"Refining Stocks Rise as Interest Rates Climb... Existing Facility Value Highlighted"[Click e-Industry]

Scarcity Value of Existing Refineries Rises as Interest Rates Soar
Outperformed the Market During Previous Rate Hikes

There is analysis in the securities industry suggesting that the current trend of high interest rates, which constrain new refinery investments, could actually increase the asset value of existing refiners.

According to IBK Investment & Securities on September 10, researcher Lee Dongwook stated the previous day, "Interest rate hikes raise the hurdle for new capacity expansion and increase the pressure for phasing out high-cost, aging facilities," maintaining S-Oil as the top pick in the refining sector.

High Interest Rates Enhance Scarcity Value of Existing Refining Facilities

The refining industry is a representative example of a capital-intensive sector that requires a large upfront investment. When interest rates rise, the costs of undertaking new projects increase as well, reducing the economic viability of new expansions. In addition, older facilities that require additional investment for environmental regulation compliance and technological advancement face higher capital costs, mounting the pressure to shut them down.

Lee emphasized, "Unless demand falls sharply, operating rates and the relative asset value of existing refining facilities may actually increase. Given that S-Oil has already made significant investments in its refining facilities, these assets are likely to be regarded as irreplaceable, especially as the economic merit of new facilities declines."

Amplified Refining Margin Volatility amid Low Inventory

Changes in inventory levels also increase the linkage between interest rates and refining margins. The crude oil and petroleum products sector requires a significant amount of working capital, so as interest rates rise, refiners and distributors face greater inventory financing costs, which encourages them to keep inventories at lower levels.

When inventory levels are low, even minor supply-demand shocks can lead to sharp reactions in spot product prices. During scheduled maintenance, unexpected facility shutdowns, or seasonal demand increases, the prices of gasoline, diesel, and jet fuel can rise faster than crude oil prices, pushing up refining margins.

Lee explained, "In the current refining industry climate, it is more important to focus on the duration of high refining margins than the actual peak margin. Even if demand does not grow significantly, if supply capacity remains limited, increased utilization rates and refining margins are unlikely to revert quickly to historical averages."

Assets Generating Cash Flow Stand Out... Outperforming During Past Tightening Periods

Typically, during periods of rising interest rates, growth stocks— which depend heavily on distant future profits—face significant downward valuation pressure. In contrast, refinery stocks generate current cash flow from already established facilities.

Refiner stocks also demonstrated strong performance during past interest rate hikes. Lee pointed out that refining stocks outperformed the broader market both during the U.S. Federal Reserve's tightening cycle from 2004 to 2006, and amid rapid rate increases from 2022 to 2023.

He added, "High interest rates result in a higher discount rate for new facilities but assign scarcity value to established, competitive existing assets. As long as interest rate hikes do not lead to a sharp drop in demand and a certain level is maintained, the value of cash flows generated from refining assets will continue to rise."

This content was produced with the assistance of AI translation services.