Refined Margin Expected to Rebound in Second Half... "Focus on S-Oil and SK Innovation"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As economic activities resume and demand normalizes, along with increased inventory valuation gains due to rising oil prices, oil refining companies are expected to show improved earnings. Profitability is anticipated to normalize in the second half of the year with a rebound in refining margins.

According to the Korea Exchange on the 21st, S-Oil has fallen about 7% since the beginning of this month. Foreign investors and institutions sold off stocks worth 71.3 billion KRW to realize profits. They also net sold SK Innovation shares worth 467.1 billion KRW, dragging the stock price down by about 25%. Negative investment sentiment toward the battery business segment is also believed to have contributed.

However, the securities industry suggests expanding interest in the refining sector, considering the normalization of economic activities due to vaccinations and increased inventory valuation gains from the rebound in oil prices. The refining margin, a profitability indicator for the refining industry, is expected to rise from the second half of the year. Noh Woo-ho, a researcher at Meritz Securities, said, “Starting from the first quarter, oil refiners will show a year-round earnings recovery rally,” adding, “Both refining and chemical sectors are expected to see demand improvements for key products based on improved supply and demand conditions.”

According to financial information provider FnGuide, the estimated operating profit for S-Oil, a leading domestic refiner, in the first quarter is 218.7 billion KRW, expected to turn profitable compared to the previous year. The highest estimate is 444.8 billion KRW, representing a 445% growth compared to the previous quarter, exceeding market expectations. The refining segment is expected to offset the previously weak refining margins with inventory valuation gains from rising imported oil prices. The petrochemical segment anticipates an expansion in PO and PP spreads. Jinmyung Lee, a researcher at Shinhan Financial Investment, said, “The refining segment’s operating profit is expected to be 370 billion KRW this year, driven by strong first-quarter results from rising oil prices and a refining margin increase in the second half due to industry improvement,” adding, “It is the company with the greatest potential to rise when the domestic refining industry recovers.”

For SK Innovation, the market’s expected operating profit for the first quarter is 5.9 billion KRW. The highest estimate predicts a turnaround to profitability with 287.6 billion KRW. Inventory valuation gains from rising imported oil prices are expected to result in profits larger than market expectations. By business segment, despite litigation risks with competitors, the battery segment is maintaining a growth trend in scale. The separator segment continues to sustain steady profit margins due to increased adoption rates, and lubricant sales are increasing.

Noh Woo-ho of Meritz Securities said, “Even considering weakened investment sentiment, SK Innovation needs to resolve the discount on new businesses,” adding, “The combined value of LIBS separators and EV batteries is estimated at 24.1 trillion KRW.”

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