Korean refiners’ operating profits to top W5tr

South Korea’s major oil refiners are expected to see their net operating profits exceed 5 trillion won ($4.4 billion) this year, thanks to high cracking margins and timely operational strategies, according to industry analysts.

SK Innovation, the industry leader, GS Caltex, S-Oil and Hyundai Oilbank have already posted combined operating profits of 4.05 trillion won from January to September, according to their regulatory filings, with analysts forecasting a bright outlook for the industry in the fourth quarter.

Despite low crude oil prices -- with Dubai crude sliding below $40 for the first time in seven years -- refining margins have remained high in the fourth quarter, according to analysts.

Cracking margins -- the key determinant of an oil refiner’s profits -- stood at an estimated $8.30 per barrel during the October-November period, peaking at $10.70 in November.

The cracking margin refers to the difference between the prices of the crude and the final product. Though figures differ across companies, a margin of around $4 is widely considered the break-even point for Korean refiners.

In addition to improved margins, the refiners’ efforts to diversify their crude import sources -- to decrease their vulnerability to oil price fluctuations -- and to cut costs by driving up production of high-value petroleum products based on cheaper, lower-grade crude are also perceived to have played a significant part in improving their profits.

“Korean refiners are forecast to post improved earnings in the fourth quarter, as refining margins remain very strong, despite low crude prices,” said Shinhan Investment Corp. analyst Lee Eung-joo.

“Demand for heating oil products like diesel, kerosene and aviation fuel typically go up during the winter, driving up margins of heavy oil distillates in the fourth quarter. Gasoline refining margins are also relatively high, though lower than that of the third quarter,” he said.

SK Innovation and GS Caltex are expected to log more than 300 billion won in operating income while S-Oil is forecast to post around 250 billion won in the fourth quarter, according to market analyst FnGuide. Industry watchers forecast Hyundai Oilbank to remain profitable during the period as well.

As analysts foresee a successful fourth quarter, Korean refiners are geared to record more than $5 trillion won in annual earnings this year, which would be the second-best performance to the record-high 7.2 trillion won posted in 2011.

By Sohn Ji-young (jys@heraldcorp.com)