Korean refiners to keep up hot earnings streak Q2 on soaring margin

Kim Geum-yi and Jenny Lee 2022. 6. 22. 11:03
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[Graphics by Song Ji-yoon]
South Korean refiners would have kept up hot earnings streak in the second quarter on the boon from soaring oil prices and supply shortage that has fattened their refining or operating margin.

According to market tracker FnGuide on Tuesday, S-Oil is forecast to have earned 825.2 billion won ($638.10 million) in operating profit in the April-June period, which would be up 44.52 percent from the same period in the previous year. SK innovation’s operating income is projected to have been more than doubled to 1.01 trillion won over the same period.

Their profit margin has significantly improved, sending analysts to upgrade target stock prices on earnings surprise.

According to industry insiders, Singapore refining margins, the benchmark for profitability among oil processors in Asia, jumped to $8.38 per barrel in the first quarter of this year from $2.1 in the second quarter of last year. The index went further up to hit $20 milestone per barrel in May and $25 in June.

Refining margin is the difference between the prices of oil products and the feedstock like crude oil, measuring the value contribution of the refinery per unit of input. Industry insiders consider the margin of about $4 is a breakeven level for refiners. Upside is stronger for margins due to shortages of crude oils and petrol products from the Russia-Ukraine war and surging demand for aviation fuel and automobile gasoline during the holiday season after the economic reopening.

S-Oil’s operating profit in the second quarter would jump 12.6 percent on quarter to 1.5 trillion won, 81.8 percent higher above previous market consensus, projected Lee Dong-wook, a researcher at Kiwoom Securities.

Lee forecast S-Oil’s petrochemical business would swing to profit, posting 77.4 billion won, with the lube base oil section exceeding 200 billion won. Its refining business would have reaped 1.22 trillion won in operating profit, up 1.8 percent from the previous quarter.

[Graphics by Song Ji-yoon]
Kiwoom Securities revised upwards the target price of S-Oil by 7.1 percent from its earlier target to 150,000 won per share.

Korean refiners would benefit most from the latest price boon.

“Given the various geopolitical situations including the relationship between the U.S. and Saudi Arabia, crude oil prices will likely stay high for the time being, which is favorable for Korean refiners,” said Jeon Woo-je, a researcher at Hanwha Investment & Securities. He raised the second-quarter operating income estimates for S-Oil and SK innovation from 1 trillion won to 1.4 trillion won and from 2 trillion won to 2.6 trillion won, respectively.

On the anticipation for strong earnings in the second quarter, local refinery stocks have fared better than other stocks in the bear market. S-Oil and SK innovation rose 3.30 percent and 4.27 percent, respectively, over the last month, outperforming the country’s benchmark Kospi index losing 8.73 percent. Goldman Sacks expected Brent Crude would go higher than $140 per barrel this summer.

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