The Biggest Beneficiary of OSP Cuts
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
1Q20 operating loss to miss consensus at KRW638bn
S-Oil is forecast to have posted an operating loss of KRW638bn (turning negative QoQ, YoY) for 1Q20, missing the market consensus of a KRW426.8bn loss. The main culprit will be the refining division which likely incurred a sizable loss of KRW733.9bn (widening loss QoQ). Inventory valuation loss of KRW369.7bn is expected on plunging oil prices (average USD64.9/bbl in December 2019 → USD33.7/bbl in March 2020). The one-month lagging refining margin fell USD8.2/bbl QoQ. Petrochemical operating profit is estimated to have dropped 15.5% QoQ to KRW17bn on declining product spreads. Operating profit from lube base oil should have come in at KRW79bn (-19.6% QoQ) due to a USD18/ton QoQ drop in spreads from rising Bunker C price and product price declines.
2020 OP forecast at KRW516.6bn (+23% YoY), reflecting OSP cuts from 2Q
For 2020, we forecast operating profit to increase 23% YoY to KRW516.6bn. Saudi Arabia slashed its official selling price (OSP) for crude oil (Arab Light/Medium average) by USD6/bbl MoM for April and USD3.78/bbl MoM for May. S-Oil, which has the largest share of crude imports from Saudi Arabia (90%), will be the biggest beneficiary of OSP cuts. Operating profit from refining is projected at KRW221.2bn (positive swing, +KRW955.1bn QoQ) for 2Q20 with refining margin rising to USD13/bbl QoQ on lower OSP. Refining operating profit should increase KRW1.1tr HoH to KRW589.2bn in 2H20 on improving refining margin and oil price recovery.
Retain BUY for a target price of KRW83,000
We retain our BUY rating on S-Oil for a target price of KRW83,000. Earnings for the first half of the year should be sluggish due to low oil prices and weak demand, but are highly likely to turn around in the second half on the back of the OPEC+ group’s production cut agreement in April and Saudi Arabia’s OSP cuts. The surge in coronavirus cases in the US and EU is expected to slow gradually after peaking in April. Oil prices and demand should rebound heading toward 2H20. We recommend S-Oil as our sector top pick for its upbeat earnings outlook based on OSP cuts and oil price hike.