With the global shortage of refining and base oil supply expected to continue at least through 2027, S-Oil's strong performance is also forecast to persist. However, as geopolitical instability in the Middle East widens, whether crude can be secured stably was cited as the key variable that will determine future results.
On the 4th, Lee Chung-jae, an analyst at Korea Investment & Securities Co., maintained a "buy" rating on S-Oil and a target price of 160,000 won. The previous session's closing price was 121,700 won.
S-Oil posted second-quarter revenue of 11.3 trillion won, operating profit of 965 billion won, and net profit of 514.6 billion won this year. Operating profit was largely in line with the 1 trillion won estimate from Korea Investment & Securities Co. and the market consensus of 955.1 billion won.
Improved profitability in the base oil segment underpinned the results. The base oil operating margin reached a record 37%. As production disruptions occurred in Qatar and Bahrain, which account for about 20% of the world's Group III base oil supply, the shortage deepened.
In refining, although Dubai crude prices fell from the previous quarter, the segment posted a 5.9% operating margin on the back of higher global refining margins.
The analyst projected it will take considerable time to restore energy facilities in the Middle East and normalize passage through the Strait of Hormuz. As long as Iran retains the military capability to strike key energy facilities of neighboring countries, such as Saudi Arabian oil fields and Qatari gas fields, normal operations at refining and petrochemical facilities in the Gulf could also be delayed.
A decline in U.S. crude inventories was also cited as a factor supporting oil prices and refining margins. The U.S. Strategic Petroleum Reserve (SPR) has fallen to its lowest level since 1983, and U.S. petroleum inventories in August were expected to drop to the lowest level since 1990.
Given that disruptions at Gulf oil fields have lasted more than five months, it judged that output would be unlikely to recover immediately even if geopolitical tensions ease. Considering the extent of damage to oil fields and related facilities, it also assessed that the strength in oil prices is likely to persist for a long time.
The restoration of Russia's refining facilities was also projected to be difficult. Due to Ukrainian drone attacks, facilities with a capacity of 3 million barrels per day—about 40% of Russia's total refining capacity—were destroyed. Because Ukraine is focusing on core machinery and equipment that are hard to restore, it said it is difficult to predict when operations will normalize.
Russia's crude production has fallen for six consecutive months, and as Kazakhstan and Belarus have begun exporting gasoline, Europe's refined product supply and demand are also being affected. Accordingly, even if geopolitical clashes in the Middle East and Russia end, the global shortage of refining and base oil supply is expected to continue at least through 2027.
However, the biggest variable for S-Oil's results is domestic crude supply and demand. As the battlefield expands to the Mediterranean, including a fire caused by a drone attack at Egypt's natural gas import facility recently, uncertainty surrounding Korea's crude imports is also growing.
"In a tight global refining supply-demand environment, the biggest variable that will determine S-Oil's future results is crude procurement," the analyst said. "If crude is supplied normally, strong results will continue at least through 2027."