SK Innovation's Q2 operating profit jumps 61% on lubricant, battery strength

SK Innovation posted more than 3 trillion won ($2.07 billion) in operating profit in the second quarter, driven by strong performances in its lubricant and battery businesses.

SK Innovation announced Thursday that it recorded sales of 29.16 trillion won and operating profit of 3.49 trillion won in the second quarter. Sales rose 20 percent quarter-on-quarter and operating profit surged 61.3 percent. Compared with the same period last year, the company swung to a profit and sales climbed 49.9 percent.

The earnings rebound was driven by the lubricant and battery businesses as well as a lagging effect — the time lag between raw material procurement and cost recognition — stemming from the Middle East war.

SK Enmove, which handles the lubricant business, posted operating profit of 691.9 billion won, up 503.4 billion won quarter-on-quarter. Supply disruptions at major competitors in the Middle East pushed up margins in the base oil business, and earnings expanded on stronger sales in key global markets.

SK On's battery business posted operating profit of 821.8 billion won, with the operating result improving by 1.17 trillion won quarter-on-quarter. The gains were driven by higher sales volumes in Asia, receipt of customer compensation payments and an increase in tax credits under the US Inflation Reduction Act.

SK Energy, which operates the refining business, recorded second-quarter operating profit of 651.2 billion won, including roughly 560 billion won in inventory-related gains. However, overall profit shrank quarter-on-quarter as oil prices fell amid expectations of easing geopolitical risk following the signing of a war-ending MOU between the United States and Iran last month.

"A drop in oil prices toward the end of the quarter compressed related earnings, pushing June into a loss," an SK Innovation official said. "When oil prices fall, high-cost crude purchased earlier is reflected in costs with a time lag, producing a reverse-lagging effect and negative inventory impact, and end-of-period inventory valuation losses can also arise," the official added.

Among other subsidiaries, SK Geocentric posted operating profit of 43.7 billion won, SK Incheon Petrochem posted operating profit of 821.8 billion won, SK Earthon posted operating profit of 29.9 billion won, SK On Trading International posted operating profit of 313.2 billion won, SK ie technology posted an operating loss of 63.5 billion won and SK Innovation E&S posted operating profit of 105.9 billion won.

SK Geocentric saw operating profit fall 83.9 billion won quarter-on-quarter, hurt by a narrowing spread between paraxylene (PX) prices and naphtha, its feedstock. SK Earthon's operating profit declined 34.8 billion won quarter-on-quarter due to lower sales volumes tied to the shipping schedule for crude oil from its Chinese equity stake.

SK ie technology narrowed its operating loss by 9.7 billion won quarter-on-quarter thanks to improved utilization rates. SK Innovation E&S saw operating profit fall 177.3 billion won quarter-on-quarter as demand for its city gas business declined with the onset of the seasonal off-peak period in the second quarter.

Looking at the third-quarter outlook by business, conditions in the oil sector are expected to soften further. OPEC+ production increases and rising refinery utilization rates within Asia could ease upward momentum in oil prices and refining margins. In the chemical business, a recovery in PX demand is expected to be delayed into the third quarter.

In the lubricant business, base oil spreads are expected to gradually narrow if competitors' supply disruptions begin to ease. The oil exploration and production business plans to improve profitability by drilling additional production wells at its own blocks in China, Vietnam and other locations.

The battery business is expected to see continued profitability improvements through ongoing operational efficiency efforts. For the power and LNG business, the company anticipates a seasonal uptick in electricity demand and higher system marginal prices driven by rising oil prices.

"Amid continued uncertainty in the Middle East, we will do our utmost to ensure a stable supply of petroleum products while responding flexibly to market changes and continuing our efforts to improve operational efficiency and profitability," an SK Innovation official said.