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Refining margins to remain strong even under conservative assumptions

Maintain Buy and raise TP to W150,000

We raise our target price for S-Oil to W150,000 (from W135,000), reflecting upward revisions to our earnings forecasts driven by stronger-than-expected refining margins (target P/B unchanged at 1.45x). Even under conservative refining margin assumptions that factor in an easing of geopolitical risks, we do not expect global refinery operations and refined product exports to normalize before year-end. That said, uncertainty surrounding Korea’s fuel price cap policy remains a key risk to monitor, as refiners’ earnings could fluctuate significantly depending on when the policy is lifted and the scale of compensation for the resulting losses.

2Q26 review: Solid refining margins offset by OSP and policy headwinds

For 2Q26, S-Oil reported operating profit of W965.0bn, in line with the consensus (W964.6bn) but down 21.6% QoQ. Refining operating profit nearly halved QoQ to W532.4bn. Although the average Singapore refining margin rose sharply to US$22.3/bbl in 2Q from US$7.0/bbl in 1Q, the benefit was more than offset by: 1) higher OSPs (-W650.0bn QoQ); 2) the absence of inventory-related gains (-W530.0bn QoQ); 3) scheduled maintenance; and 4) foregone profit associated with the fuel price cap policy. Lube base oil operating profit increased about 187% QoQ to W477.4bn. Delays in the recovery of Middle Eastern production facilities and logistics tightened supply, particularly for Group III base oils, driving a sharp increase in product spreads to around US$140/bbl (vs. around US$50/bbl previously).

Benefits from lower OSPs to emerge in 4Q26

For 3Q26, we forecast operating profit at W692.0bn, above the consensus (W632.8bn) but down 28% QoQ. We expect refining operating profit to decline about 63% QoQ to W198.2bn, reflecting: 1) our conservative margin assumption (US$16.2/bbl in 3Q vs. US$22.3/bbl in 2Q); and 2) a lower USD/KRW rate. The August OSP cut should have only a limited effect on 3Q26 earnings, with a more meaningful benefit expected from 4Q26.

We estimate that foregone profit associated with the fuel price cap policy amounted to W260bn in 1Q26 and W700bn in 2Q26 and forecast it at W300bn for 3Q26. Government compensation could be received as early as 4Q26. Lube base oil earnings should remain strong in 2H26 on tight supply, and we expect the business to post another quarterly operating profit record in 3Q26, following its record result in 2Q26.