[Click e-Stock] "Refining Enters Structural Strength... S-Oil Target Price Raised"

"Accumulation of Decarbonization Policies and Geopolitical Risks"

On July 15, Shinyoung Securities raised its target price for S-Oil from 140,000 won to 175,000 won and maintained its ‘buy’ investment rating.

Hongjoo Shin, a researcher at Shinyoung Securities, explained, “We raised the target price-to-earnings ratio (PER) to the average level during the previous upcycle,” and evaluated, “Since the 2020s, the refining industry has entered a period of structural strength due to the ongoing effects of decarbonization policies and accumulating geopolitical risks.”

As the background, she noted, “Decarbonization policies are limiting net increases in global refining capacity, and even before the war, global petroleum product inventories were low. The war has sharply depleted inventory levels. In this situation, division within OPEC and the diversification of crude oil procurement by Asian refiners are leading to a structural discount on the official selling price (OSP), which is expected to contribute to cost reduction.” She added that with the conclusion of large-scale investments over the past three years, an increase in payout ratio can also be expected.

She forecast that S-Oil’s second-quarter operating profit will exceed market expectations. She projected an operating profit of 1.1 trillion won, expecting a turnaround to black from a loss compared to the same period last year. Shin said, “This is thanks to solid performance in refining as well as a significant improvement in base oil business,” and added, “Refining operating profit is expected to be 690.4 billion won. Although oil prices have dropped sharply, inventory profit of about 210 billion won is estimated due to increased input OSP.”

She expects operating profit in the third quarter of this year to drop 54% from the previous quarter. Refining operating profit is projected to fall sharply to 145.6 billion won. Shin explained, “This is because, in the process of a sharp fall in OSP that soared right after the war, there will be temporary inventory losses and negative lag effects.” She further anticipated, “From August, when lower oil prices and OSP are reflected in input costs, earnings will likely improve thanks to strong refining margins.”

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