S-Oil 1Q Operating Loss Expected at 560 Billion Won... 'Bleak' Outlook Even After COVID-19

Losses Expected in 2Q... Oversupply from China Persists Despite COVID Slowdown

[Asia Economy Reporter Minwoo Lee] S-Oil's operating loss for the first quarter is expected to reach 560 billion KRW, which is more than 150 billion KRW larger than market consensus. This is due to inventory losses caused by the sharp drop in oil prices. Since crude oil demand itself has decreased due to the COVID-19 pandemic, there are concerns that even if oil prices rise after the situation stabilizes, earnings may not rebound accordingly.

On the 11th, Kyobo Securities forecast that S-Oil will record sales of 5.384 trillion KRW and an operating loss of 564 billion KRW in the first quarter of this year. Although the sales decline compared to the same period last year was limited to 0.8%, the company shifted from an operating profit of 270 billion KRW to an operating loss more than twice that amount.

The main cause of this large-scale deficit is estimated to be inventory losses of about 300 billion KRW caused by the plunge in oil prices from around 67 dollars per barrel at the end of last year to the mid-20 dollar range. Additionally, the lagging refining margin, which dropped sharply from 10 dollars per barrel to minus 4 dollars per barrel, also had a negative impact. However, the lubricants business is expected to maintain both sales and profits in the first quarter due to stable BC oil prices and normal shipment volumes. Other expenses, such as interest costs, are estimated to remain at a similar level to last year, around 50 billion KRW.

The outlook for the second quarter is also not optimistic. An operating loss of 45 billion KRW is predicted, indicating continued deficits. Researcher Jeonghyun Kim of Kyobo Securities stated, "The calculation assumes an average Dubai crude oil price of 30 dollars per barrel in the second quarter and a lagging refining margin increase of 6 dollars per barrel compared to the previous quarter." He added, "The chemical sector is expected to show slightly lower or similar performance compared to the first quarter due to continued supply adjustment effects, while the lubricants sector will see a decline in sales volume as driving distances sharply decrease." The COVID-19-induced reduction in outdoor activities is thus affecting the refining industry as well.

Even after the COVID-19 situation eases, difficulties remain. Researcher Kim explained, "Even if demand for petroleum products recovers as the COVID-19 situation improves, chronic oversupply originating from China is anticipated." He further noted, "The Chinese government has maintained domestic petroleum product prices despite the sharp drop in oil prices, leading to an improving profitability trend for Chinese refiners."

For these reasons, Kyobo Securities has issued a 'Trading Buy (short-term buy)' investment opinion on S-Oil and lowered the target stock price to 80,000 KRW. They advised a conservative investment approach toward the refining sector for the time being.

This content was produced with the assistance of AI translation services.