[Click eStock] "S-Oil Turns to Loss Due to Oil Price Plunge... Target Price Down"

Adjusted to 100,000 KRW per week, 5% lower than before

Shinhan Investment Corp. on the 9th adjusted the target price for S-Oil to 100,000 KRW per share, down 5% from the previous target, stating that "a return to losses is expected in the fourth quarter of last year due to the decline in international oil prices." The buy rating was maintained.

On the same day, Jinmyung Lee, Senior Researcher at Shinhan Investment Corp., said, "Operating profit for the fourth quarter of last year is expected to be 79.1 billion KRW, down 91% from the previous quarter. This is expected to fall significantly short of the market consensus of 446.3 billion KRW," adding, "Refining operating profit is expected to turn to a loss (-197.3 billion KRW) due to the sharp drop in oil prices and refining margins."

Senior Researcher Lee analyzed, "Despite OPEC+’s voluntary production cuts, doubts about their effectiveness and demand concerns caused international oil prices to fall by 9 USD per barrel. As a result, an inventory valuation loss of 147 billion KRW is expected," and "Refining margins are estimated to have plunged by 10 USD per barrel quarter-on-quarter due to weakness mainly in transportation products and the impact of rising Official Selling Prices (OSP)."

However, he added, "Despite the weak oil prices, refining margins have been on a recovery trend since the low point in October last year," and "the fundamental strength of the sector is still considered solid." The chemical and lubricants businesses are expected to deliver strong performance, supported by the absence of one-off losses from the previous quarter and steady margins. Chemical operating profit is expected to increase by 64% quarter-on-quarter to 74.2 billion KRW.

Although paraxylene (PX) margins declined compared to the previous quarter, performance improvement is still anticipated. Lubricants operating profit is expected to be 202.1 billion KRW, with an operating margin of 30.1%, improving from the previous quarter. Good results are expected due to margin improvement from cost reductions and the elimination of opportunity losses from scheduled maintenance (41 billion KRW).

Senior Researcher Lee pointed out, "The volatile international oil price environment last year caused the refining sector to experience high earnings volatility, leading to continued de-rating (decline in price-to-earnings ratio). As a result, the current stock price has fallen to a price-to-book ratio (PBR) of 0.79."

He also added, "Considering that the possibility of further short-term declines in oil prices is limited and refining margins are showing signs of improvement, the market conditions are judged to be solid," and "Demand normalization is expected to continue this year while supply increases are likely to be limited. Especially, favorable supply-demand conditions are expected in the first half of the year."