Shinhan Investment Securities on the 13th said S-Oil(010950) is maintaining solid fundamentals despite falling oil prices, supported by strong refining margins and easing cost burdens. It kept a "Buy" rating and raised its target price by 29% to 180,000 won from 140,000 won.
According to Shinhan Investment Securities, S-Oil's second-quarter revenue this year is expected to be 12.3669 trillion won, up 38.3% from the previous quarter, with operating profit projected at 947.7 billion won, down 23%. Shinhan Investment Securities said this is in line with the market consensus (operating profit of 941.5 billion won).
By business segment, operating profit in the refining segment is expected to come in at 473.9 billion won, down 54% from the previous quarter. It said a decline in operating profit is inevitable as the large inventory gains booked in the previous quarter have disappeared and one-off expenses from regular maintenance and the implementation of a price cap are reflected.
However, despite Dubai oil prices plunging from $129 per barrel in March to $82 in June, it assessed that performance was defended as spot refining margins rose $21 per barrel from the previous quarter on continued global supply-demand tightness.
Shinhan Investment Securities expected the chemical segment to post an 1.8 billion won loss due to a narrowing PX (paraxylene) spread. In contrast, it projected the base oil segment to achieve a record-high operating profit of 475.6 billion won, up 186% from the previous quarter, as the base oil spread surged 204% amid disruptions to the Pearl GTL facility of Qatar Shell (Shell).
Lee Jin-myeong, an analyst at Shinhan Investment Securities, projected a short-term decline in third-quarter operating profit would be unavoidable due to inventory valuation losses from falling oil prices and the time-lag effect in crude procurement (reverse lagging).
The analyst said, "However, strong refining margins are continuing due to low petroleum product inventories and supply disruptions at global refining facilities," adding, "In particular, as Saudi Arabia's official selling price (OSP) turns negative starting in August, the burden of crude procurement costs will gradually ease."
The analyst added, "Compared with before the Ukraine war, the refining margin level itself has risen, so S-Oil's fundamentals remain solid," and explained, "From next year, when investment in the large-scale petrochemical 'Shaheen Project' is completed, free cash flow (FCF) will improve significantly."