DB Securities said on the 20th that even after oil prices stabilize, the decline in refining margins may not be large for S-Oil(010950). It raised the target price to 190,000 won from 140,000 won and maintained its "Buy" rating.
DB Securities said S-Oil's second-quarter operating profit on a consolidation basis this year will be 878.7 billion won, down 29% from the previous quarter but turning to profit from a year earlier, extending strong results from the first quarter.
Although international oil prices plunged in June due to the impact of a truce, inventory valuation losses will likely remain limited when considering the official selling price (OSP) and other factors.
By business, the refining business is estimated to post 464.6 billion won in operating profit, aided by a rise in refining margins (from $20 per barrel in the first quarter to $39 in the second quarter) despite the impact of backward lag (time lag in materials and supplies input).
While the chemical business is expected to swing to a loss, the lubricants business is projected to log a record quarterly operating profit of 427.1 billion won as margins surged due to operational disruptions in the Middle East.
Third-quarter operating profit this year is expected to decline to 528 billion won from the previous quarter. Assuming Dubai crude at $65 per barrel in September, large inventory valuation losses in the refining business would be reflected, reducing operating profit in that business to 91.7 billion won.
However, Han Seung-jae, an analyst at DB Securities, emphasized that attention should be paid to the absolute level of refining margins rather than the decline in earnings.
Analyst Han said, "S-Oil's complex refining margin fell to $30 per barrel due to a wait-and-see stance following the June truce and a plunge in oil prices," but added, "This is a high level approaching the highest monthly average margin during the Russia-Ukraine war, and in July it is rebounding to around $37 per barrel."
Han assessed that to resolve the global refining shortage, normalization of the Strait of Hormuz or China's full export permits and domestic price normalization must come first.
However, he predicted that this is unlikely in the short term and will support strong refining margins. He also noted that for base oils, preliminary compiled data show the export price in early July at $2,130 per ton, up sharply from the second-quarter average ($1,620), so additional upside risk should be considered.
Han said, "As the Organization of the Petroleum Exporting Countries (OPEC) shows willingness to increase production and OSP cuts are made, cost pressures are relatively stabilizing, while refining margins continue to soar," adding, "Even after oil prices stabilize, the decline in refining margins may not be large."