Starting the Year on Right Note

SK records 32 pct rise in pre-tax income of 763 bln won for 1st qtr

SK Corp., the nation's largest energy company in Korea and a major regional oil exporter in Asia, said its sales in the first quarter this year, up 11 percent from the same period last year, standing at 5.3 trillion won, due to high oil prices and the rise in product prices.
The oil company saw its operating profit, however, decline 14 percent from the same period in the preceding year, recording 330 billion won, due to lower refining margins and petrochemical spreads. Offsetting the result, the company increased its non-operating profit by 124 percent year-on-year to 433 billion won from 194 million won in the first quarter of 2005 contributed by equity method gains as well as foreign exchange gains from the appreciation of the Korean won. As a result, the pre-tax income rose by 32 percent from the year earlier to 763.4 billion won.
"While market condition for the petrochemical division partly contributed to a lower year-on-year performance in the first quarter" operating profit, the company expects to fully achieve the annual target of 21.3 trillion won in revenue and 1.4 trillion in operating profit by securing a more stable refining margin, strong growth in lubricant business, and achieving strong profit growth in E&P business thanks to higher crude oil prices."the company said.
In spite of a decrease in the refining margin, operating profit for the company's petroleum business improved for the first quarter of this year. The most important factor was the company's crude oil purchasing strategy. To improve crude oil economics, SK Corp. increased its purchases of West Africa crude oil from December 2005, which provided more cost efficiency than Middle Eastern crude oil. As a result, West Africa crude oil reached 25 percent of the total supply mix by January of this year, exceeding the 2005 average of 7 percent. Another factor is the utilization of low-priced inventories.
Since the economics of using Middle Eastern crude oil was not high enough, the division reduced imports of oil from the Middle East and instead utilized inventories accumulated when oil prices were more stable.
The price of naphtha for the first quarter of 2006 rose a substantial 26.4 percent year-on-year and these volatile market conditions reduced profit margins, which resulted in a 57 percent reduction in operating profit for the petrochemical division compared to a record breaking 2005 first quarter's results. However, despite the rise in naphtha price and unfavorable market conditions, the petrochemical division secured 89.4 billion won of operating profit. Looking ahead into the second quarter of 2006, major maintenance shutdowns in Asia are expected, which will tighten the supply and improve profitability.
The most improved results for the first quarter of 2006 came from SK's lubricant division. Sales and operating profit jumped by 34 percent to 174.6 billion won and 65 percent from 20 billion won to 33 billion won, respectively, years-on-year. Successful management of the rising raw material cost on the product price was a key factor for such results.
In order to meet the rising global demand for group III base oil, the company recently signed a joint venture agreement with Indonesia's oil company Pertamina on April 23 to build a third lube base oil plant in Indonesia. SK's lubricant division has high expectation that this agreement will further strengthen its market leadership and increase its profitability in the group III base oil market.
The exploration and production division's sales and operating profit for the first quarter of this year reached 75.1 billion won and 47.7 billion won, respectively, in spite of the contract expiration of the Marib Yemen oil block. The most notable result was the unit's operating profit, which increased 63.5 percent, reaching 47.4 billion won compared to 28.5 billion won last quarter.
The average daily production for the first quarter was approximately 20,000 barrels per day which has slightly decreased from last year's average of 24,000 bpd. However, the division expects additional oil and LNG production from Brazil BMC-8, YLNG and PLNG blocks to further enhance its profitability from the second half of 2007 onwards. nw

SK Corp. Chairman & CEO Chey Tae-won.

A night view of SK's Ulsan oil refinery complex.