Good morning. This is Katie Kang, Treasurer of S-Oil. I'd like to extend my gratitude to investors and analysts in and out of Korea for joining S-Oil's conference call for Q1 2025 earnings results. For today's conference call, we have CFO J.W. Bang, IR team leader H.D. Jeong, and team members. First, I will take you through the highlights of Q1 results. In Q1, the company recorded operating income of KRW -21.5 billion . Refining business turned red due to bearish refining margin, resulting from the delayed regular T&Is in the region. Petrochemical business also recorded a loss, while lube business recorded similar level of operating income with Q4 last year.
Next is market outlook. Although uncertainties arising from the U.S. tariffs may put slight downward pressure on demand, the issue is anticipated to be addressed gradually over time. In that case, lower oil price is expected to gradually bring demand recovery. At the same time, we are forecasting OSP to come down as OPEC+ raises output. All of these factors are expected to work in favor of refining margin with some time lag. In the mid to long term, we believe favorable market fundamentals where demand growth outpaces net capacity expansion will remain in place.
Now, I'll move to Value-up Plan. As was disclosed through the company's value-up plan on March 17th, we are planning to enhance corporate value by striking a balance between growth and shareholder return through successful completion of the Shaheen Project and a dividend payout ratio of over 20% for fiscal year 2025 and 2026. We will basically implement the plan to maximize shareholder return. For your reference, progress rate of Shaheen Project stands at 65.4% as of April 16th, slightly ahead of schedule.
Engineering is at its final stage and construction works are ongoing smoothly as planned. In March, we successfully installed 118-meter high and 2,374 ton propylene fractionator, the tallest and heaviest equipment in the project. We'll fully leverage our capabilities to ensure successful delivery of the project, thereby meeting the expectation of investors. Now, team leader H.D. Jeong will walk you through the details of Q1 performance in the following slides.
Good morning. This is S-Oil IR Team Leader, H.D. Jeong. Before we begin, please be noted that Q1 financial results are provisional and therefore subject to change according to outside independent external auditors' audit results. First, please refer to page five for Q1 financial results. The company's Q1 sales revenue inched up from the previous quarter, recording KRW 8.9905 trillion . Operating income stood at KRW -21.5 billion , turning to a loss.
Refining business swung to the red, posting operating loss caused by refining margin that fell from the previous quarter. This is because some of the regional T&Is got delayed to Q2, which increased supply in the region and subsequently weakened market fundamentals. Petrochemical business continued recording deficits due to narrow the spread of major products. Despite high seasonal factors, operating income of lube business remained unchanged quarter-on-quarter as feedstock price temporarily went up. For your reference, inventory related impact reflected to Q1 operating income is KRW + 12 billion . In finance and other income, we had KRW -61.6 billion of net interest income and KRW 11.7 billion of net FX gain. Q1 income before tax recorded KRW -67.4 billion . Moving on to financial status. Cash balance as of Q1 end stood at KRW 1.863 trillion , similar with the previous quarter.
Net debt to equity ratio slightly climbed up from 2024 year-end to 70.2%. Despite volatilities in the external environment, the company has maintained enough liquidity and stable financial structure by financing at competitive and low interest rates prior than time to ensure smooth execution of the Shaheen Project. As for profitability indicators, ROE was at -2.1%, ROCE was -0.1%, and Q1 EBITDA was KRW 121 billion. Now, I'll go through market environment and outlook by each business segment. First, refining business turns to a loss from the previous quarter due to bearish refining margin, recording KRW -56.8 billion in operating income. In Q1, Dubai crude price remained highly volatile, skyrocketing after the U.S. imposed a stronger sanction against Russia, and collapsing after OPEC+ announced to increase output. Such uncertainties also affected product prices.
Asian refining margin turned bearish relative to the previous quarter, as regional market fundamental weakened owing to sluggish demand amid concerns over economic slowdown and regional facilities that delayed scheduled T&Is to Q2. As for Q2 outlook, results of tariff negotiations between major economies appear to serve as a key factor that will affect Asian refining margins amid high volatilities in the global market. On the demand side, global uncertainties created by the U.S. tariff policy are raising concerns over demand contraction.
A subsequent decline in the oil price by over $5 is also presenting opportunities for demand growth. On the supply side, regular T&I of regional refineries is likely to be concentrated as part of the Q1 schedules were delayed to Q2. We're also anticipating demand for gasoline inventory build-up ahead of the summer high season. All of these factors are forecast to contribute positively to refining margin improvement. Further details on future outlook will be explained with specific data in key business updates. Next is petrochemical business. Before going through market environment and outlook, allow me to share with investors that we resumed operation of XyMax, which is a unit improving PX yield in number two PX plant, on March 28th, after completing maintenance.
Accordingly, all the facilities in number two PX unit are currently up and running. In Q1, operating income for petrochemical business went down from the previous quarter, recording KRW -74.5 billion , as both benzene naphtha spread and the PO propylene spread narrowed, despite slight uptick in PX naphtha spread. First, a market condition for aromatic products. PX naphtha spread in Q1 stood at $203 per ton, slightly up from Q4 last year, while benzene naphtha spread remained bearish, marking $217 per ton.
Amid less transaction driven by worries over U.S. tariff imposition, spread of aromatic products was kept at low level due to concentrated regular T&I of a PX downstream PTA facilities and reduced benzene export to the U.S. As for olefin downstream products, PP market sidelined as many Middle East PP facilities had regular T&Is, while PO market experienced a falling spread caused by added supply from the start-up of new Chinese PO facilities. In the second quarter, we are likely to see more uncertainties in the market conditions and the trading flow for both aromatic and olefin downstream products, as market participants are taking wait and see approach in the face of U.S. tariff policy. There is also a room for an improvement in the petrochemical market depending on China's economic stimulus package and recovery of gasoline blending demand for aromatic products in summer season.
As far as we are aware, our refining and lubricant products are not subject to reciprocal and universal baseline tariff of the U.S., but petrochemical products other than MX, such as PX, benzene, PP and PO, are subject to such tariff. The share of the company's direct export to the U.S. affected by tariffs is just 0.1% of total sales revenue based on 2024, suggesting that there will be almost zero impact of U.S. tariff on our business. Next is lube business. In Q1, lube spread that narrowed quarter-on-quarter kept operating income at similar level with the previous quarter, when we had regular T&I for number one lube plant, recording KRW 109.7 billion. Even though we entered peak season, temporary price hike caused by unbalanced supply, demand of a VGO, pushed the spread lower relative to the previous quarter.
In Q2, we're expecting markets to take an upward turn from Q1, backed by seasonal demand recovery and concentrated T&I of major suppliers around the world. In particular, lagging effect of a product price resulting from recently lowered oil price and regional price that stabilized after temporary hike, are anticipated to drive a rebound in LBO spread, thereby maintaining margin at a consistently healthy level.
Moving on to key business updates. First, the business environment outlook for this year. Although increased uncertainties surrounding global economy due to the recent Trump tariff war may result in sluggish economy and downward adjustment of demand outlook, such uncertainties are expected to disappear gradually as tariff negotiations make progress. Moreover, there is less strain on the supply side as global outlook for net CDU expansion was adjusted downward compared to the beginning of the year, and marginal refiners are shutting down their facilities permanently.
As for oil demand, we're expecting product price that declined along with crude price to positively drive demand, leading to a gradual recovery. Recent announcement of OPEC+ to raise output is also anticipated to push OSP lower over time. The drop in OSP, driven by rising crude supply, positively affects the company's refining margin, which is forecast to become visible from Q2 end. Once such factors related to market fundamentals begin to exert influence, refining margin is projected to gradually recover with a certain time lag. We have a healthy fundamental outlook in the mid to long term because demand growth is projected to continuously outpace limited capacity additions.
Now, allow me to explain our Value-up Plan to enhance the company's value. The company disclosed the S-Oil Value-up Plan on March 17th, as a way to align ourselves with the government's Value-up Program, aimed at maximizing shareholder value. We'll enhance the value of S-Oil in the long term by seeking a balance between sustainable growth and shareholder return through strategic investment. We'll drive growth by successfully delivering ongoing Shaheen Project. At the same time, we'll maintain dividend payout ratio of 20% or above for the fiscal year 2025 and 2026 to return to shareholders. In detail, we'll achieve mechanical completion of the Shaheen Project within budget and schedule, as well as deliver best quality through organized quality control.
Moreover, we plan to effectively proceed with commissioning and product marketing with a thorough preparation in advance to ensure reliable operation of a new facility. As a way to drive competitiveness, we'll identify initiatives to enhance profit under downstream transformation program in our existing business, drive digital transformation underway as per the digital transformation roadmap, and prepare the company for energy transition by exploring new business and driving decarbonization, thereby take the company's competitiveness to a higher level. Going forward, we'll make utmost effort to maximize shareholder value through corporate value enhancement and continue to give updates on the progress and achievement of this program to our shareholders, including investors and analysts. This concludes my presentation. Thank you.
Korean presentation is still ongoing. Please wait for a moment before Q&A session starts. Thank you.
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Q&A session will begin. Please press asterisk one, asterisk and one if you have any question. For cancellation, please press asterisk two, that is asterisk and two on your phone.
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The first question will be given by Cho Hyunryul from Samsung Securities. Please go ahead.
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Good morning. I am Cho Hyunryul from Samsung Securities. I would like to thank you for the opportunity to pose questions. I have two questions. First is about the U.S. tariff war. How is this going to affect the Asian refining industry? You've told me about the generalities of the impact, but I would like to know how this will impact from one product to the other. How will the tariff imposition impact the products? If the tariffs are exempted to specific products, how will that recover the demand for those particular products exempted from the tariff?
Second is my question about the lube base oil business. It looks as if the income is slightly below that of Q1, and obviously it's the slowdown from 2024. How do you make up the overall lube base oil market? Do you see any potential impact as driven by the demand slowdown?
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With the United States imposing tariffs to major countries around the world and heightening trade conflicts between the United States and China, the major institutions have reflected concerns around global economic slowdown, they are now revising downwards the outlook on this year's oil demand. The size in itself varies from one institution to the other, and the outlook also varies from one scenario to the other. The range is somewhere in between 0.1 million to 0.5 million BD on a daily basis.
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As I spelled out in the earnings release, the impact on the company's petrochemical products is quite negligible, arising from the U.S. on tariff policy. As for the company's refining products and lubricants, they're not subject to the import tariffs by the United States. We're not going to see any changes in the export flow. However, for the petrochemicals, aside from the MX, they're all subject to tariffs. Since the Chinese plastics will be imposed with much higher import tariffs compared to that imposed to other countries, there's also a chance of a change in the trading flow for the petrochemical products.
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As you know, the tariff negotiations are ongoing at the moment. A lot of things might change depending on how the negotiations between the United States and China play out. For us at the moment, we're just watching the situation, following the situation very closely. What we can tell you clearly is that these tensions and the conflicts are not helping any country at all. We're hoping that the trade negotiations to progress and move in a positive way.
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As for the lube base oil performance, we have already shared with you the Q1 performance and the Q2 outlook and the earnings. I'll just go over the overall market fundamentals.
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As for the demand growth of lube base oil, we are forecasting an annual 2.4% growth for group two and group three from 2024 to 2027. Most of the capacity expansions will be around group two and group three. It was originally planned that there will be an additional of 1.3 million tons in India and Singapore this year and about 0.8 million tons of capacity additions in India and Saudi Arabia in 2026.
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According to the market intelligence, the new facilities schedule this year in Singapore will start at the end of this year, the new facilities scheduled in India will see their startup delayed to 2026 or onwards. We presume this will also affect the scheduled startup of the new facilities in India in 2026.
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Since the new capacity additions for this year are literally limited, we are expecting the lube base oil spread to stay quite calm and stable throughout the year. We believe that the impact of higher supply coming out of new facilities will be reflected in the market from 2026 and onwards on a phased basis with a time lag.
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This is the end of my answer. Thank you.
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The following question is by Parsley Ong from JP Morgan. Please go ahead.
Hi. Thank you for the chance to ask questions. I have a couple. The first question is, you mentioned earlier about the trade war. China has also imposed retaliatory tariffs on U.S. LPG. Could you share with us your outlook on the LPG margin and the impact on your refining and chemicals division as a result of this? Second question is could you share with us, based on the current margin environment, what is your expected earnings contribution from the Shaheen Project? Third question is, if your first half EPS is negative, should we assume there will be no DPS or would S-Oil consider a special dividend? The fourth question is, if I look at your chemicals division and first quarter, could you share if there was anything like inventory loss or something?
In second quarter so far, we have seen the spreads for PP and PX improve, although the benzene spread is still falling. Maybe could you share with us with these factors combined and also the restart of the PX unit, number two PX unit, are you expecting better earnings for chemicals in second quarter? What is that driven by? Thank you.
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To answer your first question, as you know, the tariff policy was just announced, we still see that there is room for the two countries making some progress in the negotiations. So far, we are not seeing any major changes.
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Obviously, if there are some constraints and limits in China importing LPG from the United States, we believe this will work in favor of the LPG price.
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Korea is an LPG net importing position, which means that we are not exporting LPG.
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You asked a question about the profitability of Shaheen Project. Well, as you know, while the global petrochemical industry is in a downturn, it has been persisting for a while. We believe this will ultimately suppress the supplies because this will deter competitors from making new investments. This will also accelerate rationalization and restructuring of the industry.
In the long term, the global economic growth and China's economic stimulus package and policies will support demand. As for the timing of when the market environments will improve, it still remains uncertain. We are expecting and hoping that the supply overhand situation to clear itself from the middle of 2027, when new facilities from Shaheen Project are up and running, will subsequently support the petrochemical margin.
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I would like to share with you that the Shaheen Project will enjoy very high-cost competitiveness because the steam cracker will deliver the best-in-class energy efficiency, and we will be treating the low-value byproducts from the existing refinery as the feedstock to the new facility.
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Because the recovery in the petrochemical market is being delayed, the economics from the Shaheen Project are not as high and not meeting the target that we had set at the very beginning. Even if the low spread persists, we still believe we will be able to fully run the new facilities from Shaheen Project and secure economics.
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Therefore, if we successfully deliver the project on time and when the market conditions rebound and turn around, we believe the contributions to the company's earnings will be big.
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To answer your third question on the dividend, as we have shared our dividend guidelines and the value program through the public disclosure, although we are in the middle of Shaheen Project this year and 2026, we have issued a guideline of paying 20% or higher of net income as dividend payout.
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Our goal until the completion of Shaheen Project is to make sure that we keep a sound and stable financial structure and focus all our capabilities into the successful delivery of the project. After 2026, considering and in light of the financial structure that we have and the profitability, we will do our best to give more to shareholders in terms of shareholder return.
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As for the Q1 inventory impact this year for the petrochemical business, it was KRW -10 billion. As for the spread, I would like to clear that in April, the spread of PX and benzene slightly went down. PO was pretty much the same, PP made an uptick when you compare it to the first quarter. As for the Q2 income estimation, it is difficult to make an estimation for now, because the transactions are quite small due to the uncertainties surrounding the tariff. If you just take out the uncertainties arising from the tariff policy, I think there are some supporting factors or some bullish factors. First of all, the regular T&I of the PX will be bigger in size compared to the size of turnaround in the PTA, which means there will be less supply in the market.
Some of the PX players in the region are lowering their utilization rate because of the thinning economics of the PX business. The third is there may be some demand for gasoline blending, and this could be a factor supporting the spread of PX and benzene. If Chinese economic stimulus policies work well, they will also have a positive impact on the petrochemical market.
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The following question is by Kim Myeongju from Shinhan Investment Securities. Please go ahead.
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I am Kim Myeongju from Shinhan Investment Securities. I would like you to walk us through the ramp up status of the global refining capacity and the production as a result of that.
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Let me walk you through the global refining capacity ramp-up status. First is the Dangote refinery in Nigeria. This is a 650 MBD refinery. It recently had some issues around the RFCC catalyst, right now it's running at around 400 MBD. They're going to have a regular T&I of about 200 MBD for one month from June 1st. During this period, the gasoline production will go down and SSRO production will go up. Once the CDU and RFCC up and run after the repair and maintenance, most of the diesel and gasoline will be supplied mostly to the domestic market. For gasoline, it will be sold to the domestic market and also exported to the European market, which means that gasoline probably may face some downward pressure.
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There is the 400 BD Yulong refinery in China's Shandong province. It started the test run for the number two CDU, the 200 MBD CDU in August. In October last year, we understand that they started to sell gasoline to the Chinese market. As for the other 200 MBD number one CDU, it was supposed to start the test run at the end of March this year, it's been delayed to September. For this plant, their petrochemical yield is over 50%, the overall impact on the refining market will not be very big.
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There is the 350 Olmeca refinery in Mexico. We understand that works are still underway for some of the facilities, it's been being delayed, which means the impact from the onset of products to the market will be limited.
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As for the others refineries in China and India, they have plans for expansion, but it's going to take some time until there is a ramp up. The impact on the market will be limited. In the United States, the LyondellBasell 280 MBD Houston Refinery already shut down, and in the second half of the year, Phillips 66 will also close down their Wilmington refinery. All in all, this year the net capacity additions will be around 200 MBD, and they will not have a very big impact because the overall expansion will be limited.
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This is the end of my answer. Thank you.
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Currently there are no participants with questions. Please press asterisk one asterisk and one to give your question.
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I'd like to once again thank all the analysts and investors for showing your support and attention to S-Oil. As always, we will always try to be in full communication with you in a fair and transparent manner. If you have any further questions about our Q1 earnings, please feel free to contact S-Oil IR team. This is the end of the conference call on Q1 earnings release. Thank you very much.