SK Innovation Co. Ltd.

The negative outlook on SKI reflects our view that the company's financial credit metrics have limited headroom for the ratings over the next 24 months. This takes into account the company's more aggressive financial policy amid the volatile oil and refining market. SKI's operations remain vulnerable to fluctuations in oil prices, which could lower its ability to weather negative developments. We may lower the ratings if SKI's adjusted debt-to-EBITDA ratio exceeds 1.5x on a sustained basis. This may be a result of a significant deterioration in operating cash flows due to weaker refining and petrochemical margins than we expect and higher swings in oil prices. This also may be a result of the company's financial policy becoming more aggressive with

...SK Innovation Co. Ltd. (SKI) will remain one of the largest and most complex refiners in Asia. The company benefits from strong economies of scale, good track record of high operating efficiency, and integration of the oil refining business with the petrochemical and lubricants business. Its diversified product mix helps generate stable operating cash flows. The company's earnings and cash flows are exposed to the inherent volatilities in oil refining, petrochemicals, and crude oil prices. In 2018, SKI's adjusted EBITDA dropped 26% to Korean won (KRW) 3.1 trillion. Weak oil refining margins and a sharp decline in crude oil prices resulted in a substantial inventory loss of about KRW590 billion in the fourth quarter of 2018. The inventory loss is a temporary phenomena, and we expect earnings to recover in 2019 from a low base.That said, overall EBITDA will be KRW3.2 trillion-KRW3.6 trillion annually over the next two years, compared to the peak-of-the-cycle level of KRW4.2 trillion in 2016...

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