"Post-Petroleum Era and COVID-19 Double Whammy... GS Faces Difficulty in Short-Term Earnings Recovery"

Increased Production Capacity but Weak Demand Due to COVID-19
Long-term Burden Rises with Energy Paradigm Shift

[Asia Economy Reporter Minwoo Lee] GS is expected to post earnings below market expectations in the third quarter as well. Its main refining business faces difficulties in short-term recovery due to the combined effects of the post-oil era, increased supply, and weak demand caused by the COVID-19 pandemic.

On the 1st, SK Securities forecast that GS will record sales of 3.8222 trillion KRW and an operating profit of 261.5 billion KRW in the third quarter. Although these figures represent increases of 4.3% and 66.3% respectively from the previous quarter, they are down 15.5% and 52.6% compared to the same period last year. The operating profit is expected to fall significantly short of the market consensus of 377.4 billion KRW.

This is interpreted as the main refining business’s poor performance being difficult to recover. Jiwoo Son, a researcher at SK Securities, explained, "Until July, profits increased due to the 'lagging effect' from using crude oil purchased cheaply during the international oil price decline, but since then, with oil prices weakening again, GS Caltex’s refining division is expected to perform poorly. Especially, since September’s market conditions are expected to be the worst, third-quarter earnings will likely fall short of consensus." Despite favorable chemical market conditions, the paraxylene (PX) margin in the chemical division only slightly rose from an average of $479 per ton in the previous quarter to about $530 per ton in the third quarter.

The long-term trend changes of the post-oil era and battery premium also pose burdens. Researcher Son said, "Due to the Fourth Industrial Revolution, the energy paradigm is rapidly shifting from primary energy sources (hydrocarbons) to secondary energy sources (electricity), so the post-oil era trend will continue. Although refining capacity is still increasing, refining margins are inevitably expected to remain weak for the time being due to demand reductions caused by COVID-19."

The stock price is also sluggish. Although the price has already fallen, the momentum for recovery is lacking compared to pure chemical companies. Against this backdrop, SK Securities maintains a 'Buy' rating on GS but lowered the target price by about 17% to 40,000 KRW. The previous trading day’s closing price was 31,000 KRW.