[Into the Stocks] S-Oil Riding the Oil Price Surge, How High Will Its Stock Go?

[Asia Economy Reporter Song Hwajeong] S-Oil, which recorded a deficit of 1 trillion won last year due to the impact of COVID-19, is seeing its stock price rise steadily amid expectations of a full-scale earnings turnaround this year. With international oil prices reaching their highest level in two years and oil demand rapidly recovering, earnings are expected to improve significantly.

According to the Korea Exchange on the 8th, S-Oil's stock price has risen 48.12% so far this year until the previous day. The stock price, which was in the 70,000 won range at the beginning of the year, recently settled around the 100,000 won mark. This is the first time since November 2019 that S-Oil's closing price has exceeded 100,000 won. On the 3rd, the stock price even reached 107,000 won intraday, marking a 52-week high.

Growing Earnings Expectations Due to Oil Price Increase and Demand Recovery

S-Oil recorded an operating profit of 629.2 billion won on a consolidated basis in the first quarter of this year, turning to a profit compared to the same period last year. This is the best quarterly performance since the second quarter of 2016. Although it struggled with losses last year due to the impact of COVID-19, a clear recovery trend has emerged this year. S-Oil recorded an operating loss of 1.0877 trillion won last year, turning to a deficit compared to the previous year.

This earnings recovery is interpreted as a result of rising oil prices and increased oil demand. On the 7th (Eastern Time, US), the July West Texas Intermediate (WTI) crude oil price on the New York Mercantile Exchange closed at $69.23 per barrel, down 39 cents (0.6%) from the previous session. Intraday, it surpassed $70 per barrel for the first time since October 2018. Oil prices have risen about 43% since the beginning of the year.

As oil demand recovers, refining margins are also beginning to improve. Refining margin is the amount obtained by subtracting crude oil prices and transportation/operating costs from the prices of petroleum products such as gasoline and diesel. Generally, the recovery of refining margins is interpreted as an improvement in the profitability of the refining industry. Jeon Yujin, a researcher at Hi Investment & Securities, said, "Gasoline demand is recovering due to the normalization of mobility following the expansion of vaccinations mainly in developed countries, and sequential recovery of kerosene and jet fuel is expected from the second half to the end of the year as industrial activities resume." She added, "Although about 1.2 million B/D (barrels per day) of capacity expansion is expected in 2021-2022 due to the COVID-19 pandemic, considering the planned closures and conversions of about 900,000 to 1 million B/D annually, the actual expansion scale is minimal." Jeon further stated, "Supply pressure is expected to be limited over the next one to two years, while demand is expected to recover rapidly, so refining margins will show an upward trajectory from the second half of this year through 2022, with the first half being the bottom."

According to Samsung Securities, the global gasoline market, which saw an 11% decrease in demand last year compared to the previous year, is expected to grow by 8% this year. With the distribution of COVID-19 vaccines, the recovery of driving distances in the US and gasoline demand began to become clear from March this year. Accordingly, the gasoline spread rose from an average of $5.3 in January 2021 to an average of $9.9 in May. The global jet fuel market, which saw a 40% drop in demand last year, is expected to grow by 18% this year. Although jet fuel demand is slower than gasoline, it is expected to recover thanks to travel bubbles and vaccine passport systems that began in earnest from the second quarter this year. Cho Hyunryeol, a researcher at Samsung Securities, said, "Fuel demand for transportation is gradually becoming visible with the easing of social distancing," adding, "In particular, US gasoline demand has started to recover, and jet fuel demand is expected to gradually recover in the second quarter."

With the recovery of the business environment, earnings improvement is expected to continue. Shinhan Investment Corp. forecasted that S-Oil's annual operating profit this year will reach 2 trillion won. Lee Jinmyung, a researcher at Shinhan Investment Corp., said, "Refining operating profit will reach 914.2 billion won, driving earnings growth," and added, "Despite earnings decline due to the disappearance of inventory effects in the second quarter, earnings improvement will continue with the rebound of refining margins due to demand recovery in the second half."

Growing Dividend Expectations Amid Earnings Recovery

As earnings normalize, expectations for dividends are also increasing. S-Oil, known as a representative high-dividend stock, did not pay dividends last year due to deteriorated earnings from losses. The researcher said, "Due to the poor business environment last year, a large-scale operating loss of 1 trillion won was recorded, and dividends were not paid for the first time," adding, "However, this year, earnings are expected to normalize and approach the highest level since the company's founding, so dividend capacity will also be sufficiently high, making 2021-2022 a period where dividends can be fully focused." Reflecting these market expectations, S-Oil announced on the 2nd that the record date for the interim (quarterly) dividend will be on the 30th of this month. The researcher explained, "With high upside potential in the refining sector, S-Oil is expected to be the biggest beneficiary among domestic refiners due to the recovery of the business environment," and added, "With earnings normalization, dividend attractiveness is highlighted, and the dividend per share this year is expected to be 3,500 won (dividend yield of 3.7%)."

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