S-Oil sees softer Q3 refining margin after record Q2 profit

S-Oil Corp., the South Korean unit of Saudi Arabian Oil Co., on Thursday posted record sales and operating profit for a second consecutive quarter on the back of soaring refining margins.

The Saudi Aramco unit, however, warned that regional refining margins will decline in the third quarter, signaling a smaller profit for Korea's third-largest oil refiner.

Operating profit during the April-June period more than tripled to a record high of 1.72 trillion won ($1.3 billion), from 571 billion won a year earlier. The previous record-high operating profit of 1.33 trillion won occurred in the first quarter.

Its second-quarter net profit more than doubled to 1.01 trillion won from 410.7 billion won.

“Regional refining margins soared as supply was constrained by sanctions on imports of oil from Russia and reduced exports from China, while demand was solid, boosted by a post-pandemic recovery,” the company said in earnings presentation material prepared for an investor relations event.

Gasoline, diesel and jet fuel spreads surged to unprecedented levels under extraordinarily tight supply and thin inventory, it said.

Refining margin, the difference between the total value of petroleum products and the cost of crude and related services, is closely linked to international oil prices.

The benchmark Singapore refining margin soared to a record $20.8 per barrel in the second quarter, compared with $4.1 in the first quarter and a negative $2.3 in the second quarter of 2021, according to S-Oil.

DOWNWARD CORRECTION IN Q3

The company said it expects the regional refining margin to fall in the third quarter.

“Regional refining margins are expected to correct downward but stay elevated compared to previous cycles, supported by the tight supply situation in the global refining system,” S-Oil said in its IR statement.

The diesel spread is expected to soften ahead of seasonal heating demand in winter, but stay well above the pre-Ukraine war level amid reduced exports from China, it said.

S-Oil said its refining business posted 1.45 trillion won in operating profit on sales of 9.25 trillion won in the second quarter. Its petrochemical division posted an operating profit of 18 billion won on revenue of 1.3 trillion won, while its lubricant oil business posted an operating profit of 259 billion won on sales of 888 billion won.

The company’s strong second-quarter earnings came amid controversy over the possible introduction of a windfall tax, a tax on refiners’ extra gains from surging oil prices.

The introduction of a windfall tax is also being discussed in the US. In June, the White House said it was considering congressional proposals to impose a windfall tax on oil and gas producers’ profits to benefit consumers.

Critics in Korea said it will be inappropriate for the Korean government to adopt a windfall tax since local refiners’ profits rely only on refineries, whereas global energy giants have diverse means of generating revenue and can enjoy strong returns when oil prices surge.

Write to Ik-Hwan Kim at lovepen@hankyung.com
In-Soo Nam edited this article.