South Korea's four major oil companies are expected to report solid earnings for the second quarter of this year, despite ongoing controversies surrounding price-fixing.
According to FnGuide on July 23, SK Innovation's operating profit for Q2 is projected to reach 1.8 trillion won, while S-Oil is expected to exceed 1.2 trillion won. Unlisted companies GS Caltex and HD Hyundai Oilbank are also anticipated to perform well in their refining sectors.
The strong performance of the oil companies in Q2 is attributed to some lagging effects and robust refining margins. However, industry experts believe that the increase in refining margins has played a more significant role in improving earnings than the lagging effects.
In the first quarter, a surge in international oil prices following the outbreak of conflict in the Middle East led to a substantial increase in the value of crude oil and petroleum product inventories held by the oil companies, resulting in large inventory valuation gains. Although the rise in oil prices has somewhat stabilized in Q2, the earlier acquisition of crude oil at relatively low prices has continued to contribute to some lagging effects in the refining process.
High refining margins have offset the decrease in inventory valuation gains. While crude oil prices have risen since the Middle East conflict, prices for petroleum products such as gasoline and diesel have shown a relatively stronger trend, widening the gap between crude oil import prices and product sales prices. Steady demand for jet fuel and diesel, along with disruptions to some refining facilities in the Middle East due to attacks, have also contributed to the increase in refining margins.
However, alongside the positive earnings, legal and policy risks surrounding the oil industry are growing. On July 6, the Seoul Central District Prosecutors' Office indicted SK Energy, GS Caltex, S-Oil, and HD Hyundai Oilbank, along with related executives, on charges of violating fair trade laws.
The prosecution alleges that the oil companies exchanged price information and collectively raised domestic petroleum product prices following the Middle East conflict. The estimated direct impact of the price-fixing scheme is around 14.2 trillion won, and when considering the competitive restrictions due to price-following by other oil companies, the total is estimated to reach 26 trillion won.
As penalties or fines related to the price-fixing allegations have not yet been finalized, the direct impact on Q2 earnings is expected to be limited. However, additional costs such as fines, penalties, and civil damages may arise depending on the outcome of future trials.
There are also unresolved issues regarding the government's price cap system for petroleum products. The government has allocated 4.2 trillion won in contingency funds to compensate for losses incurred by oil companies due to the price cap, but it is reported that there are disagreements between the government and the industry regarding the criteria for loss assessment.
An industry insider stated, "While we cannot expect large-scale inventory valuation gains in Q2 like in Q1, refining margins and some lagging effects have supported earnings. The price-fixing trial and the settlement of losses from the price cap have not yet impacted this quarter's results but may affect the second half of the year."
* This article has been translated by AI.
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