S-Oil Stock Fell to 90,000 Won Mid-Month but Recovered to 100,000 Won Range
Lubricant Base Oil Operating Profit Up 50.6% QoQ
Refining Sector Expected to Grow Alongside COVID-19 Recovery
[Asia Economy Reporter Gong Byung-sun] Despite weakness in the refining sector, S-Oil achieved strong second-quarter earnings that exceeded market expectations (consensus). While the lubricants segment showed favorable performance, the refining sector is also expected to recover from its slump starting in the second half of the year.
According to the Korea Exchange on the 28th, S-Oil's stock price rose more than 4% intraday to reach 101,000 KRW. Although profit-taking reduced the gains and the stock closed at 98,400 KRW, up 1.78% (1,700 KRW) from the previous day, it showed signs of recovering from its previous slump. Since the 13th, S-Oil's stock had fallen for seven consecutive trading days, dropping from the mid-100,000 KRW range to the mid-90,000 KRW range.
The rebound in S-Oil's stock price is thanks to an earnings surprise. According to the earnings report disclosed the day before, S-Oil's operating profit in the second quarter was 571 billion KRW, turning profitable compared to the same period last year. This exceeded the consensus estimate of 465 billion KRW by 22.8%. Sales increased by 94.4% year-on-year to 6.711 trillion KRW.
In fact, the core business segment of S-Oil in the second quarter, refining, was sluggish. The rising official selling price (OSP) of crude oil led to increased cost burdens. On the 6th, Saudi Aramco, the world's largest oil producer, announced it would raise prices for Asian and European crude grades starting in August, with the August OSP reaching $2.7 (approximately 3,117 KRW), the highest since March last year. Accordingly, the refining segment's operating profit in the second quarter was 152.5 billion KRW, down about 55% from the previous quarter.
However, the lubricants segment offset the refining sector's weakness. The lubricants segment's operating profit in the second quarter was 285 billion KRW, up 50.6% from the previous quarter. This represents the highest-ever performance for the lubricants segment.
The strong performance of the lubricants segment was due to increased demand and reduced supply. Since last year, stricter exhaust gas regulations in China and India have increased demand for high-quality base oils. Using high-quality base oils is known to improve vehicle fuel efficiency and reduce exhaust emissions. On the other hand, despite this increased demand, supply has continued to decline. Kim Hyun-tae, a researcher at BNK Investment & Securities, explained, "Low refining facility utilization rates have reduced the supply of base oils," adding, "The supply reduction and high profitability are expected to continue." In fact, due to supply reductions, the lubricants spread (margin) surged from $50.7 in the fourth quarter of last year to $81.9 in the second quarter of this year, showing strong performance.
From the second half of the year, the previously weak refining segment is also expected to recover. This is because mobility, which had been stagnant due to COVID-19, is expected to gradually pick up. Although the COVID-19 Delta variant is spreading recently, the UK is lifting regional lockdowns and not restricting movement as much as last year. Researcher Kim said, "If recovery from COVID-19 continues, air travel?which is directly linked to refining profits?is expected to increase," adding, "The recovery of refining margins is also expected to accelerate."
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