S Korean refiner Hyundai Oilbank plans IPO in 2022 on domestic fuel demand recovery, ample liquidity

South Korean oil refiner Hyundai Oilbank plans to list its shares on the country's main bourse next year as the fuel producer aims to take full advantage of the country's upbeat oil demand recovery outlook and strong refining margins, while favorable capital market conditions amid low interest rates bode well for raising funds.

Hyundai Oilbank's board members have approved a plan to push for an initial public offering, or IPO, some time in 2022, a company official told S&P Global Platts.

Hyundai Oilbank is owned 74.13% by Hyundai Heavy Industries Holdings that runs South Korea's top shipbuilder Hyundai Heavy Industries, while Saudi Aramco holds a 17% stake as the second-biggest shareholder.

Hyundai Heavy Industries Holdings said its board has also approved the refining subsidiary's IPO plan.

This is the second attempt to list Hyundai Oilbank on South Korea's stock exchange after the refiner aborted its first IPO bid in late 2018 in the wake of a deal by Hyundai Heavy Industries to sell a 17% stake in Hyundai Oilbank to Saudi Aramco in January 2019 for $1.24 billion.

Demand recovery, upbeat sales, margins

The refiner's IPO plan comes at a strategically appropriate time as South Korea's domestic consumer and industrial fuel demand is poised to stage a steady recovery from the lows seen in 2020 due to the outbreak of the coronavirus pandemic, industry and market participants said.

"South Korea is likely to be among the first batch of countries to emerge out of the pandemic thanks to the fast pace of the country's vaccination progress... subsequently, domestic oil products demand has started to pick up in recent months, improving the fuel sales outlook, which would be highly positive for investor sentiment," said a marketing source at Hyundai Oilbank.

Over January-April, South Korea's oil products consumption rose 1.4% year on year to 297.291 million barrels, latest data from state-run Korea National Oil Corp. showed.

Consumer demand for transportation fuels in particular will likely continue improving in line with increasing population mobility as the nationwide vaccination program gathers pace, refinery officials and market analysts said.

According to Platts Analytics, the country is forecast to consume 872,000 b/d of gasoline, diesel and jet fuel combined in 2021, up from 837,000 b/d in 2020.

Hyundai Oilbank reported an operating income of Won 412.8 billion ($369 million) in the first quarter, recovering from a Won 563.2 billion operating loss in the same period a year earlier and a Won 78.6 billion operating loss in Q4 2020. Its Q1 sales rose 2.7% year on year to W4.54 trillion.

The sharp uptrend in Asian middle distillate crack spreads would continue supporting the refiner's domestic product sales and export earnings, while jet fuel margins may eventually recover as international flights are bound to flourish when the pandemic ends, the company official and marketing source said.

The Singapore 92 RON gasoline crack spread against front month ICE Brent crude futures has averaged $5.31/b to date in H1, a sharp improvement from the $2.47/b averaged in H2 2020 and $1/b in H1 last year, Platts data showed.

Ample financial market liquidity

Hyundai Oilbank's IPO bid was also largely driven by favorable capital market conditions as ample liquidity in the financial market amid record-low interest rates, on top of the country's rosy economic recovery outlook, will likely spur investor appetite, the company official and fixed income market analysts in Seoul said.

The Bank of Korea has been maintaining its benchmark policy interest rate at a record low 0.5% since May 2020. The central bank's aggressive monetary easing stance continues to keep cash flows flourishing in the financial system, with the M2 money supply indicator in April rising by 50.6 trillion won ($45 billion) from March to reach 3,363.7 trillion won ($3 trillion), the largest month-on-month growth in more than 12 years, latest BOK data showed.

The M2 is used to gauge the flow of cash in short-term funds that could be easily converted into cash.

With CPI inflation poised to pick up, central banks in major economies around the world have started to consider the timing of interest rate hikes. Still, easy monetary policy is to stay for a while and abundant liquidity will continue to work in favor of IPOs and the broader stock market, analysts at Kyobo securities and SK securities in Seoul said.

South Korea's benchmark stock index KOSPI closed at a record high of 3,278.68 points June 16.

The BOK on May 27 raised the country's 2021 economic growth forecast to 4% from a 3% growth projection made in February.