Growing Momentum for 'S-Oil·Lotte Chemical'

Expectations for Demand Recovery and Benefit from Texas Facility Shutdown
Foreign and Institutional Buyers Drive 26% and 15% Increase This Month, Respectively

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Foreign and institutional investors are showing increased interest in S-Oil and Lotte Chemical, as expectations rise for the resumption of economic activities and benefits from facility shutdowns caused by the Texas cold wave.

According to the Korea Exchange on the 23rd, foreign and institutional investors have purchased the most shares in refining and chemical companies, with S-Oil and Lotte Chemical leading in stock purchases so far this month. During this period, foreigners and institutions bought 233.6 billion KRW worth of S-Oil shares and 127.9 billion KRW worth of Lotte Chemical shares. This is based on the expectation that these two companies, which posted poor results last year due to weak demand caused by the spread of COVID-19, will enter a performance turnaround phase with demand recovery following the reopening of economic activities.

The stock prices have also risen. Since the beginning of this month, the stock prices of the two companies have increased by 26% and 15%, respectively. As of 11:10 AM on the day, Lotte Chemical recorded 326,500 KRW, up 8.11% from the previous day, and S-Oil was at 89,000 KRW, up 3.7%.

The Texas cold wave is analyzed to be accelerating the pace of performance improvement for both companies. According to Argus, an energy information specialist, power supply was cut off to 2 million households in the U.S., and approximately 3.3 million barrels per day (mbpd) of refining capacity in the U.S. has been shut down. This accounts for 15% of the total U.S. capacity and 3.3% of global capacity, indicating that the petroleum products market is expected to remain tight for the time being.

In the chemical sector, shutdowns are continuing, so supply is expected to be insufficient relative to demand for chemical products such as PE, PP, and MEG. In particular, MEG supply in the U.S. has become highly unstable, and Lotte Chemical is expected to significantly increase its profit improvement. As of last week, the MEG price was $705, about 30% higher compared to the beginning of the year.

Considering these environmental changes, the securities industry is raising earnings expectations for S-Oil and Lotte Chemical. According to financial information provider FnGuide, S-Oil's expected operating profit for the first quarter is 173.1 billion KRW, with a turnaround to profitability expected compared to the previous year. Hyundai Motor Securities forecasts a quarterly profit of 328 billion KRW and raised the target stock price by 27% to 110,000 KRW. This is based on the judgment that rising international oil prices and strong chemical product prices could have a positive impact. Kang Dongjin, a researcher at Hyundai Motor Securities, explained, “Although refining margins (the amount obtained by subtracting crude oil purchase costs from petrochemical product prices) will be limited due to weak jet fuel demand, rising oil prices will increase inventory-related profits, resulting in a profit.”

For Lotte Chemical, the expected operating profit for the first quarter is around 360 billion KRW, with a turnaround to profitability expected compared to the previous year. Baek Youngchan, a researcher at KB Securities, who raised the target stock price by 37% to 504,000 KRW, analyzed, “Demand recovery following the economic recovery after COVID-19 will be clearly visible from the first quarter. With expected price increases for chemical products such as MEG, the stock price gains of cyclical stocks will be even greater after confirming quarterly results.”