LS Securities raised its target price for S-Oil to 140,000 won from 133,000 won on July 13, citing an extended period of strong earnings, but downgraded its investment rating from 'Buy' to 'Hold' due to recent stock price gains that have already reflected much of the positive outlook. Analyst Jung Kyung-hee noted that the upside potential now stands below 15% following the stock's recent rise. The revision reflects S-Oil's competitive advantages in crude oil procurement through its parent company Saudi Aramco, which has enabled higher utilization rates compared to other refiners amid Middle East-driven shortages of medium and heavy crude oil.
LS Securities Forecasts S-Oil Q2 Revenue at 13.8 Trillion Won
LS Securities projected S-Oil's Q2 consolidated revenue at 13.8 trillion won, representing a 71% increase year-over-year. The brokerage estimated operating profit at approximately 1 trillion won, marking a turnaround to profitability. Jung stated that S-Oil maintained relatively higher utilization rates compared to other refiners by leveraging its crude oil supply advantages from majority shareholder Saudi Aramco during the medium and heavy crude shortage intensified by Middle East conflicts. The company is also expected to benefit from lower transportation costs due to this supply structure.
Lubricant Base Oil Segment Expected to Drive Earnings Growth
The lubricant base oil business is forecast to be the primary earnings driver for Q2. Global Group III lubricant base oil supply has decreased by 20-25% due to operational disruptions at Qatar's Shell Pearl GTL plant and major facilities in Bahrain and the United Arab Emirates, leading to intensified supply shortages. LS Securities estimated S-Oil's Q2 lubricant base oil operating profit at 451.9 billion won, up 171% quarter-over-quarter. The chemical segment's operating profit is projected to reach 134.1 billion won, a 426% increase from the previous quarter, driven by rising product prices.
Positive Outlook Projected Through Next Year on Supply Advantages
LS Securities expects the favorable conditions in refining and lubricant base oil to continue into next year. The brokerage noted that medium and heavy crude supply has remained tight since the U.S. shale revolution expanded light crude proportions, with the Russia-Ukraine war and Middle East conflicts further exacerbating the shortage. S-Oil's long-term supply agreement with Aramco is expected to enable stable procurement of medium and heavy crude, sustaining the company's competitive benefits. Expectations for expanded shareholder returns have also emerged, as the completion of the Shaheen project this year marks the end of large-scale capital expenditures, potentially increasing dividend capacity. LS Securities highlighted that S-Oil maintained a dividend payout ratio above 30% from 2021 to 2023 before Shaheen fund execution and has set a policy of at least 20% payout for 2024-2026, suggesting higher likelihood of dividend expansion after investment completion.
FAQ
What did LS Securities do on July 13 regarding S-Oil?
LS Securities raised S-Oil's target price from 133,000 won to 140,000 won but downgraded the investment rating from 'Buy' to 'Hold', citing strong earnings prospects offset by recent stock price appreciation that has already reflected much of the positive outlook.
Why is S-Oil's lubricant base oil segment expected to perform strongly in Q2?
Global Group III lubricant base oil supply has decreased by 20-25% due to operational disruptions at major facilities including Qatar's Shell Pearl GTL plant and sites in Bahrain and the UAE, creating supply shortages that benefit S-Oil's lubricant base oil business, with Q2 operating profit forecast at 451.9 billion won, up 171% quarter-over-quarter.
How does S-Oil's relationship with Saudi Aramco provide competitive advantages?
S-Oil receives crude oil supply from majority shareholder Saudi Aramco through a long-term supply agreement, enabling stable procurement of medium and heavy crude during shortages intensified by Middle East conflicts and allowing the company to maintain higher utilization rates and benefit from lower transportation costs compared to other refiners.
