Japan refiners maintain profitability in H1, outperform Asian rivals
Net income at Japanese oil refiners fell in the first half of their fiscal year, but they maintained profitability and outperformed their South Korean rivals as strong domestic margins shielded them from a weak overseas market.
Japan's top three refiners - Eneos Holdings, Idemitsu Kosan and Cosmo Energy Holdings - reported a 40% to 60% drop in net profit for the six months ended Sept. 30, compared to the year ago period, primarily impacted by substantial appraisal losses on oil inventories amid falling crude prices.
However, profits excluding inventory-related factors fell by only 22% to 35%, aided by improved margins for petroleum products in the domestic market.
For both Idemitsu and Cosmo, "the strength in core earnings progress against their guidance appears positive, as underlying margins remain strong," Thanh Ha Pham, Jefferies' equity analyst, said in a note.
Eneos' domestic margins were better than anticipated and upward revision was a surprise as energy prices and currency rates were unfavorable in the second quarter, Pham said.
"Real margins were solid, as supply and demand have relatively normalized," Eneos CFO Soichiro Tanaka told reporters on Wednesday. "Export slowed in the first half due to poor overseas market conditions, but we expect the market to emerge from the bottom in the second half, leading to an increase in our export volume."
Elsewhere in Asia, South Korean refiners, one of the region's top fuel exporters, reported sharp losses in the third quarter from oil refining.
Global refining margins have dropped in recent months because of weaker economic activity and the startup of several new refineries in Asia and Africa, while oil prices fell 17% in the third quarter, impacting profits at energy majors such as Shell and TotalEnergies.
Cosmo's earnings materials showed that Japanese gasoline margins were about 20 yen ($0.13) per liter higher than overseas margins recently.
Over the past couple of decades, Japan consolidated its refining sector by reducing capacity and merging companies as oil demand has been declining due to its aging population and as vehicles become more fuel efficient. That helped support refiners' profits from domestic fuel sales.
"Despite falling oil prices and sluggish petroleum product markets in Asia, our fuel segment has maintained healthy conditions, supported by optimization of domestic supply system," Idemitsu CEO Shunichi Kito said. "Additionally, our overseas trading business generated higher-than-anticipated profits," he said.
However, Japanese refiners have grappled with unplanned plant shutdowns in recent years because of its aging facilities.
Still, Eneos reported an improvement in its unplanned capacity loss (UCL), reducing it to 5% in the first-half from 8% a year earlier, thanks to enhanced construction quality during maintenance and smoother operations during restart periods.
"Earnings in the next fiscal year are expected to improve as UCL continues to decline, with additional benefit from our electric power business through the launch of a new LNG power plant," Eneos CEO Tomohide Miyata said.
For the full-year ending next March, Eneos boosted its net profit forecast by 5%, also supported by higher copper prices in its metals segment.
($1 = 155.8600 yen)
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