Good morning, everyone. This is Katie Kang, the Treasurer of S-Oil. I would like to extend my gratitude to our investors and analysts in and out of Korea for your attention to S-Oil's conference call for Q4 earnings results. Today, we have our CFO, J.W. Bang, IR team leader, J.W. Ahn, and team members. First, I will take you through the highlights of our fourth quarter results.
Despite one-off inventory-related loss caused by oil price decrease and bearish refining margin, the company recorded KRW 209.8 billion in Q4 net income, thanks to FX gains through organized FX risk management and investment tax credit from Shaheen Project. On a yearly basis, operating income and net income posted KRW 1.4186 trillion and KRW 998.2 billion respectively. Next is the market outlook for 2024. The company expects favorable market fundamentals to continue into 2024 for overall refining business.
As for refining business, oil demand is forecast to grow steadily this year. According to major institutions' outlook, transportation fuel, mainly gasoline and jet fuel, will lead strong demand growth supported by reduced price pressure on consumers with the decline in international oil price. The company's major petrochemical product, PX, is expected to experience improved market fundamentals as large-scale capacity expansion, mainly led by China, was mostly completed in 2023, adding significantly less new capacity this year.
High supply condition is projected for lube business, as no capacity addition that is able to affect global market is scheduled for 2024. As such, we are expecting consistently high complex margin above the pre-pandemic level in 2024. In particular, there will be far less T&I this year as we completed regular T&I for major units over the past two years. Next is about decarbonization roadmap of the company. Aligned with global and nationwide efforts to deal with climate change and reduce carbon emission, we set the target to deliver 35% of carbon reduction against business as usual by 2030 and net zero by 2050.
To this end, we established the decarbonization roadmap, including concrete initiatives and annual pathway to decarbonization, which we are putting into action. This is regularly updated and is reported to BOD as one of the company's key business agendas. The roadmap includes specific carbon abatement initiatives, such as energy efficiency improvement for existing facilities, low carbon electricity purchase, and steam import. These are implemented in phase based on economics and feasibility, allowing the company to make visible progress for decarbonization every year.
Going forward, S-Oil will continue to put all our efforts as a clean energy and chemical company to enhance ESG management system, thereby live up to the expectations of domestic and overseas investors. Team leader J.W. Ahn will get into more details for Q4 performance with the following slides.
Good morning. I am J.W. Ahn, the leader of IR team. Before we begin, please be noted that Q4 financial results are provisional and subject to change according to independent external auditors' audit results. Let me begin with Q4 2023 performance and outlook. Please refer to page five for Q4 2023 financial results. The company achieved KRW 9.8 trillion of revenue in Q4, up by 9.2% from the previous quarter due to the increase in sales volume compared to Q3, as regular T&I of several units was completed early in Q3. Q4 operating income stood at KRW 7.6 billion.
We had one of negative inventory-related impact and lagged margin due to oil price drop. For your reference, inventory-related loss of KRW 144 billion was reflected to the company-wide operating income in Q4. By business segment, refining business turned to loss due to slight downward adjustment in refining margin, in addition to oil price decrease. Petrochemical and lube segments saw their income rise compared to the previous quarter. In particular, the rebound in product spread pushed up operating income of lube business by 54% from the previous quarter.
For finance and other income, we had KRW 162.3 billion of FX gain through effective FX risk management under downward trend in $1 rate. As a result, income before tax in Q4 recorded KRW 137.6 billion. Net income stood at KRW 209.8 billion, which was higher than income before tax. Reflecting KRW 96 billion of investment tax credit from investment into Shaheen Project. The company's cumulative operating income before tax, and net income for 2023 is KRW 1.4 trillion, KRW 1.1 trillion, and KRW 998.2 billion respectively.
For your reference, the impact of regular T&I that the company conducted last year for major units on the full year operating income is KRW -460 billion. Moving on to the company's financial status. Year-end cash balance for 2023 was KRW 1.974 trillion, up from the previous quarter due to reduced working capital caused by the decline in oil price. The debt-to-equity ratio as of the end of 2023 slightly fell year-on-year to 42.5%. Despite KRW 2 trillion of capital expenditure for Shaheen Project in 2023.
Healthy income generation and timely external financing at a competitive interest rate enabled us to maintain cash balance and financial structure at an appropriate and stable level. As for profitability indicators, ROE and ROCE stood at 11.4% and 9.8% respectively in 2023. Annual EBITDA recorded KRW 1.853 trillion. Let me move on to the performance and outlook for each business segment. First, refining business. In Q4, refining business recorded KRW 265.7 billion in operating loss.
Regional refining margin inched down in Q4 from the previous quarter due to sluggish off-seasonal demand for transportation fuel and warmer than usual early winter weather. Low inventory level of global refining product supported the market. Average Dubai crude price dropped sharply from $93.3 per barrel in September to $77.3 per barrel in December, mostly offsetting the hike in the previous quarter due to increased output from non-OPEC countries led by the U.S. Extended output cut by OPEC+ and increased chances of SPR replenishment by the U.S. government limited a further decline in the market.
As for 2024 outlook, we expect Asian refining margin to be maintained at a level higher than past average, driven by globally low inventory level and stable demand growth. After its decline in October, with the beginning of off-season for transportation fuel, Asian refining margin bottomed out in November and widened consecutively in December and January. For your reference, Singapore refining margin is maintained at a healthy level above $6 per barrel in January.
In Q1, heating demand for the remaining winter, unplanned shutdown of global refineries caused by bad weather, spring regular T&I in the region, and demand uptick during China's Spring Festival are expected to support refining margin. Moreover, further expansion in the margin is projected during driving season in Northern Hemisphere and summer high season for travel, which start from Q2 end. New refining facilities in Nigeria and Mexico are starting up this year, but industry analysis points to uncertainties as to when they will settle into normal operation and how fast.
Major institutions' outlook up to now shows that such facilities will have limited impact on the market in the second half and onwards. I would like to share further details and outlook in key business updates. Next is petrochemical business. Petrochemical business recorded KRW 47 billion in Q4 operating income, similar to the previous quarter, despite a slight drop in chemical product spread, resulting from the basic fact caused by opportunity loss from T&I in Q3. For aromatics, PX and benzene spread in Q4 remained firm, recording $356 and $230 per ton respectively, despite their fall from the previous quarter.
Though seasonal slowdown in gasoline blending demand put downward pressure on the market, demand uptick from the start-up of a new PTA facility and high operation rate of downstream polyester facilities in China supported the market. In 2024, demand growth is anticipated to continue amid a significant reduction in new PX and benzene capacity addition. PX consuming PTA facilities in China are planned to go through large-scale capacity expansion, and gasoline blend demand is also expected to maintain.
As for olefin downstream, PP and PO market weakened in Q4 with narrowing spread due to dwindling demand in derivatives and minimized restocking of downstream customers at the end of the year amid slowing Chinese economy. Such weak sentiment is expected to continue into 2024, with capacity expansion led by China. Chances of gradual recovery also exist, aligned with the pace of Chinese economic recovery that will affect the demand of petrochemical products. Turning into lube business.
Operating income of lube business in Q4 recorded KRW 226.2 billion, up by 54% compared to Q3. Whole year operating income in 2023 stood at KRW 815.7 billion, continuing its great contribution to the company's overall income. In Q4, LBO spread improved from the previous quarter thanks to regional demand recovery after off-season, with the end of monsoon in India, while feedstock price adjusted downward in correspondence to fall in oil price.
In 2024, LBO market is forecast to remain firm, driven by continuous demand growth for Group II and III premium product, with no meaningful capacity expansion. Usual demand upturn during spring lubricant change season is also expected to revive the bullish sentiment in the market. Now, we would like to give updates on our key business. First, strong market fundamentals in 2024. As for refining business, global oil demand growth outlook for this year ranges between 1.1 million and 2 million BD, which is stable given its average from 1.5 million to 1.6 million BD.
On demand side, continuous bullish demand for transportation fuel is forecast to drive stable growth in Asia, including China, India, and Southeast Asia, as well as the Middle East and North America. As for gasoline, we anticipate international oil price, which sidelined since its fall in Q4 last year, to put less fuel cost burden on consumers, thereby supporting gasoline demand. Jet fuel demand, which recovered to 90% of a pre-pandemic level at the end of 2023, is also projected to continue such a trend into this year.
On supply side, net capacity addition is projected at 800,000 BD to 1 million BD in 2024. This comes with a limited direct impact on the market, according to major institutions, as there remain uncertainties with the timing for commercial operation and ramp up. The 650,000 BD refinery in Nigeria that is known to have started up the CDU in the beginning of this year, is the largest one this year. As new operation of a refining facility begins gradually and consecutively in the long term, it takes minimum 15 months and up to two years to settle into normal operation from its initial feed-in, as was witnessed in the recent cases.
Considering the situation, major institutions presume the new facility will only affect the market from the second half or afterwards. Next is supply-demand outlook for PX, that accounts for the largest portion in the company's petrochemical product portfolio. PX market also experienced a large capacity expansion led by China over the past few years. Despite 9,600 kta of capacity addition, which was the largest since 2006, spread of a PX over naphtha remained firm, averaging at $389 in 2023, driven by strong gasoline blending demand for feedstock aromatics.
In 2024, major capacity expansion will come to an end, and annual demand growth will naturally outpace capacity addition, such is projected to address supply glut in the region. PX market sentiment is anticipated to improve from 2023, driven by steady growth in gasoline blending demand and larger scale capacity expansion of PTA facilities, which amounts to 9 million tons. LBO market condition is also forecast to remain strong as there is no scheduled capacity addition that may affect the market condition.
Moreover, major LBO producers plan to have a regular T&I in the first half. Once realized, demand uptake from spring lubricant change season is expected to put upward pressure on spread, resulting in bullish market sentiment. Next is decarbonization roadmap of the company. We established a quantitative target of a 35% reduction in carbon emission against the business as usual by 2030, based on our mid to long-term business operation plan and NDC scenario. In the long term, we set net zero in 2050 as our way forward.
This comprehensive roadmap includes a specific reduction pathway based on estimated future carbon emission, required reduction amount, and cost-effective emission initiatives to achieve the target. This is updated on a regular basis, considering the company's mid to long-term strategy and the changes to external business environment, including global policy trend and development of a carbon abatement technology. We came up with specific initiatives to achieve the roadmap, which we are implementing in phase based on priority with consideration into feasibility, including technical maturity and economics.
We have five major initiatives to achieve decarbonization, which are operational levers, low carbon utility, clean hydrogen import, CCUS, and carbon credit. Under these initiatives, the company is going after heater efficiency improvements, waste heat recovery, and process heat integration for refinery energy efficiency. Second, low carbon utilities such as gas turbine cogeneration to reduce carbon intensity of electricity, steam and water used for engineering process, import of low carbon steam, and solar power generation facility.
Lastly, external hydrogen import, sales of CO2 for industrial use, and overseas CDM project to reduce global GHG emissions. According to estimated contribution by each initiative, operational lever, and low carbon utility that come with feasibility and economics compared to other initiatives, will allow us to achieve over 70% of a total planned reduction target by 2030. Such efforts made by the company are resulting in meaningful progress every year as we achieved 249 kta of carbon abatement from 36 action items in 2023.
34 items in operational levers, including energy efficiency improvements, were also completed. Solar power generation panel is installed at the idle space of Incheon Terminal to secure eco-friendly energy. In addition, the company is cooperating with Dongkwang Chemical , which manufactures carbon products such as liquid carbon for beverage and dry ice, as a result of capturing and utilizing 100 kta of CO2 from our hydrogen production process since 2016. Last year, we expanded captured volume of CO2 to 200 kta.
To better implement decarbonization roadmap, we monitor the status of facility investment and emission for carbon abatement regularly under the greenhouse gas reduction target we set as part of core performance indicators to achieve mid to long-term vision. Results are reflected to performance evaluation of all officers and team leaders. We will continue to share the status and our efforts for decarbonization with the market on a regular basis. With this, I'd like to wrap up my presentation. Thank you.
The Korean presentation is still ongoing. Allow us to wait for a brief moment. Thank you. Q&A session will start soon. Please wait for a brief moment. Thank you.
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Q&A session will begin. Please press at risk one, at risk and one if you have any questions. For cancellation, please press at risk two. That is at risk and two on your phone.
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The first question will be given by [Non-English content] from Shinhan Investment Securities. Please go ahead.
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Good morning. I am J.M. Lee from Shinhan Investment Securities. Thank you for the opportunity to pose questions. I have three questions. First is, what is S-Oil's estimated export quota from China? How do you think this will affect the overall regional supply and demand in 2024? The second question is you have shared with us the inventory evaluation for last year. Could you break that down into the business segments? Third is, recently the South Korean government's Financial Services Commission introduced the corporate value program.
Given the fact that your company's PBR is not very high, do you have any policies to promote the return to the shareholders other than the dividend policy?
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To answer your first question on China's light oil export quota. At the end of last year, China announced its first export quota for 2024 for the light oil, which amounted to 19 million tons, which is almost the same as 18.99 million tons that was issued as the first export quota in year 2023. Many institutions interpret this as the efforts by the Chinese government to strike a balance between keeping the refining industry efficient by controlling the export volume and driving up the Chinese economy through the exports.
Under the situation, the Chinese government is expected to have a total of 40 million tons in export volume for this year, which will not be very different from the previous years.
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However, in the short term, we are not expecting a big spike in the export volume by China because of a few reasons. First of all, there is a demand to stockpile inventory in advance of the upcoming China Lunar New Year holidays, and there's also scheduled 2 million BD regular T&I sometime around April and May. However, there is a subject to some changes depending on the export economics and the degree of demand in domestic China market.
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As for the inventory impact, in Q4, the total inventory valuation was a total of KRW -144 billion across all three business segments. If I may break it down into by each business segment, it was KRW -152 billion for the refining business, KRW -3 billion for the petrochemical business, and KRW +11 billion for the Lube Base Oil business. If you look at the whole year of 2023, the inventory valuation stood at KRW -98 billion, of which KRW -86 billion was in the refining business, KRW +9 billion in petrochemicals, and KRW -21 billion in Lube Base Oil.
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Thank you. As your third question on the corporate value program introduced by Financial Services Commission. We always put improving the shareholder value as one of our top priorities, and this is always reflected as a priority in running the business. We always reflected when we set the mid to long-term business strategies and also in our shareholder return policy. We fully share the government's policy intention, and we fully support it.
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We have a higher return on equity compared to our competitors, which is also an indicator of our competitive edge. In order to boost the company's own corporate value in the mid to long term, we are in the middle of the Shaheen Project with target completion at the first half of 2026.
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Even though we are in the middle of a very big project, the Shaheen Project, we have made it a guideline to maintain our dividend payout ratio at 20% or higher of the net income for fiscal year 2024 and 2025 in order to protect the shareholder value. Once the project is over, or even during the project execution period when we have secured enough a certain level of capital needed to invest in the project, we can raise the company's dividend payout ratio.
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After Shaheen Project, the company's capability and income creation will be much, much bigger, and therefore we will be more aggressive in the company's shareholder return policy. Once the government comes up with all the details around the corporate value-up program, we will look at them, and we will make proper responses to those new policies.
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I hope I answered your question.
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The following question is by Cho Hyun-ryul from Samsung Securities. Please go ahead.
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I am from Samsung Securities. Thank you for the opportunity to pose questions. I have three questions. First of all, I would like to know your estimation for the heating fuel demand in the winter season 2024, and what is your outlook on the diesel and kerosene margin for this year. Second question is, as you know, there are some supply logistics of disruptions in Panama Canal and the Red Sea. How is this affecting S-Oil's performance? Third question is, I understand that S-Oil recently started the initial feed in of the bio feedstock and the waste plastic pyrolysis oil into your refining process.
Could you please share with us any concrete business plan around this initiative or whether you have any plans to build a dedicated plant?
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To answer your first question about the heating fuel demand in 2024 winter season. As you know, in December 2023, the temperature in the northern hemisphere was higher than we thought. As a result of that, in December 2023, the heating fuel demand was rather disappointing. There is an indicator that can be a good barometer for heating fuel demand, which is called the Heating Degree Days. This went down by 20% in Europe compared to the previous year.
It was also the same in the U.S., where it also went down by the same level, which means the demand for heating fuel also moved down at pretty much the similar level.
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Things turned around in January 2024, where the U.S. East Coast, Japan, and Europe were hit with a cold snap in January and also starting in February 2024. As a result of that, we're estimating the Heating Degree Days in these regions to have increased by 10%-20%. If this remains the same during the remaining period, this will be the factor supporting the refining margin.
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As for the market outlook for diesel, jet fuel and kerosene 2024. In 2024, because of the low inventory in Europe and the cold snap, which affected the heating fuel demand in the winter season 2024, and the spring regular T&I in Asia and the Middle East, which is estimated to be similar to 2023, or even more than that, are expected to support the diesel spread 2024. There may be some slight adjustments as we move on due to seasonality.
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As for the market outlook for jet and turbo, the spread will be supported by the high heating fuel demand early 2024 because of the low temperature and because of the recovery of jet fuel demand in China. This will be another factor that will be supporting the spread throughout the year. The jet turbo recovered to almost 90% of the pre-pandemic level in 2023, and it is expected to go higher at the end of 2024 and at the end of 2025.
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As for the geopolitical tensions around the Red Sea, about 90% of our crude import passes through the Hormuz Strait and leaves the eastern part of Saudi Arabia and then passes through the Hormuz Strait. We have zero risk around the Red Sea issue. There is some spot volume that is passing through the Red Sea, but we're responding this through a detour around the Cape of Good Hope. The increase in the freight rate due to this is very minimal and negligible compared to the amount of crude that we import.
As for our product export, most of the export takes place within the region, which means there is no impact on our business and our exports because of the Red Sea risk.
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As for the disruptions in Panama Canal, we have no impact as a result of this. As you know, this is impacting the exports to Brazil and parts of South America and also the U.S. West Coast. When there are product exports outside of Asia and bound for Brazil and the U.S. West Coast, they have to pay a high freight rate premium. As a result of this, the price has to go down. We believe this could be an opportunity for the Asian refineries in terms of exporting to South America and the U.S. West Coast.
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The third question was about the renewable fuel. As part of S-Oil's green initiatives, in order to respond to the energy transition, we have a plan to utilize the bio feedstock and the waste plastic pyrolysis oil to produce eco-friendly fuel oil and eco-friendly petrochemical products.
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In order to enter into the market with speed, we started the co-processing, which is about producing the renewable fuel and eco-friendly chemical products from the bio feedstock and waste plastic pyrolysis oil, which is treated into the existing refining process. We earned the government's regulatory sandbox approval for co-processing, and on January 29th, which is only a few years ago, we did the initial feed-in of the bio feedstock and the waste plastic pyrolysis oil into our process.
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Our plan for this year is to acquire the international sustainability and carbon certification and sell the eco-friendly products in earnest. After that, we have plans to further increase the co-processing volume. Of course, this will be take with consideration into the impact on our processes and the market situation.
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In the mid-to-long term, we are considering separate facilities investment to produce the renewable fuel, and the details will be confirmed after doing the feasibility study.
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That answers your third question.
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The following question is by [Non-English content] from KB Securities. Please go ahead.
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I am from KB Securities, and I have two questions. First is about Shaheen Project. Could you share with us the CAPEX for 2024 through 2026? One interesting thing that captured my attention this time was the investment tax credit. Will this be communicated going forward on a quarterly or on an annual basis? Could you also tell us the rough amount of the investment tax credit? My second question has to do with the one-off cost. You said there was about KRW 144 billion in inventory loss in Q4. Is there any other one-off factors like the crude lagging impact or the T&I?
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Your first question has to do with the CAPEX for Shaheen Project and also the investment tax credit and its impact. In order for the company to mobilize all our resources and capabilities into this mega project, we have plans to minimize other investments to minimum. As of the end of last year, our total CAPEX into Shaheen was KRW 1.65 trillion. For this year, we're planning KRW 2.7 trillion, and the rest will be executed in 2025 and 2026.
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As for the investment tax credit, according to the regulations in the tax law, and assuming that our CAPEX will remain the same, our estimated tax credit for this year will be KRW 60 billion and KRW 80 billion for 2025 and 2026 respectively. However, the government has plans to extend the temporary investment tax credit, which was supposed to expire at the end of last year, and they have plans to have this put on for passage at the National Assembly this year.
If this goes through the National Assembly, the investment tax credit will go up from KRW 60 billion to KRW 170 billion for this year, which means there will be savings in the corporate tax and this will be reflected in the company's income.
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As for the lagging impact, which was the one-off impact resulting from the decline in the oil price. If you take out the KRW -144 billion in inventory valuation loss and the lagging impact, even if you take that out, we still maintained a positive operating income in Q4. Please take that into consideration. Please bear with us that we're not able to share the lagging impact resulting from the bearish crude oil price.
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There was no one-off impact from the regular T&I in Q4. This is the end of my answer.
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The following question is by Parsley Ong from JP Morgan. Please go ahead.
Questions. I have two questions. Earlier, you mentioned that you have pretty heavy CapEx, therefore it's a bit difficult to do immediate share buyback or hike dividends in lieu of the Korea Corporate Value-up Program. Could you share with us your thoughts on what kind of financial metrics, for example, what 2024 OP level or net debt to equity or asset liability ratio would make S-Oil comfortable to hike the dividend payout ratio to, let's say, 30% or 40%, or maybe even 50% in 2025 onwards.
Second question is for your lubricants. You had a pretty strong spread in the fourth quarter. I think part of that was probably due to the cheaper feedstock cost, which is related a little to the oil price decline, I believe. You mentioned a robust 2024 outlook, could you share with us your outlook on first quarter, given oil prices are significantly higher? Also, what is your outlook on lubricants in 2025 and beyond? Thank you.
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To answer your first question, I think the best way to maximize the shareholder value is to make the most efficient use of our equity in order to maximize the company's income. This is one of the ways to maximize return to the shareholders.
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In order to maximize the company's income, we are executing Shaheen Project, and during the execution period, we are going to maintain the company's financial stability.
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We are trying to enhance the company's operational efficiency in order to maximize the cash flow and the income during the investment period. As for the operating income, of course, we're trying our best to maximize it, but it is affected by some market volatilities. Even so, under such a volatile market conditions, we're trying our best to maximize the operating income as well.
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Our optimum target Debt-to-Equity ratio is set at 80%-100%, which we intentionally said because we believe this is the range that will allow us to maximize the corporate value. Once we meet this optimum target DE ratio, we can raise the dividend payout ratio after the project is over, or even during the project execution period when we believe we have secured enough capital for investment into the project.
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As for the Lube Base Oil market outlook, if we look at the whole year of 2024, we believe that demand will grow particularly during the high season when there will be the lubricant change in the spring season and the summer driving season. At the same time, this will be coupled with the limited capacity expansion in 2024, which will keep this market strong and healthy.
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We believe Q1 will be better than Q4 last year because supply will go down as some of the suppliers in Asia will go into the regular T&I. This will be at a time when we enter into the high spring season.
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As for the lagging impact, the overall direction still remains quite uncertain because as you said, the feedstock is linked to the oil price.
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With the tightening environmental regulations and growing demand for a high-quality Lube Base Oil, we are expecting higher demand for Group 2 and Group 3 going forward.
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There will be some capacity additions from 2025. We are expecting this market to remain quite bullish for the time being, because even though there will be new capacities coming up in a few years, we're still limited in knowing when they will settle down and when they will go into full operation. There's also some time needed to develop the formulation for lube base oil.
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That was my answer.
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Our scheduled time is up now, I think we have to close. Once again, I would like to thank all the investors and the analysts for showing your interest and attention to S-Oil. We are always so committed to communicating with the market based on transparency and fairness. If you have any further inquiries about the company and our business performance, please feel free to contact S-Oil's IR team. This closes the conference call for Q4 last year. Thank you very much.
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This concludes the fiscal year 2023 fourth quarter earnings resulted by S-Oil. Thanks for the participation.