Hanhwa Investment & Securities: "Concerns Over Winter Power Shortage... Expanding Investment in Refining Industry"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] Korea Investment & Securities analyzed on the 1st that investment in the refining industry should be expanded. This is based on the judgment that unstable energy supply may continue.

Energy prices have been rising since last month. Given the added impact of the Russia situation, the supply and demand this year is more unstable than the power shortage experienced last winter. LNG prices have once again hit record highs, and international oil prices have recovered to the $90 range. Last week, refining margins approached $20. As concerns about the possibility of winter power shortages grow, diesel margins are also expanding.

Choi Go-woon, a researcher at Korea Investment & Securities, stated, “The current unstable energy supply is a problem that has been inherent for years due to the intertwined issues of decarbonization transition and energy security, so it is difficult to resolve with only short-term market interventions by governments.”

Investors had to withhold investment decisions on the suddenly soaring refining margins because the environment was too volatile due to China’s zero-COVID policy and the Russia-Ukraine war. However, attention should be paid to the fact that energy supply and demand remain tight despite concerns about economic recession. Researcher Choi Go-woon explained, “It is necessary to become accustomed to the overshooting of diesel prices that repeats seasonally along with LNG prices,” adding, “As deferred demand for jet fuel flows in, inventory shortages will become more pronounced.”

S-Oil, as a pure refining company, is the stock that benefits most directly from refining market conditions, which is also linked to dividends. Although a decline in profits is inevitable in the third quarter, it is expected to continue operating results that surpass the previous boom period. Annual operating profit this year is expected to more than double from the previous year to 4.7 trillion won, with a dividend yield expected to exceed 7%.

SK Innovation is expected to have upside next year not only in its refining business but also due to the undervaluation of SK On. Considering growth expectations, it is more important that battery losses will significantly shrink in the second half rather than refining profits peaking in the second quarter and then declining. Researcher Choi Go-woon analyzed, “The losses this year, which were larger than expected, are not a matter of doubting cost competitiveness but a temporary growing pain,” adding, “On the contrary, since the time to achieve economies of scale has been shortened, a revaluation is necessary.”

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