[Click eStock] "S-Oil Expected to See Significant Operating Profit Improvement... Target Price Raised"

On December 15, Hana Securities announced that it has raised its operating profit forecast for S-Oil for next year by 11%, from the previous 1.8 trillion won to 2 trillion won, reflecting lower crude oil procurement costs (OSP) and improved paraxylene (PX) margins.

Jae Sung Yoon and Kim Hyungjun, research analysts at Hana Securities, explained this in a report released on the same day, maintaining a 'Buy' investment rating on S-Oil and raising the target price to 110,000 won. They also selected S-Oil as their top sector pick for next year.

S-Oil is expected to post an operating profit of 495.4 billion won in the fourth quarter of this year, up 116% quarter-on-quarter and 90% year-on-year, exceeding the consensus estimate of 288.6 billion won by 72%. In particular, refining operating profit is projected to improve sharply to 349.8 billion won, an increase of 234.2 billion won from the previous quarter. The report stated, "Although there will be inventory-related losses of 250 billion won due to the decline in oil prices compared to the previous quarter, the improvement in refining margins will more than offset this."

The petrochemical operating loss is expected to narrow to 6.1 billion won, an improvement of 14.7 billion won from the previous quarter. The report explained, "Despite weakness in benzene (BZ), propylene oxide, and polypropylene, PX margins in December are reaching their highest level of the year, contributing to improved performance." Operating profit from lubricants is forecast at 151.6 billion won, up 14% quarter-on-quarter, due to improved spreads resulting from lower oil prices.

Operating profit for the first quarter of next year is estimated at 539.9 billion won, up 9% from the previous quarter and turning to profit from a loss in the same period last year, and is expected to exceed the current consensus of 278.5 billion won by 94%. In particular, refining operating profit is expected to further improve to 389 billion won, up 11% quarter-on-quarter. The analysts explained, "Even assuming a decline in spot (real-time) refining margins, the actual margin decrease due to OSP cuts is only $2.3 per ton compared to the previous quarter, limiting the operating profit decrease to just 220 billion won." Conversely, "the 250 billion won inventory valuation loss that occurred in the previous quarter will be eliminated, resulting in a substantial improvement in profit compared to the previous quarter," they emphasized.

The petrochemical business is expected to return to profit, with operating profit estimated at 33.3 billion won, an increase of 39.4 billion won from the previous quarter. This is based on assumptions of a 90% operating rate for quarterly PX production capacity of 480,000 tons and a $50 per ton margin improvement quarter-on-quarter. The report assessed, "Given that current refining margins are in the mid-$13 range and the downward trend in OSP continues, our estimates for the refining business are conservative."

Additionally, while concerns over weak oil prices remain, the company expects that the OPEC Plus agreement to suspend production increases in the first quarter and improvements in macroeconomic conditions will lead to improved market margins and lower OSP, despite weak oil prices, due to tight supply and demand. The report also noted that, considering the recent sharp rise in U.S. natural gas and ethane prices and the resulting significant increase in U.S. polyethylene prices, the value of the Shaheen Project could be reflected in the company's valuation by 2026.