Yuanta Securities Korea said S-OiL's refining margin has surpassed that of Valero, a leading U.S. refiner, and raised its target price to 205,000 won from 175,000 won. The previous trading day's closing price was 136,700 won.
With refining margins staying high due to disruptions in refined product output in the Middle East and Russia and added by a drop in the price of Saudi Arabian crude, operating profit at S-Oil is projected to top 3 trillion won in the second half.
Yuanta Securities Korea projected S-Oil's sales this year at 41.3 trillion won and operating profit at 5.2 trillion won. It estimated net profit attributable to controlling shareholders at 3.8 trillion won.
It especially expected the pace of earnings improvement to strengthen toward the second half. Operating profit, which was 2.4 trillion won in the first half, is projected to increase to 3 trillion won in the second half. Expected operating profit for the third and fourth quarters is 1.3 trillion won and 1.7 trillion won, respectively.
It analyzed that supply disruptions of refined products from the Middle East and Russia are lifting refining margins. Yuanta Securities Korea said that due to the aftermath of the wars involving Iran and Ukraine, disruptions in refined product output equivalent to 12%–14% of global oil demand are continuing. It noted that reduced crude supply from the Hormuz region, damage to refining facilities in the Middle East, and drone attacks on Russian refineries are having an impact.
As a result, S-Oil's complex refining margin has surpassed major U.S. refiners. Hwang Gyu-won, an analyst at Yuanta Securities Korea, said, "S-Oil's complex refining margin in the second to third quarters is above $41 per barrel," adding, "higher than $39 for Valero, the representative U.S. refiner." As Russian refining facilities were hit, exports to Russia of gasoline and diesel/kerosene produced in Asia increased.
From September, the burden of materials and supplies prices is also expected to ease. The official selling price (OSP) premium S-Oil pays when importing Saudi crude was around $11.7 per barrel in the second quarter and is expected to drop by about $1.5 per barrel from September.
Hwang said, "When the OSP falls by $1 per barrel, S-Oil's annual operating profit increases by about 300 billion won," adding, "While purchases of Middle Eastern crude by Asian refiners are decreasing, export competition among oil-producing countries is intensifying, so there is a possibility that the OSP will decline further."
The earnings improvement is also expected to act positively on the financial structure and shareholder returns. Yuanta Securities Korea expected S-Oil's free cash that can be generated from operating activities to increase from 2.4 trillion won this year to 3 trillion won next year. If utilized, it analyzed that next year's net debt could be reduced by about 3 trillion won to bring it below 6 trillion won.
It also suggested the possibility of increasing dividends. Yuanta Securities Korea projected that if the payout ratio rises to 35%–45% in March next year, S-Oil's dividend per share could increase to 10,000 won.
Hwang added, "With conditions far stronger than expected, it is settling into a virtuous cycle of reduced financial burden and expanded shareholder dividends, boosting shareholder value."