Morning. This is S-Oil Treasurer, [K.D. Kang]. First of all, thank you to all the investors at home and abroad for joining the conference call for S-Oil's Q4 2024 results. Also joining us are CFO Ju-Wan Bang, IR Team Leader [H.D. Jung], and IR team members. Without further ado, I will go over the highlights of Q4 results. In Q4 2024, the company turned around from the previous quarter to record KRW 260.8 billion in operating income. Refining business turned around thanks to improved refining margin, petrochemical business turned red due to narrowed spread of major products. Lube business ended Q4 with lower operating income than the quarter prior due to seasonal factors and scheduled maintenance. I will now turn to the outlook. Although we are facing economic uncertainties at home and abroad, global oil demand is forecasted to show a steady growth this year.
At the same time, net capacity expansion will decline and lead to a better marketing environment driven by improved market fundamentals. Finally, GTG Project. This is a Gas Turbine Cogeneration Project we are undertaking as part of the energy-saving initiative. Target mechanical completion is 2026, total CapEx is approximately KRW 263 billion. Benefits we expect to get out of this project is less carbon emissions and savings in utility costs driven by in-house power generation. For your information, Shaheen Project is cruising smoothly with 51.8% in completion rate, which is slightly ahead of the plan as of end of December last year. Construction work is in full swing as per the plan, the company will focus all our capabilities into the project to deliver it and meet the expectations of investors.
I will turn over to Team Leader [H.D. Jung] for details of Q4 results and the rest.
Good morning. This is IR Team Leader [H.D. Jung] of S-Oil. Before I present the results, please be noted that Q4 2024 financial results are provisional and subject to change according to outside independent auditors' audit and so on. Allow me to first cover Q4 2024 financial performance and outlook. Please go to Q4 2024 financial results on page five. The company recorded KRW 8.9171 trillion in Q4 sales revenue, which is slightly higher than the quarter prior, and KRW 260.8 billion in operating income, which turned around from the previous quarter. Refining business turned around with a big jump, driven by improved refining margin compared to Q3 and higher FX, which was reflected positively in the operating income.
Petrochemical business turned red due to narrowed spread of major products, while lube business also ended with lower operating income due to seasonal factors and scheduled maintenance. For your information, inventory impact reflected in Q4 operating income is KRW 68 billion. In finance and other income, FX went up by KRW 151 billion from the previous quarter, which caused KRW -415.7 billion in net FX loss, and income before tax recorded KRW -208 billion in Q4. For your information, the company has been running FX risk management policy with consistency, in which FX impact on operating income is offset by FX gain or loss with a certain time lag to minimize impact on income before tax. Subsequently, part of FX loss incurred as a result of the spike in FX at the end of the year will be recovered as operating income in Q1 with a time lag.
If FX goes down, it will be recovered as FX gain. On an annual basis, the company recorded KRW 460.6 billion in operating income. Although petrochemical business posted operating loss in Q4 last year, it was still in the black on a whole year basis. Lube business went down in operating income in Q4 compared to Q3, but still performed well. I will move to financial status. Cash balance as of year-end is KRW 1.957 trillion, which changed little from the previous quarter. Net debt to equity ratio went up from 2023 year-end to 69.3%. Despite volatilities in the external environment, the company has stayed very much liquid with stable financial structure by financing at competitive and low interest rate right on time to ensure Shaheen Project goes on as planned.
As for profitability indicators, return on equity was -1.8%, return on capital employed was -0.4%, and annual EBITDA was KRW 429 billion. I will walk you through by each segment and outlook. First, the refining business. Refining business turned around from the quarter prior to mark KRW 172.9 billion in Q4 operating income, fueled by higher refining margin and FX increase. In Q4, reduced supply arising from turnaround maintenance and regional refineries and higher seasonal demand for heating oil significantly pushed up Asian refining margin. Singapore refining margin increased from $0.4 in Q3 to $2.5 in Q4. The strong dollar placed a downward pressure on oil price, but Dubai benchmark crude remained stable as expectations of China's economic stimulus helped curb the decline.
As for Q1 2025 outlook, we are expecting Asian refining margin to stay steady to strong, thanks to reduced exports from China and higher seasonal demand. On the demand side, winter demand for heating oil will continue, and demand for transportation and fuel during the Chinese Lunar New Year holidays is forecasted to go up. At the same time, lower natural gas inventory in Europe and subsequent price increase may create gas to diesel demand. Meanwhile, higher than usual turnaround maintenance in China in January and February this year is likely to create a favorable environment in terms of supply. More details and future outlook will be shared with you later with more data. Petrochemical business. Spread of both aromatics and olefin downstream narrowed in general, and Q4 operating income dropped from the previous quarter to KRW -28.1 billion. First, on aromatics products.
FX spread over naphtha marked $187 / ton, and benzene spread over naphtha marked $245 / ton in Q4, both of which narrowed from the quarter prior. Gasoline blending demand for feedstock aromatics went down as gasoline was in low season, while startup of new facilities in China brought up supply, which adjusted spread downward. In Q1 this year, we are expecting part of the regional supply increase to be offset by demand growth coming from new PTA and styrene monomer facilities starting up. Also, recovery in gasoline blending demand ahead of the gasoline high season will hopefully support aromatics market. Olefin downstream. In Q4, PP market slightly improved, while PO market stayed bearish. Regional PP supply changed little, while demand picked up thanks to the Black Friday and Christmas shopping season, which subsequently widened spread compared to the previous quarter.
PO spread was adjusted downward from the previous quarter as startup of PO facilities in China after maintenance turnaround raised supply while downstream demand stayed bearish. In Q1, facilities expansion will continue in China, but we are expecting China's economic stimulus measures to create higher demand in the market. Next, lube business. In Q4, lube business marked KRW 115.9 billion in operating income, which slightly dropped from the previous quarter due to turnaround of number one lube plant and slightly narrowed spread. Despite the drop in feedstock price and regular turnarounds of major facilities in the U.S. and Europe, product spread in Q4 last year slightly fell to $53.6 /bbl from the previous quarter due to off-peak season and subsequently bearish demand. Group II, however, showed a relative strength thanks to tight supply in Asia.
This quarter, we are expecting demand to gradually come back with the spring oil change season and the spread to improve as a result. We also expect Lunar New Year holidays in China and various economic stimulus measures by the Chinese government to bring about a general demand recovery for lube, including industrial oil. All these would add up to hopefully keep the margin at a healthy level. Next is key business updates. First is the business environment outlook for this year. Geopolitical and policy uncertainties do remain at home and abroad, we are forecasting global oil demand to grow in a steady form, driven by robust economic growth in India and countries in Southeast Asia, where demand is going up. We also think China's economic stimulus measures will support oil demand growth.
Major institutions' outlook on global demand growth this year is 1.2 Mbd , which is similar to 2024. Global economic growth is forecasted at a low 3%, this is forecasted to push demand for fuel products to grow evenly across gasoline, kerosene, and diesel in 2025. On the supply side, marginal refining facilities will shut down, outlook suggests that net capacity expansion this year is 300 Mbd, which will fall short of demand growth. This limited expansion is not limited to 2025 only, forecasted to continue through 2030. It means facilities expansion will only be limited while demand grows steadily in the long term, according to the forecast. Improvements in the market fundamentals, as a result, will hopefully create a healthy marketing environment. Next is the GTG or Gas Turbine Generator project. The company made a final investment decision on GTG project in November 2024.
The objective is to respond to rising electricity price in Korea and higher power consumption after we complete Shaheen Project. We are targeting mechanical completion in December 2026, EPC work is underway. We will be building two Gas Turbine Generators that treat natural gas to get electricity and two waste heat recovery boilers that make high-pressure steam from high temperature and high-pressure exhausted gas. GTG will generate 121 megawatts of electricity and 160 tons/hr Of high-pressure steam, both of which will be consumed internally. We are expecting these highly energy-efficient facilities to reduce carbon emissions by 116,000 tons/ year. Total CapEx is KRW 263 billion, IRR 26.6%, payback period 3.4 years, which makes it a highly profitable project. This concludes my presentation. Thank you. I would like to ask you to please wait until the Korean presentation is over.
Now 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. The first question will be given by Cho Hyunryul from Samsung Securities. Please go ahead.
Thank you for the chance to pose the question. I am Cho Hyunryul from Samsung Securities. I have three questions. First, you mentioned during your presentation that there is less export from China. Recently, we are hearing more about the increase in the EV sales in China. How do you expect this to affect refining product demand in China? Will this have impact on the regional market dynamics? My second question has to do with the lube base oil market. In Q4, it was a bit bearish. However, we have enjoyed a healthy margin for two to three years. How do you see the outlook into the future for the year 2025 and 2026 in terms of market dynamics and profit? My third question has to do with the CapEx.
Including Shaheen Project, would you share your company-wide CapEx and the status for execution, including GTG project too? Thank you.
On your first question about China as demand and export. On demand side, we have uncertainties with economies at home and abroad. However, we are forecasting a stable demand growth in the region, supported by the solid economy growth of emerging economies that includes India. As for demand for China, we are also forecasting demand growth supported by its economy stimulus package. As recent utilization rate of small teapot refineries in China falls far short of the run rate of the major refineries, that will be affecting the export volume. Starting from the 1st of December last year, Chinese government conducted export tax rebate cut.
Additionally, the sanctions against Russia and Iran imposed by the U.S. is expected to adversely affect the margin of small teapot refineries in China. As a result, we are expecting this to accelerate restructuring of these teapot refineries. As a result of these factors that affect the market fundamentals, we expect the current situation would work in favor of regional market dynamics. Let me answer on your second question. On your second question about the lube base oil market. Since the second half of the year 2023, we have been enjoying a quite stable lube base oil spread at around by $50 range. As a result, that had affected positively to our income creation. We are not expecting any big changes to this stable sentiment this year. This year, capacity addition is scheduled mostly in India and Singapore, centered at Group 2 facilities.
However, as it takes time for these added capacity to affect the market, we are also expecting this market sentiment to continue. As for the outlook into the first quarter of 2025, we are expecting demand to rebound during Lunar New Year holidays in China and demand recovery due to the stockpiling demand in the face of spring lubricant replacement season. Demand will improve, supported by the Chinese economic stimulus package.
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Let me answer your third question on the company CapEx and Shaheen Project. As for the CapEx of Shaheen Project for the year 2025 and 2026, we are planning KRW 3.48 trillion of a CapEx execution for Shaheen Project this year. For the next year, which is our target year for the project mechanical completion, we are planning to execute 16% of the CapEx, which is KRW 1.5 trillion.
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As for the CapEx of a GTG project is KRW 100 billion for this year. We are planning KRW 130 billion of a CapEx for GTG project next year.
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We are planning a CapEx for other maintenances. However, this plan for the CapEx is subject to the size of T&I for our refinery. For the details, please refer to our presentation materials. Once any updates are made, we'll share that with you.
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This concludes my answer. Thank you.
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The following question is by Lee Jin Myung from Shinhan Investment Securities. Please go ahead.
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Lee Jin Myung from Shinhan Investment Securities, please go ahead.
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Lee Jin Myung from Shinhan Investment Securities, please ask your question.
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The following question is by Kim Tae-Hong from Mirae Asset Securities. Please go ahead.
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Currently, there are no question with questions. Please press asterisk and one to give your question.
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The following question is by Lee Jin Myung from Shinhan Investment Securities. Please go ahead.
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The following question is by Cho Hyunryul from Samsung Securities. Please go ahead.
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Let me add one more question on your GTG project. In fact, market is not familiar with this at the concept of GTG, and your final investment decision was made quite recently in November last year. Would you share your background for pushing for this project? I'd like to know whether this project will have advantage for your Shaheen Project. I mean, would that resulting in cost effectiveness for Shaheen Project for you to take advantage of? My third question is about the self-power generation related to Gas Turbine Generator. This is quite unfamiliar concept too. As for the refining industry, will it make a contribution to the savings of cost in the mid to long term?
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We have been discovering items, putting our priority on the maximization of our operational efficiencies, and have been pushing forward the items that comes with economics. This strategic project was initiated from 2021 through energy optimization studies that was conducted with Saudi Aramco. Since then, we continued our cooperation with Saudi Aramco that enabled us to go through enough feasibility study and front-end engineering design. As a result, we could make final investment decision in November last year.
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The electricity and steam self-generated from this GTG project will be consumed in-house, I mean, in our refinery and existing process. Our Shaheen Project also has the similar self-generation system. This is very similar with the concept of GTG. We achieved the best energy efficiency for Shaheen Project, too.
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Once this GTG is completed, the ratio of self-generated electricity usage will be raised to 45% from current 10% range.
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This concludes my answer.
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The following question is by Parsley Ong from JPMo rgan. Please go ahead.
Hi, thank you for the chance to ask questions. Follow-up questions on the GTG project. For the natural gas feedstock, where do you plan to source the natural gas from? Will this be a long-term oil-linked contract, maybe linked to Henry Hub or spot LNG? What kind of pricing terms are you expecting? Second question is on PX. Can you confirm that your No.2 PX plant has completely restarted? I see the utilization rate was 57% in fourth quarter. What is your first quarter 2025 utilization rate outlook? Refining margins have been weaker. Are you seeing potential for any run cuts?
The last question is, could you give us an update on your cash flow and dividend outlook? Roughly when do you think you would be comfortable to hike your dividend payout ratio? Thank you.
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To answer your first question on the feedstock sourcing for GTG project. As for the current feedstock that we are using, we signed a long-term contract to stably source the gas, which is a hydrogen feedstock and feedstock for our existing process. As for the GTG project and Shaheen Project, we are pushing for long-term contract to source our feedstock in a stable manner too.
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Let me answer your second question on the run rates of No. 1 and No. 2 PX. Currently, we are running two PX units, which are No. 1 and No. 2 PX units. As for the No. 2 PX, we had a fire incident in July last year. That's why we adjusted downward the current utilization rate. However, our No. 1 PX facility is up and running at the maximum capacity. As for the No. 2 PX, we are back to normal operation at around April this year. In the first quarter, we are likely to continue maintain our current utilization rate.
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As for your question on the utilization rate outlook for the refining facilities related to the current refining margin, we believe that we secured enough economies under current refining margin. Therefore, in the first quarter, we will run our refining unit at full capacity.
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To answer your question on dividend payout ratio. Currently, there is no changes scheduled with our dividend policy. In running our dividend policy, we always put priority on the maximization of shareholder value, comprehensively considering our business performance and our funding for the sustainable growth. As you are well aware, we are making progress of Shaheen Project currently, we are planning to maintain current dividend payout ratio. However, once funding for the Shaheen Project is secured above a certain level and our business results gets better, we will look into this payout ratio again.
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This concludes my answer.
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The following question is by Jeon Yu-Jin from iM Securities. Please go ahead.
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Thank you for the opportunity to pose a question. I am Jeon Yu-Jin from iM Securities. I have two questions. First question has to do with the natural gas. Despite the recent bullish sentiment, we are currently seeing a somewhat quite bearish kerosene and diesel margin. Can you share the background of that? My second question has to do with the capacity addition. Would you share the scheduled capacity expansion, mainly for Group II and III for lube base oil facility?
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As for your first question on the spread of diesel and the kerosene margin. As you said, the spread of diesel and kerosene inched down recently, and we understand that the various spread is the result of a strong oil price rather than the decline in product price. This means that increase in oil price is not reflected to the price of product yet. However, with some time lag, it will be reflected later on.
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On your question about the capacity expansion and lube business and market sentiment. According to the market intelligence, India is scheduled to have 8,000 BPD capacity addition centered at Group II and III facilities. Singapore is also scheduling 20,000 BPD of capacity addition. However, as was mentioned before, it would take time for these added capacities to have a direct impact on the market. On the supply side, we are forecasting no big change, we expect overall demand to rebound across LBO industries, including industrial oil supported by Chinese economic stimulus package. In the first quarter, we are forecasting inventory stock by linked demand in the face of spring lubricant replacement season, and subsequently, we are expecting a demand to recover.
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This concludes my answer.
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The following question is by Jeon Woo-je from KB Securities. Please go ahead.
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Thank you for the opportunity to ask the question. I am Jeon Woo-je from KB Securities, I have two questions. First is about the FX impact in Q4. You mentioned that there was around KRW 400 billion of FX impact in Q4, also mentioned that there will be offset by the FX gain in Q1, hopefully. If there is no change with FX rate in 2024, how much do you expect the FX loss will be offset? My second question has to do with your borrowings related to Shaheen Project. I understand that you already finished various commitment with competitive interest condition. Would you share the interest rate spread compared to the existing borrowings?
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To answer your first question on FX impact. During my presentation, I mentioned that the FX impact we had due to the significant rise in FX rate at the end of last year, we are hopefully to expect to recover that in the first quarter with some time lag, and we expect that amount to be around KRW 80 billion.
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As for this figure, KRW 80 billion, I mentioned, this is resulting from the crude lifting , which was conducted in November and December last year with the higher FX rate.
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On your question about the financing cost of Shaheen Project. Currently, we completed around KRW 1 trillion of a facility loan and around $600 million of shareholder loan. We already completed the financial contract for those at floating rate, which is linked to CD rate and others. Currently, as a result, we are currently applying around 3.6% of interest rates. If the policy rate, I mean, key rate from the government, goes down later, this may go down, too.
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As for the other financial cost, it will be supported by the issuance of corporate bonds from the second half of this year. We will apply the market interest rate. Given the fact that we recently issued corporate bond with the rate of 3.5%, we are expecting this to go down further.
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This concludes my answer.
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Thank you once again for joining today's conference call in 2024 Q4 earnings result. We will be committed to communicate with you transparently and fairly. If you have any further questions, please feel free to contact our IR team. With this, I would like to conclude the Q4 2024 earnings release. Thank you.