GS Group’s heavy reliance on refining hinders operations
Concerns have been raised about Korea’s eighth-largest conglomerate, GS Group, due to its heavy reliance on refining, which has put the entire group at risk as crude oil prices and demand for petroleum products have plummeted in recent months.
GS Group is striving to diversify its portfolio — it set up an investment firm in the U.S. to embrace fresh businesses — but industry watchers say launching new innovative projects should be expedited under new Chairman Huh Tae-soo.
In an earnings report from holding firm GS Holdings, it saw consolidated sales of 4.2 trillion won ($3.39 billion) and a 9.5 billion won operating profit in the first quarter of the year, down a respective 5 percent and 98.1 percent from a year earlier.
The disappointing numbers are attributable to poor earnings from its refining subsidiary, GS Caltex. GS Holdings fully owns GS Energy, which has a 50 percent stake in GS Caltex.
In the first quarter, GS Caltex posted a 1.03 trillion won operating loss, plunging from a 329.5 billion won operating profit last year. The company also recorded a 1.01 trillion won net loss in the first quarter.
Not only GS Caltex but also three other major local refiners recorded shocking operating losses in the first three months of the year, totaling 4.4 trillion won, as the industry was hit hard by plummeting global crude oil prices in addition to deteriorating demand.
The outlook is grim for the second quarter as well.
According to brokerages’ reports, refining margins in the second week of May stood at minus $1.60 per barrel, extending a negative streak for nine consecutive weeks. As a result, refiners are suffering difficulties in coping with soaring inventory, to the point where an industry official was quoted as saying “firms may have to look for bath tubs to store oil.”
The pessimistic outlook is worrisome for the entire GS Group, because of its heavy reliance on GS Caltex.
GS Caltex’s sales accounted for 57.4 percent of the group’s total revenue last year, up from 57.2 percent in 2018. Its operating profit also accounted for 41.6 percent of the group’s total in 2019. Among GS Caltex’s own businesses, refining accounted for 86.6 percent of last year’s sales, up from 85.8 percent in 2018.
Due to this revenue structure, concerns have been raised about the group’s risk management, because the refining business is heavily swayed by outside factors.
“Compared to other petroleum firms in Korea, GS Caltex has maintained a high reliance on refining, while others have already diversified their portfolios,” an industry official said. “With no refiners being free from uncertainty regarding oil prices, this has become a serious risk for the group, and GS’ first-quarter earnings showed this.”
GS Group appears to be aware of the concerns, with Huh highlighting open innovation as one of the group’s new strategies. In March, GS Holdings’ board agreed with his proposal to establish a venture fund firm in Silicon Valley.
Huh, who was appointed as chairman in December last year, led GS Home Shopping from 2007 and earned plaudits for the company’s successful entry into overseas markets and mobile shopping.
His appointment was interpreted as GS Group’s bid to seek fresh leadership to diversify the group’s oil-centric portfolio.
During his first public appearance after becoming chairman in January, Huh stressed the importance of companies “sharing healthy influences with various business partners including startup companies,” as well as pledging that the group will introduce the philosophy of open innovation.