TEXT-Fitch: No immediate rating impact on SKI from weak Q412 results

Mon Feb 4, 2013 2:16am EST

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(The following statement was released by the rating agency)

Feb 04 - Fitch Ratings says that South Korea-based SK Innovation Co., Ltd's (SKI, 'BBB'/Stable) weaker-than-expected profitability in Q412 has no immediate impact on its ratings.

SKI's preliminary 2012 results fell short of Fitch's and general market's expectations, mainly due to a weak performance in its petroleum refining and marketing business and an unexpected operating loss in its lubricant business in Q412.

While the preliminary results indicate SKI's funds from operations (FFO) adjusted net leverage for 2012 is likely to have breached Fitch's negative rating guideline of 3.0x, Fitch does not believe the company's latest performance to be a strong reflection of its prospects in 2013.

SKI's ratings already take into account the cyclical nature of its businesses and fluctuations in the company's earnings due to high sensitivity to commodity prices and a less than favourable economic environment. Fitch's forecasts for SKI over 2013-2014 also incorporate subdued margins for its refining, petrochemical and lubricant businesses. Further, the company's upstream operations are expected to benefit from high oil prices while its chemical division should benefit from its para xylene capacity expansion (3.1 million ton) that is scheduled to begin commercial operations from 2014.

Fitch further takes comfort from SKI's commitment to improve its leverage, which has resulted in total debt falling to KRW7.9trn at end-2012 from KRW8.9trn at end-2011. It had cash and liquid resources of KRW3.7trn at end-December 2012.

SKI reported Q412 revenue and operating profit of KRW17.2trn and KRW202bn respectively. While revenues increased 13% over Q411, operating profit was 40% lower. For 2012 revenue and operating profit were KRW73.3trn and KRW1.7trn respectively; operating profit was 43% below its 2011 results and broadly 15% lower than Fitch's expectations.

SKI's petroleum refining and marketing business reported an operating profit of KRW78.5bn in Q412 compared with KRW214bn in the previous quarter as a result of depressed refining margins and inventory-related losses. The Singapore complex refining margin fell to USD 6.6 per barrel in Q412 from USD9 per barrel in Q312, reflecting challenging market conditions. Although average Dubai crude oil prices were broadly similar to those of the previous quarter (USD107.5 in Q412 versus USD106.3 in Q312), a long inventory processing period resulted in SKI booking inventory losses of around KRW140bn in Q412.

The performance of SKI's lubricant business was also severely affected with an operating loss of KRW28.6bn compared with an average quarterly profit of KRW90bn-100bn in the first three quarters of 2012. SK Lubricants Co., Ltd, a SKI subsidiary which exports around 80% of its products, was affected by slower demand in its core markets - Europe and US - and, consequently, by weaker margins for the lubricant business overall. Although Fitch expects lower margins for lubricants in 2013-2014 due to incremental global capacity, as with refining operations, lubricant margins should start improving in late Q113 with the beginning of the driving season in US.

SKI's latest operating profit excludes foreign currency exchange gains of KRW74bn, which hitherto have been classified under operating profits by the company. However, Fitch has consistently excluded such FX gains and losses in the agency's calculation of EBITDA and FFO for SKI.

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