■ Profit expansion in traditional businesses, including refining, petrochemicals, lubricants, and E&P leads to the turnaround

– The refining business achieved an operating profit of KRW 1.11 trillion, and the petrochemical business saw a QoQ increase of KRW 66.8 billion, recording KRW 237 billion for this quarter

– The lubricants business saw a slight increase in its operating profit to KRW 261.7 billion, while the E&P business achieved an operating profit of KRW 79.4 billion

■ The battery business accomplished robust revenue of KRW 3.17 trillion, with an all-time low operating loss of KRW 86.1 billion, demonstrating continuous growth

– Despite the decline in metal prices, its performance was bolstered by the increased production of plants in the US and revenue expansion, combined with the benefits generated from the AMPC, which amounted to KRW 209.9 billion. This led to a decrease of KRW 45.4 billion in operating loss compared to the previous quarter.

■ SK Earthon successfully started crude oil production in the oil field of the 17/03 block in China.

– Daily production at its peak is expected to be around 29,500 barrels

– Annual revenue are expected to be around KRW 500 billion, with an operating profit of about KRW 250 billion

* Under the assumption that Brent crude oil price is at USD 90 while the USD to KRW exchange rate is at KRW 1,300 per USD

On November 3, SK Innovation announced in its Q3 2023 earnings report that it achieved revenue of KRW 19.89 trillion and operating profit of KRW 1.56 trillion.

In terms of QoQ performance, both revenue and operating profit increased by KRW 1.16 trillion, and KRW 1.67 trillion, respectively. The operating profit in the refining business saw a significant improvement due to a rise in both oil prices and refining margins influenced by the production cuts of OPEC+ in the third quarter. The increased inventory-related profits due to the rise in naphtha prices for the petrochemical business, inventory effects from the rise in raw material prices for the lubricants business, and improved profitability from enhanced productivity in the battery business all culminated in the company achieving the highest quarterly revenue and operating profit for 2023.

SK Innovation stated, “The third quarter witnessed an expansion of profits across all business areas, including traditional businesses such as refining, petrochemicals, and lubricants, as well as productivity improvements in the battery business and the incorporation of the U.S. Advanced Manufacturing Production Credit (AMPC). These have led to the QoQ increase in the operating profit to revenue ratio by 8.4%, achieving the 7.9 % in this quarter for SK Innovation.” The company added, “The battery business is targeting a turnaround in the fourth quarter, with ongoing enhanced productivity of new overseas production plants, increased benefits from the AMPC, and cost reductions.”

■ Q3 2023 earnings by business

When breaking down the performance by business area, the refining business recorded an operating profit of KRW 1.11 trillion, the QoQ increase by KRW 1.52 trillion due to rising oil prices and refining margins resulting from improved market conditions. Despite a decline in product spreads (margins), the petrochemical business achieved an operating profit of KRW 237 billion, the QoQ increase by KRW 66.8 billion as its performance was bolstered by inventory-related profits due to rising naphtha prices.

The lubricants business demonstrated an operating profit of KRW 261.7 billion, the QoQ increase by KRW 1.8 billion, reflecting the inventory effect from rising raw material prices despite a decrease in base oil revenue volume. The exploration and production (E&P) business saw the QoQ increase in an operating profit by KRW 11.2 billion, resulting in the Q3 operating profit of KRW 79.4 billion due to the effect of reduced variable costs associated with decreased production volume.

The battery business maintained its growth in Q3 by recording KRW 3.17 trillion in revenue, which is 45% increase compared to the same quarter in the previous year. The operating loss for this quarter was the smallest on record at KRW 86.1 billion, demonstrating an improvement in the operating profit and loss by reducing of KRW 255.4 billion and KRW 45.4 billion compared to the first and second quarters, respectively. The company has reduced the scale of losses for two consecutive quarters due to the effect of increased benefits from the AMPC, which have been facilitated by the ramp-up of production and revenue expansion at its production plants in the US.

The benefits generated from the AMPC, which is in line with the US Inflation Reduction Act (IRA), for the battery business in the third quarter amounted to KRW 209.9 billion, significantly exceeding the combined total of KRW 167 billion for the first half of the year.

The materials business* recorded an operating profit of KRW 3.5 billion, an improvement of KRW 3.6 billion from the previous quarter, due to the revenue effect from increased revenue volume from key clients.

(*) It is based on the consolidated financial statements of SK Innovation, which removed internal transactions between SK Innovation’s subsidiaries. It may have differences from SKIET’s earnings

■ Q4 2023 market outlook

For the fourth quarter, the market outlook for the refining business remains bullish despite concerns over the trend of high interest rates from the US Federal Reserve and potential demand contraction, as low inventory levels persist alongside increased stocking demand during the winter season and a demand recovery trend in China, which lead to an outlook of exacerbated supply imbalances.

In terms of the petrochemical business, for polyethylene (PE) and polypropylene (PP), the rising naphtha prices are a factor for the margin contraction. However, a steady market outlook is anticipated as year-end demand increases. For para-xylene (PX), despite a decrease in demand following the end of the summer driving season, margins are expected to be only modestly reduced due to the continued high operation rates of major facilities in China.

The lubricants business anticipates margin contraction due to decreased seasonal demand, yet the level of decline is expected to be limited due to reduced supply volumes of unconverted oil (UCO) caused by rising diesel prices. The E&P business expects to see significant improvement in revenue and profit due to the start of crude oil production from the oil field in the 17/03 block. Peak oil production is anticipated to reach about 29,500 barrels per day, and annual revenue and operating profit are expected to be approximately KRW 500 billion and KRW 250 billion, respectively. Furthermore, more block exploration projects and block development are planned to continue down the road.

The battery business is expected to experience a short-term slowdown in electric vehicle (EV) demand growth and the impact of falling metal prices. However, improvements in the productivity of new overseas production plants, cost reductions, and increased benefits from the AMPC are projected to continue the trend of enhanced profitability. The materials business anticipates improved profitability in the fourth quarter through increased revenue volumes to key clients along with the business’ ongoing efforts to diversify its customer base.

SK Innovation stated, “Amidst ongoing geopolitical uncertainties, SK Innovation plans to reinforce the execution of its ‘Carbon to Green’ strategy while maintaining robust performance based on the competitiveness of its existing businesses.” The company further emphasized the commitment to its future green management strategy by stating, “In line with this, we will continuously strive to enhance our corporate value as a Green Energy & Materials Company by following strategies. Firstly, we will accelerate ‘Green Transformation’ through ‘Green Anchoring’ centered on batteries and Lithium-ion Battery Separator (LiBS) businesses, plastic recycling, and sustainable aviation fuels (SAF). In addition, for the enhanced corporate value, we are committed to broadening our green portfolio with ‘New Green Anchoring’ in areas such as hydrogen, ammonia, and small modular reactor (SMR) technology.”

[Attached]

(*) Refining: SKE, SKTI, SKIPC refining business/ Petrochem: SKGC, SKIPC petrochemical business
(**) Materials: Based on consolidated financial statements of SK Innovation, which removed internal transactions of SK Innovation affiliates.