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Fuel price cap policy to heighten earnings volatility

Maintain Buy and raise TP to W135,000

We raise our target price for S-Oil to W135,000 (from W120,000), reflecting upward revisions to our earnings forecasts driven by stronger refining margins (target P/B unchanged at 1.45x). Supply disruptions stemming from the closure of the Strait of Hormuz have driven broad-based increases in crude oil and refined product prices. Even if a ceasefire takes hold, normalization is expected to take more than three months, suggesting price strength is likely to continue into 2H26. That said, uncertainty surrounding Korea’s fuel price cap policy is a key risk to monitor, as earnings could fluctuate significantly depending on when the policy is lifted and the scale of government compensation for refiners’ losses.

1Q26 review: Earnings come in slightly above elevated expectations

For 1Q26, S-Oil reported operating profit of W1.23tr, beating the consensus (W1.17tr) by about 5%. Earnings improved QoQ largely thanks to the refining business, which saw stronger refining margins and higher inventory-related gains amid rising oil prices. Total inventory-related gains amounted to W643.4bn, including W524.8bn from refining, W87.1bn from petrochemicals, and W31.5bn from lube base oil. However, these positives were partially offset by the fuel price cap policy and regular maintenance. We estimate that the price cap policy (in effect for 19 days in 1Q26) resulted in opportunity losses of around W260bn during the quarter.

2Q26 preview: Earnings outlook hinges on resolution of fuel price cap policy

For 2Q26, we forecast operating profit at W491.7bn (-60% QoQ). We expect earnings to decline due to: 1) the full-quarter impact of opportunity losses from the fuel price cap; and 2) a sharp rise in Saudi OSPs. Assuming the price cap policy remains in place through June, we estimate related losses could expand sharply to around W900bn in 2Q26. That said, once government compensation is finalized, the company should be able to recover a substantial portion of these losses. We assume that roughly W810bn―equivalent to 70% of projected 1H26 losses of around W1.16tr―will be recovered gradually over 3Q-4Q26.

The key variables at this stage are the timing of the policy’s termination and the scale and timing of government compensation. With the government and refiners still engaged in negotiations over the basis for calculating losses (cost-based vs. MOPS-based), the final impact on 3Q-4Q26 earnings remains highly uncertain.