Good morning. This is K.D. 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 Q3 earnings results. For today's conference call, we have CFO J.W. Bang, IR Team Leader H.D. Jeong, and the team members. First, I will take you through the highlights of Q3 results. In Q3 2024, the company recorded operating income of -KRW 414.9 billion , resulting from the loss in refining business that widened from the previous quarter. This is mainly due to one-off impact from inventory related loss caused by the decline in international oil price and reduced FX rate. By systematic FX risk management, offset this with FX gain, delivering -KRW 272.5 billion in income before tax. As for businesses other than refining business segment, petrochemical business saw reduced income due to narrowed spread of major products.
In contrast, lube business continued its contribution to performance backed by its bullish margin. Next is market outlook. Bearish margin that continued into Q3 from Q2 forced regional refiners, mostly in China, to reduce their run rate. Operation rate out of the region is being adjusted downward in Europe. We expect this lower than 2023 refining utilization to continue until refining margin recovers to a level that supports economies of refining facilities. Moreover, regional refining capacities are anticipated to undergo heavier T&I in Q4 compared to the same period last year. Under such supply restricting factors, winter weather will push heating oil demand higher, mostly in Europe and Japan. As a result, we are forecasting regional market fundamental to improve gradually. Next, I'll brief the progress of Shaheen Project.
The company is investing in Shaheen Project with the goal to prepare for energy transition and raise the company's corporate value in the long term. The project is on track with 92.9% progress rate in engineering work, 51.8% in procurement, and 26.3% in construction as of the end of October, delivering 42% in overall EPC progress. Construction is in full swing. Cracking headers, a core facility of steam cracker being installed at site. The company will do our best to successfully deliver Shaheen Project to improve shareholder return in the long term. Now, Team Leader H.D. Jeong will get into more details for Q3 performance with the following slides.
Good afternoon. This is S-OIL IR Team Leader H.D. Jeong. Before we begin, please be noted that Q3 financial results are provisional based on the company's preliminary book closing and subject to change according to independent external auditors' audit results. Now allow me to explain Q3 financial results and outlook. First, please refer to page five for Q3 financial results. Q3 sales revenue dropped by 7.6% from the previous quarter, recording KRW 8.84 trillion. This is due to international price of major products in dollar terms that declined with oil price during the quarter. Selling price in won term also fell as won-dollar rate dropped. In Q3, the company's operating income stood at -KRW 414.9 billion . Despite quarter-on-quarter uptick in refining margin, the decline in operating income resulting from inventory related loss and decline in FX rate widened the loss in the refining business.
While quarter-on-quarter income from petrochemical business reduced, lube business posted a small increase in income compared to Q2 thanks to the rebound in product spread. For your reference, -KRW 286.1 billion of inventory related impact and - KRW 50.5 billion of FX impact were reflected to Q3 operating income. Decline in the international oil price resulted in one-off loss as opposed to small gain in the previous quarter. Negative impact of lagging margin also affected the overall income. In finance and other income, we had a KRW 202.1 billion of net FX gain, resulting from the decline in won-dollar rate. Q3 income before tax recorded a -KRW 272.5 billion. As was mentioned, we consistently run a FX risk management policy. To ensure that the impact of FX rate on the operating side is neutralized in annual income before tax with a certain time lag by FX gain and loss.
The company's cumulative operating income to Q3 2024 is KRW 199.8 billion. Despite reduced income in this quarter in petrochemical business, its cumulative income up to Q3 this year remained above the level of the same period last year. Next is financial status. Cash balance as of Q3 end inched up to KRW 1,615 billion from Q2, as the decline in oil price reduced working capital requirements. Net debt to equity ratio slightly climbed up to 65.3%. Despite volatility in the external environment, we are keeping our financial structure stable with enough liquidity to ensure smooth execution of the Shaheen Project. As for profitability indicators, annualized ROE stood at -0.9% and ROCE at 0.8%. Cumulative EBITDA from Q1 to Q3 recorded KRW 454 billion. Now, allow me to go through market environment and outlook by each business segment. First, refining business segment.
In Q3, operating income of refining business was -KRW 573.7 billion, widened from the previous quarter, owing to one-off impact caused by the drop in international oil price and FX rate. In Q3 Asian refining margin was up by $0.4 from the previous quarter. Despite sluggish gasoline, kerosene, and diesel market sentiment that worked as a downside factor, completion of a regular TNI of regional naphtha crackers improved the demand, thereby pushing quarter-on-quarter refining margin slightly upward. After reaching its peak in early July, Dubai crude price declined to an annual low on worries over global economic slowdown. Continuing geopolitical instability limited the price from falling further. As for Q4 outlook, Asian refining margin is predicted to recover, supported by the growth in the seasonal demand amid restricted supply and the back of regular TNI in and out of the region.
On supply side, adjustments of operation rate that continued into Q3 due to bearish margin and scheduled TNI in Q4 by refineries in and out of the region are forecast to lay the ground for improved market fundamentals. On demand side, kerosene, jet fuel, and diesel for heating purpose are expected to lead growth. As post-pandemic recovery of global jet fuel demand continues into this year-end, jet fuel demand is forecast to increase when travel season peaks at the end of the year. Furthermore, we are forecasting demand for diesel inventory buildup and consumption in winter to support market fundamentals in Q4. More details and outlook will be explained with the specific data in key business update section. Let me move on to petrochemical business segment.
In Q3, operating income of petrochemical segment dropped from the previous quarter to KRW 5 billion due to weakened spread of overall aromatic and olefin downstream products. First is aromatic product. In Q3, PX spread went down from the previous quarter, recording $271 / ton. This downward correction was caused by added supply, resulting from reduced gasoline blending demand for feedstock aromatics with the beginning of a low season after the summer, and the completion of a regular T&I in many regional PX facilities. Benzene spread remained relatively strong, though it narrowed from the previous quarter to $315 / ton. As was for PX, completion of a regular T&I of facilities also pushed up benzene supply. Despite weakened import demand from the U.S., spread stayed bullish thanks to expanded import from China.
Although seasonal slowdown in gasoline blending demand is anticipated in PX and benzene market in Q4, we are forecasting this to be partially offset by demand growth coming from the startup of new downstream PTA and SM facilities. As for olefin downstream products, pure market remained unchanged in Q3 as opposed to PP market that weakened. PO spread was maintained at the level similar to the previous quarter due to maintenance and throughput adjustment of Chinese PO facilities, both of which sustained market sentiment. By contrast, PP spread went down quarter-on-quarter due to a combination of sluggish downstream demand and abundant supply following completion of regular T&I in regional PP facilities. Despite continuing capacity expansion in China, we forecast market condition to improve in Q4 based on expectations for demand recovery, driven by China's economic stimulus package. Turning to lube business segment.
Q3 operating income of lube business recorded KRW 153.8 billion , inching up from the previous quarter. Though demand softened in the face of a low season, including India's monsoon and manufacturers' shutdown during summer holiday season in major economies, the market remained firm, backed by tight supply of mainly group two products. Affected by feedstock price that declined with oil price, LVO spread widened by $4 from Q2, recording $55.8. As for Q4 LVO market, we're expecting bullish sentiment, just like in the previous quarter, as regular T&I of our facilities in the U.S. and Europe will bring down supply in the market. Next is key business updates. Allow me to touch on gradual improvement in supply-demand balance in the short-term outlook.
In Q2 and Q3, Asian refining margin was maintained at a low level as geopolitical risk pushed ocean freight higher, limiting outbound shipping of diesel from Asia to Europe amid sluggish demand affected by China's economic downturn. This bearish margin forced the less competitive regional refiners to cut their run rate, disrupting around 950,000 bpd of supply since May. Chinese refiners, whose operation rate started to come down from April, maintained their rate at mid-70%. Despite the uptick following issues of the third export quota, utilization rates still remains low compared to the previous year. Refineries located in Europe, including Italy, Greece, Spain, also are known to have recently announced downward adjustment in their throughput, which suggests that less competitive facilities will keep adjusting run rates until economics are secured. In addition, following the seasonal pattern, autumn T&I already started and are ongoing in the U.S. and Europe.
In Asia, capacities that are scheduled to undergo T&I in Q4 is expected to be higher by 140,000 bpd compared to the same period last year. Such adjustment in operation rate and regular T&I will serve as supply tightening factors in the region in the short term. Although we witnessed lower than expected demand growth for major products in Q3, we are anticipating the demand to recover over to usual averages in Q4. According to the outlook by one institution, Q4 global demand for major products is forecasted to reach up to 940,000 bpd. By product, demand for heating oil in Japan and increase of travel at the end of the year are projected to drive around 450,000 bpd in demand growth for kerosene and jet fuel.
We are also expecting 310,000 bpd increase in diesel demand due to increased industrial activities in India and Southeast Asia after the monsoon season, as well as winter heating demand. By region, Asia is anticipated to account for 60% of overall demand growth. Growing demand pickup from China is projected to be supplemented by strengthening demand in India and other emerging economies, which are experiencing high economic growth rate. There is also a chance of even greater demand, depending on the impact of China's economic stimulus package and changes in the winter temperature. To sum up, we expect the Asian refining margin to slowly recover against the backdrop of the market fundamentals, pointing to a gradual improvement. Next is the progress of the Shaheen Project. We are in the middle of a Shaheen Project as part of our efforts to respond to energy transition and improve long-term corporate value.
As of October end, EPC works are ongoing smoothly as planned with a 42% in progress rate. Progress rate for engineering is 92.9% with the completion of a 3D model review that reflects detailed engineering. We are issuing drawing for construction based on review results. We are at 51.8% in the progress of procurement as we have completed order placement for most equipment and materials. We are closely monitoring the overall procurement process, including manufacturing and the delivery of equipment and materials ordered to make sure we procure on time. As for construction, 26.3% has been completed. Currently, foundation work for TC2C equipment that converts crude and low-value refining product into petrochemical feedstock is well in progress.
As for steam cracker, which will treat naphtha or LPG as a feedstock to produce olefin monomer, including ethylene and propylene, we are also installing storage tanks and cracking heaters, a core equipment for steam cracker. Construction for building polymer extruder that will produce HDPE and LLDPE from feedstock ethylene produced in steam cracker and automated warehouse is also taking place. With the construction work now fully underway, you can also see the project's progress at the site in the next slide. The picture on the left shows previously explained cracking heaters, a core equipment for steam cracker. Onsite installation started in June, and eight out of 10 heaters have been installed. On the right, you can see polymer area where structural work for pipe rack and construction for polymer extruder building are ongoing. With this, I would like to wrap up my presentation. Thank you.
[Non-English content]
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.
[Non-English content]
The first question will be given by Jin Myung Lee from Shinhan Securities. Please go ahead.
[Non-English content]
Good afternoon. Thank you very much. I am J.M. Lee from Shinhan Securities. Thank you for the opportunity to pose questions. I have two questions for you. First is regarding China. The Chinese refineries run rate has been going down and compared to their export quota, the export volume itself seems to be lower. What is your outlook on China's export quota going forward? Is there any chance that the regional margin will face a downward pressure as China expands their export volume towards the end of the year? Second question is about the Value-up Index. I understand that S-OIL has been included in the Value-up Index. How are you going to respond to this?
[Non-English content]
First of all, on your question about China's export and the export quota and the outlook into the future. At the end of September, the Chinese government announced a third export quota, which stands at around 8 million tons for the light oil products. On a cumulative basis for this year, they are going to allocate 41 million tons.
[Non-English content]
This already exceeds the last year's export quota of 40 million tons. Given the fact that the export economics are not very favorable at this moment, their chances of giving extra export quota before the end of the year seems quite limited.
[Non-English content]
As the Chinese economy, as you know, the Chinese government recently announced their economic stimulus packages and that has ever since led to some positive signs of their economy.
[Non-English content]
There are some favorable indicators. First of all, the young generation's unemployment rate in the cities was 18.8% in August, but it slightly went down in September. According to the announcements by the Chinese Statistics Office, the manufacturing sector's PMI in October exceeded 50% for the first time since April.
[Non-English content]
Given these situations, we don't see a very high chance of a further demand decline in China, which results in higher exports into the region.
[Non-English content]
This is CFO J.W. Bang. Let me answer your second question regarding the company being included in the Value-up Index. In running and operating our business, we always put top priority in improving the shareholder value. This is obviously reflected in our mid to long term strategies and is also one of our key factors in our shareholder return policies.
[Non-English content]
We believe the best and the most desirable way to Value-Up is to consistently invest in high profitable projects and initiatives and thereby increase the company's income and enlarge the shareholder return.
[Non-English content]
As the company has consistently invested and maintained its systems and dividend policy of the company's price-book ratio is the highest in the industry, which is a key indicator. This also explains why the company was the only player in the energy sector to have been included in the Value-up Index in September.
[Non-English content]
We believe the best way to Value-up is to make sure that we successfully deliver the Shaheen Project. We are considering to give a public disclosure next year on our specific and concrete Value-up plan that maximizes the shareholder value and also shows our commitment to being part of the government policy.
[Non-English content]
This answers my question.
[Non-English content]
The following question is by Woo -je Jeon from KB Securities. Please go ahead.
[Non-English content]
Good afternoon. This is Jeon Woo-j e from KB Securities. I have three questions. First is with regard to the PX fire incident in July. What was the impact of the fire incident on the company's financial performance? I would like to know if the No.2 PX is back on track and up and running right now. Second question has to do with Shaheen Project. Has there been any changes or updates on the financing of the construction? Third is about the immersion cooling. Could you give us any updates on your plans for the immersion cooling business? When are you getting into the market, and how big would you like to scale this business up?
[Non-English content]
To answer your first question about the impact of the incident in the No.2 PX at the end of July. After the incident, we had to shut down the production, but we took immediate measures to bring up the facility. The main processes are all up and running. The aromatizer is in full throttle. The only facilities that have been still under a shutdown situation is the XyMax, which resulted in a partially reduced production of PX. We have fully substituted this with Aromatic, which is a feedstock. Also with the MX, which we are selling in full volume. Fortunately, the spread between the PX and MX at the moment is very limited. As a result of that, there is almost zero impact on the company's income as a result of the incident.
[Non-English content]
At the moment, the company is putting in all the efforts to make sure that our processes are fully back in operation, including the XyMax. Our target and our plan is to get them all back into operation in March next year.
[Non-English content]
Since we have been insured to the property all risks and the business interruption insurance, we'll be fully compensated for the loss resulting from the fire incident, other than for fully compensated for the amount exceeding $2.5 million and for the period exceeding 60 days from the date of the incident.
[Non-English content]
Second, with regard to any changes in the financing plan for Shaheen Project, let me tell you that there is no change in the financing plan because when we set the plan itself from the outset, we assumed a very conservative stance. Therefore, even if the overall business conditions have been declining recently, that has had no impact on the company's financing plan for the project.
[Non-English content]
Out of our investment cost, 29% is based on external financing, and of that, about 67% is the facility loan and the shareholder loan, both of which have already been committed.
[Non-English content]
Even if the business environment continues to get worse, we will fully be able to respond to the situation by flexibly operating the credit period extension with Saudi Aramco and also through the standby credit line, which has already been committed and it's valued at around KRW 1 trillion.
[Non-English content]
With regard to your third question on the immersion cooling oil business. At the end of October this year, the company launched the S-OIL e-Cooling Solution, which is a high flashpoint immersion cooling oil. We performed the empirical test of the product by using the server manufactured by one of the top tier server manufacturers in third quarter this year, the test findings suggest a stable operation of the server and an outstanding heat management performance.
[Non-English content]
The immersion cooling technology is widely applicable to not only to the data centers, but also to the energy storage system and the battery cooling. Because of this, the company is engaging in joint studies with multiple partners, and we plan to continuously expand this heat management solutions across many industries.
[Non-English content]
That answers your question.
[Non-English content]
The following question is by Jinho Lee from Mirae Asset Securities. Please go ahead.
[Non-English content]
Good afternoon. This is Lee Jinho from Mirae Asset Securities. I have three questions. First is with regard to Shaheen Project. I read a news article about the crude oil to chemical projects having been canceled or being reviewed again within Saudi Arabia. Is this any sign that Saudi Aramco has changed its overall direction in their business going forward? Second is with regard to SAF. Could you give us any updates on SAF including the news that the government may potentially require SAF in a few years? Third is about the new refining facilities ramp up. We saw the operation, the startup of new facilities last year. Could you give us any updates on these new facilities?
[Non-English content]
To answer your first questions on Saudi Aramco's COTC project, I understand that one of the newspapers in Korea recently announced and ran a news article that Saudi Aramco scrapped their COTC project locally. I don't think it is appropriate for us at this moment to tell you whether this is true or not, and if it is true, why they did so.
[Non-English content]
On the contrary, if it is true that they did cancel their COTC project as was covered in the major newspaper, I think that would put a bigger spotlight on the company's Shaheen Project, because if they did indeed scrap the COTC project, that would further sharpen the Shaheen Project's cost competitiveness and will allow the company to secure a better footing and position in the market.
[Non-English content]
As part of the green initiative, in order to respond to the global energy transition and in order to become a competitive low carbon product supplier, we are looking into new energy businesses like renewable diesel, SAF and circular chemicals, all treating the bio feedstock.
[Non-English content]
As was announced to the investors in the market in the previous earnings release and through the media coverage, we have launched a co-processing to our existing refining facilities that treats the bio feedstock and the waste pyrolysis oil to get the renewable fuel and circular chemicals. This was a way to make sure that we quickly enter into the market. Also in the same line, in April this year, we acquired the ISCC certification.
[Non-English content]
In the second half of this year, we made an agreement with Korean Air and other airliners to supply the company SAF to the regular international flights. We are extending these discussions with other airliners as well.
[Non-English content]
In order to enlarge the company's co-processing volume, we are currently investing in the dedicated tanks and the pipelines, and in the mid to long term, we also have plans to make further investments into SAF. Once the details are set and agreed upon, we are going to announce them to the market.
[Non-English content]
To answer your third question on the new refining facilities and their utilization at the moment. We understand according to the market intelligence that the Dangote Refinery, which is a 650 ,000 bpd refinery, their utilization rate stands at around 40%-50%.
[Non-English content]
Their diesel and jet fuel is mostly sold in the domestic market. For naphtha, which was dedicated to the export market, we understand that they have not been exporting naphtha recently because they have been running their naphtha reformer in full scale to get gasoline.
[Non-English content]
We understand that they are getting around 100 ,000 bpd of gasoline from the reformer, mostly for the domestic market.
[Non-English content]
We forecast that the volume going forward will continue to be used in the domestic market to make up for the shortage.
[Non-English content]
They started the test run for the RFCC in August, and they're fully ramping up at the moment, but I don't think it will have an impact on the global export market for this year. Maybe there will be some changes as they continue to ramp up and start their exports in 2025.
[Non-English content]
As for the 350 ,000 bpd Olmeca Refinery in Mexico, we understand that they have some troubles in running the CDU, and they are importing the VGO on the spot market for their FCC operation.
[Non-English content]
Considering these situations where we don't expect them to go into normal commercial operation within this year, and they will probably go into a full commercial operation from 2025.
[Non-English content]
Finally, as for China's 400 ,000 bpd Yulong Refinery in Shandong province, they test run the 200 ,000 bpd CDU, we believe they will be able to go into on spec full operation from the middle of 2025.
[Non-English content]
Answers your question.
[Non-English content]
The following question is by Parsley Ong from JPMorgan. Please go ahead.
Hi, this is Parsley. Thank you for the chance to ask questions. I see that your cumulative CapEx so far is only KRW 1.5 trillion, which is a lot lower than your full year guidance of KRW 3.136 trillion. Do you think there's potential for your 2024 CapEx to undershoot guidance? Could you share with your outlook for 2025 CapEx free cash flow and therefore your dividend? Second question is with regards to your renewable projects or sustainable projects. You mentioned earlier a lot of new products like sustainable aviation fuels, biofeedstocks, e-cooling solutions. Do you have any capacity numbers to share with us? Like how much do you already have in 2024 and 2025? Do you have any competitive advantages that could help S-OIL protect or gain market share versus other peers in the region who I'm sure are also pursuing very similar projects? Thank you.
[Non-English content]
[Non-English content]
With regards to your first question about the potential CapEx underrun, the numbers show that our execution is actually less than our annual plan for 2024, less than half of our annual plan for 2024. Actually, this is all because of the schedule issues, and we are executing our CapEx as planned, and the remaining will all be executed before the end of the year.
[Non-English content]
As for the year-end dividends, it is a little premature to give you any information about our dividend. However, we have already given our guidance on the company's dividend payout ratio. As you know, our income and gains are income. The numbers are not final yet. We cannot give you the details about it, but I think we can just refer to our guidance on the dividend payout ratio for now. With regard to the company's renewable projects, they are still in the infancy stages, and we are only reviewing our plans to further expand it into the future. We cannot give you any specifics about the capacity and the competitive advantage, since we are still in the initial stages. Once we have the specifics that we can share with you with regard to the capacity and our competitive edge, we will share that with you.
[Non-English content]
With regard to the SAF, we have signed an MOU to store some of the feedstocks at a competitive price. Once any further updates are made, we are going to share that with you. This answers your question.
[Non-English content]
Thank you very much for showing your attention to S-OIL. The company will continue to exert full efforts to fairly communicate with the market and also in the most transparent manner to the analysts and investors. If you have any further questions, please contact the company's IR team. This concludes the earnings release for third quarter 2024.
[Non-English content]
This concludes the fiscal year 2024 third quarter earning results by S-OIL. Thank you for your participation.