Good morning. This is Katie Kang, Treasurer of S-Oil. I would like to extend my gratitude to our investors and analysts in and out of Korea for joining S-Oil's conference call for Q3 2026 earnings result. For today's conference call, we have CFO Ju-Wan Bang, our team leader, Ms. H.D. Jeong , and team members. First, I will take you through the highlights of Q3 results. In Q3 of 2026, global oil prices rose again amid escalating conflicts in the Middle East, including threats to shipping routes in the Red Sea, while global refining margins remained elevated.
Despite the domestic price cap, the refining segment's performance improved, supported by positive lagging effects from rising global oil prices and robust export margins. In addition, as lube base oil spreads reached a new record high in Q3, the company's total operating income increased 46% quarter-over-quarter to KRW 1. 4067 trillion . In particular, the lube business posted another record quarterly operating income of KRW 742.7 billion, accounting for over half of the total operating income and driving overall earnings growth.
The company's total operating income for the first nine months reached KRW 3.6 trillion. Next is the market outlook and our response strategies. Conflicts supply and demand conditions tight. Against this backdrop, we are maintaining stable refinery operations through diversified crude sourcing and logistics. This allows us to turn favorable market conditions driven by tight supply into tangible profits. Next is the progress of Shaheen Project.
The Shaheen Project is currently undergoing commissioning of major facilities in phases. We are focusing on company-wide efforts on ensuring a successful and the completion of the Shaheen Project with key stakeholders while reaffirming our commitment to successful commercial startup and stable operations going forward. This concludes my overview of the key highlights. Now, our team leader, Mrs. H.D. Jeong , will get into more details for Q3 performance and market outlook.
Good morning. This is S-Oil IR team leader, H.D. Jeong . Before we begin, please note that Q3 2026 financial results are provisional and therefore subject to change according to outside independent external auditor's audit results. First, please refer to page five for Q3 2026 financial results. In Q3, the company posted sales revenue of KRW 11. 9687 trillion, up 5.5% quarter-over-quarter, and operating income of KRW 1. 4067 trillion, up 45.8% quarter-over-quarter.
If you look at each business segment, operating income from the refining segment increased 29.7% QoQ to KRW 690.4 billion, supported by positive lagging effects from rising global oil prices and strong refining margins. Despite the continued domestic fuel price cap, robust export margins helped improve the segment's performance. Although the petrochemical segment recorded an operating loss of KRW 26.4 billion, the loss narrowed quarter-over-quarter. In the lube segment, tight supply-demand conditions continued in Q3– KRW 0.7 billion, setting a newly quarterly record.
For reference, the company recorded KRW 29.4 billion in inventory-related loss in Q3. In financial and other gains and losses, the company recorded net interest cost of KRW 56.4 billion and a net foreign exchange gain of KRW 609.7 billion due to foreign exchange decline. Q3 income before tax and net income came in at KRW 1. 9717 trillion and KRW 1. 4356 trillion, respectively. Moving on to financial status. As of the end of Q3 2026, the company held KRW 1. 564 trillion in cash, while net debt-to-equity ratio was 66.5%.
Amid global volatility, the company maintained a stable financial structure through timely financing at competitive rates and proactive working capital management while pursuing major investments such as the Shaheen Project. ROE for the first three quarters reached 35.1%, up 33.1 percentage points year-over-year, while EBITDA surged to KRW 4. 312 trillion from KRW 927 billion a year earlier. Now, I will go through market environment and outlook by each business segment. First is refining business segment on page seven.
As mentioned earlier, operating income from the refining segment improved QoQ to KRW 690.4 billion, supported by positive lagging effects from rising international crude oil prices amid sustained strong refining margins. Higher operating rates followed the restart of facilities after the completion of turnaround and an inspection also contributed to improved performance. Let me now walk you through Dubai crude oil price trends in the third quarter.
In Q2, international crude oil prices declined as the blockade of the Strait of Hormuz temporarily eased following the signing of the MoU between the U.S. and Iran to end the conflict. As a result, the monthly average Dubai crude price remained below $80/b bl in both June and July. However, as negotiations between the U.S. and Iran made little progress, concerns over disruptions to global crude oil supplies intensified in September, with shipping routes in the Red Sea also coming under threat in addition to the Strait of Hormuz.
Consequently, the average Dubai crude price rose to $113.7/bbl in September. Next, let me turn to international refining margins. In Q3, the refined product market remained extremely tight. Global refining operations continued to face disruptions due to attacks on Middle Eastern refineries and drone strikes on Russian refining facilities. This was further compounded by refined product shipping disruptions in the Strait of Hormuz and the Red Sea, as well as export restrictions on refined products imposed by major countries, including Russia.
As a result, Asian refining margins remained at high levels, continuing the trend seen in Q2. Kerosene and diesel spreads remained strong in the $60/bbl range in Q3, as they did in Q2. As for gasoline, demand remained strong during the driving season, while refiners adjusted their product yields in response to strong kerosene and diesel spreads and reducing the share of gasoline production. As a result, gasoline spreads remained largely unchanged quarter-over-quarter at $24.9 US/bbl in Q3. Next, let me turn to the outlook for Q4.
The refined product market is expected to remain tight in Q4 2026 as disruptions at major refineries continue and the fall T&I season begins in the U.S. and Asia. Ongoing discussions in major countries over potential export restrictions on refined products are also a factor constraining supply. As supply shortages persist, inventories of major refined products remain low globally. With the Northern Hemisphere entering the peak heating oil demand season, supply-demand balances are expected to tighten further, supporting strong refining margins in Q4.
Meanwhile, Saudi Arabia's official selling price, or OSP, fell sharply from $15.5/bbl for July crude intake to $-1.5/bbl for September intake, easing the company's crude oil costs. The downward trend has continued with the OSP for December crude intake falling further to $-5/bbl . However, the strength of refining margins in Q4 may vary depending on how geopolitical developments unfold. A more detailed outlook for market conditions and the company's response measures will be provided in the key business update section with supporting data.
Next is petrochemical business segment. In Q3, the petrochemical segment posted an operating loss of KRW 26.4 billion, narrowing from the previous quarter. Let me now discuss the market environment in Q3. In Q3, market conditions for aromatic products improved quarter-over-quarter. Supply tightened due to T&I and production costs cuts at PX and benzene facilities, while downstream demand for products such as PTA and styrene monomer showed signs of recovery. As a result, PX and naphtha spreads rose QoQ to $270 per ton, while benzene naphtha spreads increased to $187 per ton in Q3.
Stronger blending demand amid a robust gasoline market also contributed to tighter supply-demand balances for PX and benzene. For olefin downstream products, both PP and PO markets remained weak in Q3. First, polypropylene supply increased as operating rates at production facilities in China rose, while demand remained sluggish. As a result, PP spreads over propylene turned negative in Q3. For propylene oxide, demand weakened during the summer off-season for the construction industry. Consequently, PO spreads over propylene narrowed to $222 per ton, reversing the gains seen in Q2.
Next, let me discuss the outlook for Q4 2026. For aromatics, inventories remain low due to prolonged low operating rates following the Middle East conflict, while normalization of production at major facilities continues to be delayed. As a result, market conditions are expected to remain favorable. However, the sustainability of strong downstream demand seen in Q3 will be a key factor in determining whether spreads widen further.
For PP and PO, demand is expected to recover ahead of the year-end peak season, including Black Friday and Christmas. However, increased supply from newly operational production facilities in China is expected to limit improvements in market conditions. Next is lube business segment. Operating income from the lube business segment increased sharply QoQ to KRW 742.7 billion in Q3, setting a new all-time quarterly record. The LBO market remained extremely tight in Q3, particularly for Group III base oil, continuing the trend seen in Q2.
Group III base oil prices rose further due to production disruptions in the Middle East, which accounts for about 30% of global Group III base oil production, and shipping restrictions caused by the closure of the Strait of Hormuz. As a result, LBO spread increased by approximately $27/bbl QoQ to a record high of $166.8/bbl . As LBO production in the Middle East is expected to take considerable time to return to normal, tight supply-demand conditions are expected to persist in Q4 due to continued supply disruptions. Next is key business update. Let me now discuss the refining market outlook and the company's response measures.
As the Middle East conflict has prolonged, global gasoline and diesel inventories have fallen to their lowest levels in the past five years. On the supply side, refinery operation continued to face disruptions not only in the Middle East, but also in Russia. As of September, the scale of global refinery disruptions reached its highest level in the past decade, excluding the COVID-19 period. As crude oil supply conditions gradually improved, global refining utilization rates increased slightly from 75% in Q2 to 77% in Q3.
However, they remain well below the pre-war level of 81%. With refinery disruptions continuing globally, demand to restore inventories depleted during the conflict is also expected to rise. As a result, tight supply-demand conditions may persist into next year, even if geopolitical tensions ease. Global refining margins are therefore expected to remain strong for the foreseeable future. To turn favorable refining margins into actual profits, the company has strengthened flexibility in crude oil procurement, transportation, and refinery operations to respond to supply and logistics uncertainties caused by the Middle East conflict. First, we have diversified our crude oil supply sources.
While securing a stable supply of crude oil under our existing long-term contracts with our major shareholder, we have also diversified our crude sourcing by procuring various crude grades, including Saharan Blend and Murban, as well as additional volumes under long-term contracts. In addition, we have utilized government strategic oil reserves through swap arrangements. Second, we have flexibly managed crude oil transportation and routes and methods in close coordination with our major shareholder.
Depending on geopolitical developments, we have adjusted shipping routes, utilized ship-to-ship transfers for crude oil transported through the Strait of Hormuz, and taken alternative routes around the Cape of Good Hope. Finally, we have optimized refinery operations based on the characteristics of the crude oil we procured. As our crude oil slate has become lighter since the outbreak of the Middle East conflict, we have adjusted CDU utilization rates to maintain the overall balance of our refinery operations.
In this way, despite volatile crude oil supply and transportation conditions caused by geopolitical conflicts, the company has maintained stable refinery operations by diversifying crude oil sources and shipping routes and optimizing refinery processes. Going forward, we will continue to respond flexibly to various constraints to maximize the earnings benefits from favorable refining margins. Last is the progress of Shaheen Project. The Shaheen Project is currently undergoing commissioning, targeting startup in early 2027.
Mechanical completion of major facilities has been achieved, and the commissioning activities are being carried out in phases. We are also gradually starting up utility systems, including power, steam, and water, along with offsite facilities such as storage tanks and external pipelines. Through the commissioning of each process unit, we are ensuring readiness for startup in early 2027. We will keep you posted on the progress of Shaheen Project. This concludes our presentation, and thank you. [Non-English content]
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Now Q&A session will begin. Please press asterisk and one, that is asterisk one, if you have any questions. 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 Lee Jin-ho from Mirae Asset Securities. Please go ahead.
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Hello, this is Jin-ho Lee from Mirae Asset Securities. Thank you for the opportunity to pose questions, I have three questions. First is on the refining business. How much of the ongoing bullish refining margin is contributed by the temporary supply disruptions and the structural supply disruptions? How long do you think this bullish refining margin will continue even after the end of the war? My second question has to do with S-Oil's Shaheen Project.
You mentioned the commercial operation target at the beginning of 2027. Is this still valid? When do you expect the TC2C steam cracker and polymer and other major processes to achieve the normal throughput? When will you start to reflect the initial cost and depreciation? My third question has to do with the government's maximum price cap. When will all the related costs and the compensation be confirmed by the Korean government? When will you recognize the additional income or loss, gain or loss by the government? Is there any cost that will be excluded from the compensation?
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Speaking of the temporary supply disruptions, I believe you are mentioning about the consequences of the wars going on. We are limited in clearly quantifying the actual operations disrupted by the war in the Middle East and the war in Ukraine, but operations disrupted in the Middle East refining facilities is around 2.5 million BD based on the throughput reduction in the region, which is equivalent to 25% of the refining capacity. Russian refineries operational disruption due to the drone attack is around 2.2— around 2 million BD- 2.5 million BD or 40% of its refining capacity.
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In terms of the structural supply and demand, the global refining facilities net expansion dropped in the last few years. From 2024- 2025, net expansion was roughly 2 million BD lower than the demand growth during the same period.
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To talk about the demand side, a major institution's forecast this year's demand to be down by 1.7 million BD compared to the previous year, but the demand for 2027 to grow by 2.5 million BD driven by demand normalizing after end of the war and demand to stockpile depleted inventory. By contrast, global refining facilities net expansion is 0.3 million BD in 2026 and 0.8 million BD in 2027.
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Because of what I have just mentioned, even if the war comes to an end, you need the materials and the manpower to restore refining facilities damaged by the war, and therefore, it takes time for the refining capacity to restore to the pre-war level, and also there are the structural factors that are causing the supply shortage.
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That concludes my answer to your question.
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To answer your second question on the Shaheen Project, we are targeting completion of the commissioning early next year, and we will start up one by one according to our operational procedures. It will first start off with the PE process, and then that will be followed by the phase startup of the steam cracker and the TC2C. Once the startup is done, we are expecting about two or three months before we go into normal operation and commercial operation. The products that are produced during the startup period, the income and the cost of manufacturing coming out of that will be recognized as income and loss for the company.
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As for when it will be reflected in the company's performance and the size of it, they are all subject to change depending on the progress of the commissioning startup and the market margin, and therefore, we could not give you the clear answer for this. As for the depreciation, it will be reflected right after commercial operation.
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To answer your third question on the government's compensation in relation to the maximum price cap, the Korean government secured budget to compensate refiners' loss coming from the maximum price cap policy, and it said it will determine the compensation after deliberating it in the related committee every quarter.
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Accordingly, the company turned in the documents to apply for loss compensation during the first settlement period at the end of September, and we are now talking with the government to ensure a proper level of compensation. Right now, the government committee is reviewing the basis for calculating the loss and compensation, and thus we cannot share with you the detailed amount or when, for which I would like to ask for your kind understanding.
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The company will reflect the compensation from the government in the company's income the moment we are notified from the government, according to the accounting standards.
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That concludes my answer.
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The following question is by Cho Hyunryul from Samsung Securities. Please go ahead.
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Good afternoon. I am Cho Hyunryul from Samsung Securities, and I have two questions, one on the refining business and on the lube base oil business. First is, how long do you think the kerosene and the diesel margin will continue to stay high? It actually spiked in Q3, and do you think this will last and for how long? My second question has to do with the performance in the lube base oil business. Its spread has been very strong recently, and the supply is tightening. Do you think this will continue, and what is the factor behind the strong margin?
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To answer your first question, kerosene and diesel margin has been very bullish in Q3 as the tight market supply conditions have sustained. First, the attacks on the refining facilities in the Middle East and Russia have caused the exports of kerosene and diesel to go down. Another factor is the declining throughput of refining facilities in Asian refineries due to the lighter crude treated into the facilities and subsequent changes in the kerosene and diesel yield.
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We don't think the latest and the ongoing supply shortage will clear itself in the short term, although it will depend on how fast the supply disruptions in the Middle East clear itself and when the refining facilities in Russia will go back to full operation. While some of the production in Russia may recover, however, considering the latest supply situations, we believe it is likely that the current and the ongoing supply shortage will continue until early next year or even until the second half of 2027. If you add to this the rising demand for heating fuel for the winter season, the outlook suggests the diesel and kerosene margin to remain at an elevated level compared to the previous years.
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To answer your second question on the strong performance of the lube base oil business, our Q3 lube base oil operating income broke an all-time high after the record high level in Q2. The latest ongoing bull market is largely attributable to the tight supply of Group III rather than Group I and Group II.
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To go into further details into the Group III market, about 30% of the global supply volume has been subject to supply disruptions as the major producers in the Middle East were directly damaged by the drone attacks in March, which forced them to shut down their facilities and declare a force majeure. As we entered into the second half of the year, we saw many T&Is of major facilities, which is causing the supply to be short, led by the United States and Europe. As a result of this, demand for Korean lube base oil and premium has been going up.
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To answer your question on how the supply tightness, for how long this will last, I think it will take quite a long time until the facilities in the Middle East are restored and the logistics are back on the normal track. It will continue until next year. We're expecting the lube base oil to show a healthy performance until the supply situation in the Middle East is back on track, and we are closely monitoring when these facilities in the region will resume their operation.
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That concludes my answer.
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The following question is by Lee Jin-myung from Shinhan Investment Securities. Please go ahead.
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I am Lee Jin-myung from Shinhan Securities, and thank you for the opportunity to pose questions. I have two. First is, how is refining margin, inventory valuation, OSP, and FX contributed? How do they contribute to the company's 3Q performance? My second question has to do with the crude purchase agreement and the shipping contract structure. Could you tell us how much is coming from spot and how much from the term crude import? I would like to also know the portion between long-term charter and the spot charter.
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To show you the factors that contributed to the 3Q performance, first is on the refining margin. The Q3 refining margin based on the Singapore complex refining margin was pretty much the same as Q2. However, the Q3 throughput was higher than Q2 because we had T&I in Q2, and that worked in favor of the company's business performance.
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There is the inventory valuation. In Q3, the total inventory valuation loss was KRW 29.4 billion, and by business segment, it was KRW -27 billion for the refining business, KRW +32.5 billion in the petrochemicals, and KRW -35 billion in lube base oil and lubricants. For your information, as I mentioned earlier, as the oil price went up towards the end of Q3, there was a positive lagging effect of roughly KRW 268 billion.
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As for the OSP, there is no major difference on a quarterly average basis based on the crude that we treat. OSP has been showing significant drop after peaking out at the end of Q2, and we are expecting this to work in favor of the company's business performance in Q4. As for the freight, I gather you asked this question because freight has been very volatile lately. In Q3, the freight was almost the same as Q2 based on quarterly average basis.
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The last key factor is FX. It dropped by roughly KRW 180 at the end of Q3 compared to the previous quarter. On quarterly average basis, it dropped by about KRW 80 . This was reflected as a KRW 290 billion loss on the operating income side. However, we recorded roughly KRW 600 billion in FX gains on the non-operating income side.
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To answer your second question, we already explained to you about the crude purchase agreement earlier, so I will just move into the freight. The oil tanker freight has been shooting up since the war broke out. The spot freight used to hit over $30/bbl , but lately it has come down and calmed down to about $20 or higher lately.
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About 65% of our shipping contracts are based on long-term chartering, so the increase in the spot freight has limited impact on the company.
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There's a tendency for the higher freight to be offset by lowered OSP. Recently, we understand that Saudi Arabia recently lowered the OSP in consideration of mounting shipping cost burden by the buyers. In fact, Saudi Aramco announced the November OSP based on Arab Light to be $-5/bbl , which is $3/bbl lower than the previous month.
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This concludes my answer.
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The following question is by Shin Hong-joo from Shinyoung Securities. Please go ahead.
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Good afternoon. I am speaking on behalf of Mr. Shin Hong-joo. I'm the RA, so let me pose three questions on his behalf. First is about the refining business. As you know, the war in Iran is prolonging. How is S-Oil sourcing crude these days? What is the overall situation, and what is the throughput status of the refinery, and what is your outlook on this? My second question has to do with the lube base oil new capacity expansions in India and China. Has this been affected by the war in Iran, and what is your understanding of this based on the market intelligence? Third is S-Oil's shareholder return policy, including the new dividend payout ratio. What is your overall direction and plan for this?
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To answer your first question on crude sourcing, the company's crude sourcing is going well at the moment. We are relying on two shipping routes. First is the ship-to-ship transfer via Ras Tanura in Saudi Arabia, and the other one is lifting from Yanbu port in the kingdom.
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First, on crude sourcing, we are securing most of our crude requirement from Saudi crude, which best suits the refinery configuration through a long-term contract. We are also expanding more Saharan Blend, which is also subject to the term contract, and also going after the spot purchase of crude outside of the Strait of Hormuz as part of flexible response to the market conditions.
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As for the throughput, the CDU throughput of the company was 76% in Q2, but it went up to 81% in Q3 because in the previous quarter, we had T&I, but after they all came to an end, the throughput went up in Q3. However, part of the CDU throughput is affected by the lighter crude that's been treated into the facilities.
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But we are expecting the CDU throughput to gradually recover to the pre-war level when we are fully able to source crude through the Strait of Hormuz. In Q4, we are expecting the throughput to be higher than Q3 because more Ship-to-Ship transfer, which is bringing us more medium and a little heavier crude to the refinery.
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So to answer your second question, we understand that there is no change in the lube base oil capacity expansion plan because of the war. However, we are seeing some of the production being adjusted downward because of the war in the Middle East, and therefore, we cannot rule out the possibility of some schedule delays in the future.
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To remind you on the new capacity expansion schedules, India has plans to expand capacity for three facilities this year and in 2027, and most of it is expanding the production capacity of Group II and Group III. But we have seen many cases where India's capacity expansion projects saw some changes in the target schedule and the actual operation, and therefore, we need to continuously monitor the expansion schedule and the actual operation in India.
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We understand that there are plans for Group III capacity expansions in the Middle East and one in South Korea and Germany and the United States in 2027 and 2028. However, as you know, the lube base oil is not a commodity. It requires blending, and therefore, some time will be needed until the new capacity additions have an impact on the overall market supply and the market fundamentals.
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To answer your third question on the company's dividend policy, although we are in the middle of a mega project, Shaheen Project, in order to protect the shareholder value, we have established the dividend guidelines to keep our dividend payout ratio for FY 2025 and 2026 at 20% or higher of the annual net income, and they were shared with you through the disclosure.
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The 2026 annual dividends will be paid out in compliance with the company's dividend guidelines, which includes the KRW 800 per share that we paid already as interim dividends. But given the fact that we have a very bullish business performance this year, assuming 20% of dividend payout ratio at the minimum, we believe the dividend per share this year will increase quite significantly.
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As for our dividends in 2027 and onwards when the project is over, we will make a decision with priority on maximizing the shareholder value. We will look at them based on our financial structure, our income size, shareholder return, and cash flow. We will establish the dividend guidelines that includes the dividend payout ratio, and they will be shared with you through disclosure early 2027.
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This concludes my answer to your question.
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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 question. I have two questions. The first is a follow-up on your refining business. You mentioned the third quarter CDU utilization was only 81% despite no maintenance, and that was because of the lighter crude oil slate. Could you give us a sense of what percentage was light in third quarter? I think everyone has been cautious about potential for a further Middle East escalation potentially this month.
Has S-Oil already made preparations in advance by buying more than usual Middle East or medium sour crude oil so that your fourth quarter utilization can be, let's say, higher? Could you just give us a range of fourth quarter expectations? For example, if there is no escalation this month, then can we expect 95% utilization in fourth quarter? If there is an escalation, what kind of utilization might it drop to? For the second question, you Korean won situation, would you expect that to continue in fourth quarter? Thank you.
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To answer your first question, as you mentioned, our CDU throughput was a little low at 81% in Q3. This is not because we had difficulty or trouble in sourcing the crude, but because of the lighter crude that we treated into the facilities. In Q3, about 90% of our crude source was Arab Light and Saharan Blend. In Q4, actually, the Arab Light, they usually come through the Red Sea, but we imported Arab Medium through the ship-to-ship transfer from Ras Tanura in Saudi Arabia, and that is why in Q4 we are expecting our overall CDU throughput to stay at 90%.
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As for whether the possibility of the war in the Middle East escalating and how that could impact our CDU throughput, generally we are being flexible and switching between the Red Sea and the ship-to-ship to Ras Tanura. I do not think the war situation will have any major impact on our overall CDU throughput. We are being fairly flexible to the situation. But if we get to get more Arab Light through the Red Sea, there could be some adjustments in the CDU. But overall, we do not see a big impact.
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You asked a question about the FX impact on the company. As you know, in Q3, the FX dropped significantly by KRW 183. Based on our FX exposure, that resulted in an FX gain of about KRW 600 billion on the company's non-operating income side.
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Compared to the end of Q3, as you know, the FX went a little down further to KRW 20 or KRW 31. Given our FX exposure, we are expecting some FX gains in Q4. However, not as big as the FX gains that we reported in Q3. For your information, we are trying our best to keep a proper level of FX exposure to make sure that the FX loss in the operating income side is offset by the FX gains on the non-operating side with some time lag. By doing so, we are trying to make sure that the FX impact on the company's income before tax is neutralized.
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This concludes my answer.
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We have now reached the end of our scheduled time. Thank you again to all the investors and analysts for participating in today's earnings call and for your interest in S-Oil. We will continue to make every effort to ensure a transparent and fair communication with the market. Should you have any further questions, please feel free to contact our IR team. This concludes today's earnings call. Thank you very much.
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This concludes the fiscal year 2026 third quarter earnings result by S-Oil. Thanks for the participation.