S-Oil, Structural Weakness Continues... Challenging Margin Recovery

[Asia Economy Reporter Park Jihwan] NH Investment & Securities evaluated that S-Oil turned profitable in the fourth quarter of last year due to increased profits in the petrochemical sector, but long-term margin recovery is expected to be difficult. The existing investment opinion 'Neutral' and target price of 72,000 KRW were maintained.

Hwang Yusik, a researcher at NH Investment & Securities, said, "In the short term, refining margins for petroleum products are weak due to COVID-19," and added, "In the long term, structural decreases in demand for petroleum products and lubricants are expected due to the expansion of the electric vehicle business."

Regarding the chemical business, it was explained that spreads are expected to weaken due to strengthened environmental regulations and increased facility expansions after COVID-19. Although a shift to a low-carbon eco-friendly business structure is necessary, it is still in the planning stage, according to the analysis.

Operating profit in the fourth quarter of last year was 93.1 billion KRW, successfully turning profitable for the quarter. In the petrochemical sector, the spread significantly expanded due to increased regional regular maintenance of PO (propylene oxide) and increased demand from the automotive and household sectors. PP also maintained strong spreads due to robust demand for packaging materials. In the lubricant base oil sector, demand is gradually recovering, and operating profit increased compared to the previous quarter due to the restart of regularly maintained facilities, according to the analysis.

Researcher Hwang said, "In the refining sector, inventory-related profits decreased compared to the previous quarter, and despite weak demand for petroleum products and increased operating rates, the scale of operating losses expanded."

Looking ahead, it is expected that the weakness in gasoline and diesel margins will continue long-term as electric vehicle sales increase. Researcher Hwang forecasted, "Due to carbon emission regulations, expenditure costs are expected to rise. As COVID-19 continues, demand for PP and PO is expected to remain solid, leading to an increase in operating profit in the petrochemical sector."