning. This is S-Oil IR Team Leader, YR Jang. Before we begin, please be noted that Q4 2025 financial results are provisional and therefore subject to change according to outside independent external auditors' audit results. First, please refer to page five for Q4 2025 financial results. The company's Q4 sales revenue recorded KRW 8.7926 trillion, up 4.5% from the previous quarter. Operating income jumped by 85% quarter-on-quarter to KRW 424.5 billion.
If you look at each business segment, operating income of refining business surged from the previous quarter, recording KRW 225.3 billion, backed by strong spread of major products. Petrochemical business witnessed its operating income narrowed to KRW -7.8 billion as PX spread continued to recover. Operating income of lube business also went up by 55% from the previous quarter, recording KRW 209 billion, driven by widened product spread. For your reference, inventory-related impact reflected to Q4 operating income is KRW -87.4 billion. In finance and other income, we had KRW -56.9 billion of net interest gain and KRW 73.5 billion of net FX gain due to increased FX rate. Q4 income before tax and net income recorded KRW 317.9 billion and KRW 265 billion, respectively. On an annual basis, the company's 2025 operating income inched down year-on-year, recording KRW 288.2 billion.
We swung sharply back into black, posting KRW 225.8 billion and KRW 216.9 billion in income before tax and net income, respectively. Moving on to financial status. The company's cash balance as of 2025-end is KRW 1.843 trillion, and net debt -to -equity ratio is 67.9%. Despite volatilities in the external environment, the company has maintained enough liquidity and stable financial structure by financing at competitive interest rate right on time, and managing working capital proactively to ensure smooth execution of Shaheen Project. Cumulative EBITDA on a whole year basis stood at KRW 979 billion. I'll go through market environment and outlook by each business segment. First is refining business. Dubai crude price declined during Q4 due to concerns over added supply, resulting from OPEC+ output increase, falling from an average of $70 in September to $62 in December.
In Q4, operational glitches of global facilities tightened the supply in the Asian refining market. Nigeria's new facility, Dangote Refinery, El Segundo Refinery in California, and Al- Zour Refinery in Kuwait all experienced operational disruption. Ukraine's drone attack disrupted the operation of Russia's refining facilities, and shutdown of Phillips 66 Refinery in California affected market fundamentals as well. In addition, sanctions on Russia imposed by the U.S. and EU added worries over product supply interruption at a time when demand for diesel and kerosene remained healthy because of the high heating season in the Northern Hemisphere. As a result, spread of diesel and kerosene rose sharply to $25 per barrel on average, driving refining margin improvements. Despite downward adjustment in the end of the quarter, following ceasefire negotiations between Russia and Ukraine, diesel and kerosene spread is still maintained at a healthy level of roughly $20 per barrel.
In Q1 2026, we're expecting limited supply to continue due to continuous operational disruption of the Dangote Refinery and Russian refineries, as well as scheduled closure of a Valero Refinery in California, amid firm demand of products including diesel and kerosene. As we enter into regular T&I season in the region from late March, demand for inventory build-up may provide additional support to refining margin. I will share more details on 2026 annual outlook and key business update with the specific data. Petrochemical business segment. Operating income of a petrochemical business narrowed in Q4 from the previous quarter, recording KRW -7.8 billion as a result of upward trending PX spread over Naphtha and PO spread over propylene.
Q4 market conditions, the PX market continued its bullish run backed by startup of a new PTA facilities in China that drove up PX demand and robust downstream polyester demand. As a result, PX Naphtha spread recorded $266 per ton in Q4. Even though Q4 is off-season, strong demand is keeping PX spread high at above $300 since mid-December. By contrast, benzene market continued bearish sentiment as imposition of a tariff lowered U.S. import demand, and benzene downstream facilities, including styrene monomer, operated at a low level. In Q4, benzene Naphtha spread stood at $103 per ton. As for olefin downstream, PP spread over propylene recorded $30 per ton, down from the previous quarter as supply increased after the completion of regular T&I.
[Olefin downstream] spread went up from the previous quarter to $176 per ton due to disrupted supply of major PO manufacturers in China and seasonal demand supported by Black Friday and Christmas. Next is Q1 2026 outlook of a petrochemical business segment. We project PX market to stay bullish based on expectations for tight market fundamentals and regular T&I of PX production facilities in the region that will reduce the supply. We will further explain tight supply-demand balance outlook in key business update with the specific data. As for benzene, PP, and PO, we are forecasting supply to increase continuously for all products due to new facilities starting up mainly in China. Spring T&I in the region is expected to partially offset supply increase of benzene. At the same time, demand for PP and PO is anticipated to improve gradually as uncertainties around global trading environments start to ease.
Next is the lube business segment. Operating income of lube business in Q4 went up from the previous quarter to KRW 207 billion. Despite the seasonal demand slowdown, LBO spread rose quarter-on-quarter due to lagging effect driven by lower the feedstock cost, recording $55.2 per barrel. Q1 this year, inventory build-up ahead of spring lubricant changing season is projected to support market sentiment, offsetting added supply caused by regional capacity expansion. Though we are expecting highly volatile LBO spread affected by price fluctuation of feedstock, including crude, we will make utmost effort to maximize our income by responding swiftly to changing market conditions. Next is key business updates. First is outlook on the business environment. We project bullish market sentiment as global demand growth for oil and PX will outpace net addition from capacity expansion.
Starting from the left bar graph, global oil demand is expected to grow by 1 million b/d, exceeding net addition of 790,000 b/d, generated both from capacity expansion and closure of refining facilities. This tight market fundamentals will go beyond 2026, and supply will fail to catch up with the demand, which is expected to support a favorable business environment for refining business. Moving on to the bar graph at the center. PX demand growth outlook in 2026 stands at 3.75 million tons. In contrast, net PX capacity expansion will be limited to 1 million ton. Moreover, market expectations on tight supply-demand balance of PX are running high for this year, as market intelligence suggests added capacity will start up at the end of this year. We also expect lower oil price and OSP for Saudi Arab crude to ease cost burden on the company.
The graph on the right shows OSP trend for Saudi Arab Light crude. OSP for crude that will trade in Q1 2026 stands below past five-year average, which means it will likely have a positive impact on the company's refining margin. Last is the progress of Shaheen Project. EPC progress rate as of January 14th is 93.1%, going smoothly as planned. Engineering and procurement progress rate is nearing completion at 97% and 99%, respectively. Based on pre-mechanical completion, engineering is complete and all that remains is as-built drawing work scheduled in Q2. As for the progress of EPC in further detail, we completed the mechanical installation of steam cracking furnace, installation of TC2C high pressure heat exchanger, and construction of a polymer automated warehouse. We are also working on installation of storage tank, above ground pipeline and conduit.
As for marketing activities, we are discussing annual term contracts with major customers considering Shaheen Project start up. Currently, we are building branch pipeline to support sales to our key customers in Ulsan and targeting completion in the first half of this year. Speaking of PE, we are carrying out quality evaluation and supply to customers through pre-marketing. We are also securing more customers and discussing term export contracts. There is no change in project schedule. We are targeting first half of 2026 for mechanical completion and second half for start-up to be ready for commercial operation. We will keep you updated on the progress of Shaheen Project. This concludes my presentation. Thank you.
[Non-English content]
Q&A session will begin. Please press asterisk one, asterisk and 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 Lee Jin-myung from Shinhan Investment & Securities. Please go ahead.
[Non-English content]
Good morning. This is Lee Jin-myung from Shinhan Investment & Securities. Thank you for the opportunity to pose questions. I have two questions. First is on the global supply interruptions or disruptions in the first quarter of this year. How big will that be in this quarter? Second question has to do with the global expansion schedule for 2026 and 2027. I would like you to break it down into the expansions and the shutdowns.
[Non-English content]
To answer your first question on the global supply disruptions, as I said during my statement, in Q4, there were several factors that caused the supply disruptions. The Dangote Refinery in Nigeria had a shutdown. The U.S. West Coast also had a permanent shutdown. There were also the drone attacks by Ukraine against Russian refineries.
[Non-English content]
Starting with the shutdown in the U.S. West Coast, the 160 mb/d Phillips 66 Refinery based in Los Angeles started the phase shutdown from October last year. We understand that they had a full and complete shutdown at the end of December. For the 150 mb/d Valero Refinery, which was announced to shut down this year, it is planned to have a phase shutdown from February this year, and their plan is to have most of it shut down by April this year.
[Non-English content]
As for the El Segundo Refinery in the United States and Al-Zour Refinery in Kuwait, both of which had supply disruptions, operational glitches in Q4 last year are known to have started up again at the end of last year and the beginning of this year. For the Dangote Refinery in Nigeria, which had operational glitches throughout 2025, is in the middle of T&I of its RFCC in January this year.
[Non-English content]
As for the Russian refineries, Ukraine continued their intensive drone attacks on their refining facilities in Russia from the second half of last year. Based on the CDU capacity, about 500,000 b/d in November last year and about 300,000 b/d in December last year were affected because of the operational glitches. Not only the refining facilities, but the offshore oil field facilities in Russia and the export port terminals are also targeted by the drone attacks, which is also resulting in operational glitches as well.
[Non-English content]
As for the global T&I, it is going to enter into the T&I season in spring and will gradually pick up to reach 7.8 million b/d in April this year.
[Non-English content]
This concludes my answer.
[Non-English content]
As for the global expansion schedule in 2026 and 2027, for this year, the net increase of the refining capacities is 790 mb/d. If I break it down, the capacity expansion is 1.5 million b/d and the shutdown is 800 mb/d. Most of these new capacity expansions are clustered in the second half of the year.
[Non-English content]
As for the new expansions, we understand that most of it will take place in India, there is a tendency in India for these capacity expansions to be delayed to some extent. Some of it will be delayed to the end of the year or even next year.
[Non-English content]
As for 2027, the net increase is only 50 mb/d. If I break it down into the expansion and the shutdown, the expansion is 140 mb/d and the shutdown 90 mb/d. For 2028, the capacity expansions and the shutdown will almost balance out each other, which means there will be no net increase on expansion, 300 mb/d and shutdown 300 mb/d as well.
[Non-English content]
As a result, we're expecting the demand increase to outpace the supply increase, which will create a favorable market fundamentals to the company in the longer term.
[Non-English content]
That's just the end of my answer. Thank you.
[Non-English content]
The following question is by Lee Yong-wook from Hanwha Investment & Securities. Please go ahead.
[Non-English content]
Good morning, this is Lee Yong-wook from Hanwha Investment Securities. Thank you for the opportunity to pose questions. I have three questions. First is, we're seeing the OSP in a downward trend. Could you tell us what is causing this downward trend, and how do you see its outlook? Second is, what is S-Oil's T&I plan and schedule for 2026? Third is, could you update us on the Shaheen Project schedule?
[Non-English content]
To answer your first question on why OSP is coming down, it has been coming down since November last year based on Arab Light. The December lifting OSP was $1 per barrel, January lifting $0.60 per barrel, and February lifting $0.30 per barrel.
[Non-English content]
This downward trend of the OSP is working in favor of the company in terms of the cost structure. This lower and bearish OSP will be reflected in the company's Q1 performance in a meaningful way. We attribute the latest downward trend of OSP to a number of factors. The ceasefire talks between Russia and Ukraine is raising the possibility of end of the war, and the global market has ample supply of crude at the moment.
[Non-English content]
Considering these various market indicators, there's also a possibility of the OSP falling below zero. However, there are a number of factors that could escalate the volatility of OSP, such as the tariff issues stemming from the United States and other geopolitical issues. Therefore, we plan to constantly monitor the OSP trend going forward.
[Non-English content]
To answer your second question on the company's T&I plans for 2026, we are going to have a turnaround for the No. 2 CDU, No. 1 PX, No. 2 RFCC, PO and PP plant starting from March this year, and it will last for one month or two.
[Non-English content]
The details of schedules are subject to change depending on the circumstances in an attempt to stockpile the inventory and optimize the process operations in a way that maximizes the company-wide margin. By doing so, we plan to keep the opportunity cost to minimum and maximize profitability.
[Non-English content]
This answers your question. Thank you.
[Non-English content]
To update you on the Shaheen Project and schedule, as we stated earlier, we have the MC target, mechanical completion target in the first half of the year. In the second half of the year, we are going to do the commissioning and commercial operation at the beginning of, other than that, I would like to elaborate more on our investment balance and our marketing plan as well.
[Non-English content]
The total investment for Shaheen Project is KRW 9.258 trillion, until the end of last year, we executed KRW 7.6 trillion. The balance for this year is KRW 1.64 trillion.
[Non-English content]
On the marketing plan for Shaheen Project, after the commercial operation, we've actually signed a number of MOUs with our customers in Ulsan Industrial Complex to sell our products. The MOUs were all signed after this FID of our project. We are also discussing with our customers to sign the annual supply contract with them, starting from the second half of this year.
[Non-English content]
As for the pipeline connection with our customers, we've also constructed the pipelines that will connect Onsan and Ulsan. For the branch pipelines that will take all our products to our customers in Ulsan area, we plan to complete them in the first half of this year.
[Non-English content]
As for the pre-marketing of the company's polyethylene, we have purchased the products that have the equal specification that we will be getting from our new PE plants. We purchased them, we supply them to our customers in Ulsan, the quality test is underway. Also, there are discussions with our customers overseas to sign term export contract as well.
[Non-English content]
This answers your question.
[Non-English content]
The following question is by Cho Hyun-ryul from Samsung Securities. Please go ahead.
[Non-English content]
I am Cho Hyun-ryul from Samsung Securities. I have four questions. First is, since Q4 last year, the kerosene and diesel margin is quite strong. What is the background behind this and what is your outlook? Second question is, how do you think the latest geopolitical events, such as the ones in Venezuela and Iran, will have on the company's business? Third is, what is behind the strong PX market these days, and what is your outlook? Fourth is, the company's 2026 performance is likely to be better than the last year. Do you think this will have an opportunity to expand the company's dividends?
[Non-English content]
To answer your first question. Since Q4 last year, the diesel and kerosene spread was very bullish. First of all, the high season for heating fuel in the northern hemisphere and the winter season boosted the demand for kerosene. Also there was some strong jet fuel demand during the year-end and year beginning holiday season. The permanent shutdown of Phillips 66 refinery in Los Angeles caused more export volume towards the United States, which all added up to keep the spread strong.
[Non-English content]
The market was further tightened by tightened sanctions against Russian crude oil and products by the EU and the United States, and the continuous drone attacks by Ukraine, which dropped the volume out of Russia.
[Non-English content]
As for the latest market conditions, some of the facilities that had operational glitches are back on track now. As a result of that, the spreads are slightly narrower compared to Q4. However, the spread is still maintaining a solid trend.
[Non-English content]
Going forward, how the ceasefire talks between Russia and Ukraine play out could create some volatility in the market. However, we're expecting the market conditions to be supported by a number of factors. The demand for heating fuel will continue towards the end of this quarter. The end of the year and beginning of the year is creating solid demand, and there is also sanctions against Russia and the drone attacks against Russia, which is impacting supply.
[Non-English content]
This is the end of my answer.
[Non-English content]
To answer a second question on how the geopolitical situations in Venezuela and Iran, the cold conflicts had an upward pressure on oil price in the short term, but they don't last for a long time because if we combine all the market views, when there is a geopolitical confrontation, they do affect the oil price in the short term. However, in the longer term, they have little impact. This is because there is a trend towards higher supply of oil in the global market, and therefore we believe in the longer term, oil price will come down.
[Non-English content]
To speak on the refining margin, it is known that the small refineries in China are importing crude from Venezuela and Iran. If more Venezuelan crude oil flows into the U.S. in lieu of China and Iran's crude exports go down, this means there will be some disruptions and interruptions in supplying cheap crude oil to these marginal players in China. This will lower their operation rate and will hopefully have a positive impact on the refining margin in Asia.
[Non-English content]
Although the timing and the likelihood remain uncertain, if more heavy and sour crude oil is produced from Venezuela, that will create intensified competition between the oil from Venezuela and the heaviest oil from the Middle East, which could lower the OSP on top of more crude oil into the market. This will hopefully ease the cost burden on the company.
[Non-English content]
To answer your third question on the sustainability of the PX market conditions and its outlook, the spread has been over $300, thanks to the strong demand from the downstream side. For this year, the regional PX capacity expansions are limited, whereas the polyester demand, which is the downstream in China, will show a strong growth of 45%, which will support the market, and we're expecting this situation to continue.
[Non-English content]
If I break it down into quarter -by -quarter, in Q1, the supply will be limited because of the intense T&I of the PX facilities in the region. In Q2 and Q3, there will be higher demand for gasoline blending because of the driving season in the United States, which will support the PX market.
[Non-English content]
If I look at the market in the longer term, the less competitive PTA and polyester players will shut down, which will partially ease the oversupply and subsequently improve the margin of the bigger players. In line with the gradually growing demand for polyester, the bigger players will have to additionally improve their operational rate, which will support the PX demand and the market conditions. In the mid to long term, we are expecting the market conditions to be favorable.
[Non-English content]
This is CFO, JW Bang. To answer your question on our dividends, we have our dividend policy whereby we want to maximize the shareholder value in the longer term. When we do so, we look into a number of factors on a combined basis. They are our business performance, the company's financial structure, and securing the available resources for the company's sustainable growth and the shareholder return. In February 2025, we disclosed the company's dividend guideline of keeping the company's dividend payout ratio for fiscal year 2025 and 2026 at 20% or above of the annual net income. This is to protect the shareholder value, even though we are investing in the mega Shaheen Project.
[Non-English content]
As for the 2025 year-end dividends, we will fully comply with the dividend guidelines, and the decisions will be made by the board of directors. When any decisions on the dividend record date and the dividend amount is decided by the board of directors, we will immediately disclose them to you.
[Non-English content]
As for the 2026 dividend, when the company's income level goes up this year, our dividend amount will go up correspondingly in parallel. We could also consider a slight increase in the company's dividend payout ratio if our income goes up. For the dividend guidelines for 2027 and onwards, we will set them by looking into the market conditions and the company's financial plans, and they will be up for discussions by the board of directors later. Once they are determined, we will share with you through disclosure.
[Non-English content]
This answers your question.
[Non-English content]
The following question is by Jeon Yu-jin from iM Securities. Please go ahead.
[Non-English content]
I have two questions. I'm Jeon Yu-jin from iM Investment & Securities, and thank you for giving me the opportunity to ask two questions. First is about the profitability, the high profitability of lube base oil business in Q4. What is the background behind that? What is your understanding of the global capacity expansion for Group 3 from 2025 to 2027? What is your profitability guidelines? My second question has to do with the restructuring of petrochemical industry ongoing in Ulsan. Could you give us some updates on how it is going?
[Non-English content]
Okay. To answer your first question, how the Q4 lube base oil performance was better than what the market expected. The composite product prices slightly dipped. The oil price and the VLSFO VGO price fell a little more, and there was a lagging impact, the time lagging, which caused the impact. Overall, because of that, the overall Q4 market was quite favorable. As for the 2025 - 2027 capacity guidance, which is mostly around Group 3. For this year, we are expecting about 660 KTA, and mostly it will be in from India and Saudi Arabia. For 2027 and onwards, we will see about a total of 1.5 million tons of capacity additions in Germany, India, Korea and China.
The timing remains a little uncertain, if you combine the 2026 and 2027 total capacity additions, it will be about 6% of the actual supply in 2025.
[Non-English content]
For the new capacity additions could pose a pressure on the supply side. Some of the capacity expansions tend to be delayed in some regions like India, therefore, there will be a time lag until it impacts the market overall. As for Group 3, the demand growth will outpace the supply growth. The demand growth will be 2.7% and supply 2.4%, therefore, the supply volume will keep abreast of the rising demand and slowly be digested in the market.
[Non-English content]
Other than the existing Group 3 players, there are new players who were only in Group 1, but will now newly move into the Group 3 market. For these players, it's going to take quite a long time for them to develop the formulation for premium lube base oil and secure the reliability. Therefore, part of the newly expanded volume will only enter into the market from 2027 and 2028 onwards.
[Non-English content]
This answers your question.
[Non-English content]
To answer your second question on the petrochemical industrial restructuring. As you know very well, the government is trying to make Korea's petrochemical industry more competitive. That is their goal, we are fully aligned with the government's policy to make the petrochemical industry more competitive. We are in full collaboration with the government.
[Non-English content]
To be more specific, we are investing in the high-tech, high-efficiency facilities in order to contribute to higher competitiveness of Korea's petrochemical industry. We took part in the voluntary agreement, the government's voluntary agreement on restructuring the petrochemical industry, also took part in the joint consulting with the petrochemical players in Ulsan Industrial Complex and submitted the proposed business restructuring plan to the government this fall, which all show that we are in full collaboration with the government's restructuring policy.
[Non-English content]
The company's Shaheen Project will significantly contribute to the competitiveness of petrochemical industry and the players in Ulsan. This is because we are going to enjoy remarkable cost competitiveness and production efficiency based on which we will have global competitive edge from our facilities and allow us to reliably supply to our customers competitive products.
[Non-English content]
We are not only going to contribute to further advancement of the local Ulsan economy, by having our customers substitute their import demand, we will also significantly contribute to the national economy of Korea as well as the trade balance.
[Non-English content]
As such, we plan to avail all our company-wide resources and competency to ensure that Shaheen Project is safely completed and reliably operated, and thereby meeting the expectations of the government and all the investors.
[Non-English content]
This answers your question.
[Non-English content]
Once again, I would like to thank all the investors and analysts for showing your keen attention to S-Oil. As always, we are committed to communicating with the market in all transparency and fairness. If you have any further questions about our Q4 performance, please feel free to contact our IR team. Once again, thank you very much for participating in the company's earning release for Q4 last year. Thank you very much.
[Non-English content]
This concludes the fiscal year 2025 fourth quarter earning results by S-Oil. Thank you for your participation.