[Click eStock] "S-Oil Expected to See Refining Performance Turnaround Next Year"

Shinhan Investment: "Stock Revaluation Expected to Continue"

On December 30, Shinhan Investment Corp. stated that despite the weak trend in international oil prices, S-Oil is expected to see a significant turnaround in its refining performance next year, driven by structurally strong refining margins. Accordingly, the firm maintained its 'Buy' investment rating and a target price of 110,000 won.

Shinhan Investment Corp. analysts Lee Jinmyung and Kim Myungjoo explained in their report released on the same day, "Due to the production increase stance of OPEC+ (the Organization of the Petroleum Exporting Countries and its non-OPEC partners), led by Saudi Arabia, both low oil prices and a downward stabilization of the official selling price (OSP) of crude oil are anticipated."

However, regarding refining margins, they forecast, "Upward pressure will persist next year due to the tight supply-demand balance for petroleum products." The global net capacity addition for petroleum products next year is expected to be 600,000 barrels per day, which is only about half of the projected demand increase of 1.16 million barrels per day. The analysts added, "Since net capacity additions will remain limited compared to demand growth through 2030, a favorable business environment is expected in the mid- to long-term."

S-Oil's operating profit for the fourth quarter of this year is projected to reach 451.1 billion won (up 97% quarter-on-quarter), surpassing the market consensus of 294.4 billion won. In particular, operating profit from the refining segment is expected to lead the strong results, coming in at 323.5 billion won (up 180% quarter-on-quarter). Although a 75.6 billion won inventory valuation loss is anticipated due to falling international oil prices, this is expected to be more than offset by robust refining margins of around $4.2 per barrel. Specifically, margins for kerosene and diesel rose by $7 per barrel due to supply disruptions from Russia, while naphtha margins increased by $4. Despite being the off-season, gasoline margins contributed to performance by rising $5 per barrel, supported by operational disruptions at Nigeria's Dangote refinery and low inventory levels in the United States.

In the chemical segment, the loss is expected to narrow toward the end of the quarter as the paraxylene (PX) spread widens. The PX spread surged from $181 per ton in October to $248 in December. The lubricants segment is also expected to post a solid operating profit of 143.6 billion won (up 8% quarter-on-quarter), thanks to improved spreads resulting from lower costs amid robust market conditions.

The analysts emphasized, "The chemical segment is expected to return to profitability, supported by a recovery in the olefin market and favorable PX industry conditions, while the lubricants segment should continue its profit growth due to a tight supply-demand balance. Given the recovery in fundamentals across all business divisions and the scheduled launch of the Shaheen Project in 2027, we believe the stock's revaluation will continue."