Rising Asian Demand And Petrochemical Upgrades Will Fuel Expansion

Key Takeaways

• The Shaheen Project and operational efficiency upgrades position S-Oil for industry-leading margins and a much earlier earnings surge than analysts expect.
  
• S-Oil's strong regional integration, supply advantages, and energy self-sufficiency place it to outperform peers as global refining capacity contracts and Asian demand rises.
  
• Heavy reliance on refining, limited diversification, and external supply risks expose S-Oil to declining margins, unstable earnings, and vulnerability amid energy transition and regulatory shifts.

Catalysts

S-Oil Corporation manufacture and sell oil refining, lube, and petrochemical products in South Korea.

• While analysts broadly agree the Shaheen Project will drive earnings growth from 2027, they may be underestimating its impact: with world-class energy efficiency and over 80 percent internal feedstock sourcing, S-Oil's cost advantage could enable industry-leading margins and a much earlier, sharper inflection in EBITDA as soon as commissioning begins in late 2026.
  
• Analyst consensus expects refining margin improvement as OSPs moderate, but ongoing and accelerating global refinery rationalizations-including sustained closures in China, Europe, and North America-could create a multi-year structural supply shortfall, driving refining margins and S-Oil's net margins to multi-decade highs.
  
• S-Oil's position as the leading Korean refiner tightly integrated into surging Asian developed and developing markets, combined with robust export demand, sets the stage for revenue outperformance as regional energy demand growth continues to outpace global averages.
  
• With significant investments in gas turbine generators at Ulsan, S-Oil is poised to raise its self-power generation rate from 10 percent to over 40 percent, providing insulation from rising industrial electricity prices and unlocking meaningful improvements in long-term operating margins and free cash flow.
  
• The company's deepened digitalization and operational efficiency initiatives, enabled by new capex and refinery upgrades, set up ongoing reductions in unit processing costs and a step-change in return on invested capital, which are likely underappreciated by the market and could deliver substantial outperformance in net earnings over the coming years.

S-Oil Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on S-Oil compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming S-Oil's revenue will grow by 1.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -1.1% today to 4.9% in 3 years time.
• The bullish analysts expect earnings to reach ₩1862.6 billion (and earnings per share of ₩15861.43) by about August 2028, up from ₩-397.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from -17.9x today. This future PE is lower than the current PE for the KR Oil and Gas industry at 10.7x.
• Analysts expect the number of shares outstanding to grow by 3.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

S-Oil Future Earnings Per Share Growth

Risks

• The long-term global energy transition toward renewables and the secular decline in demand for petroleum-based fuels pose fundamental risks to S-Oil's core refining business volumes, likely resulting in long-term pressure on company revenues and limiting sustainable earnings growth.
  
• Increasing regulatory scrutiny, rising carbon pricing, and sector-wide ESG divestment trends may drive up compliance and operational costs, simultaneously raising S-Oil's cost of capital and weighing on both its net margins and overall equity valuation.
  
• S-Oil's persistent high dependency on crude supply from Saudi Aramco exposes the firm to supply chain disruptions, margin risks from OSP volatility, and geopolitical uncertainty, all of which threaten revenue stability and introduce significant cost of goods sold fluctuations over the long term.
  
• Despite progress on the Shaheen Project, S-Oil's relatively limited diversification into higher-margin value-added chemicals makes it less resilient than peers to declining refining margins and oversupply in basic chemicals, potentially pressuring long-term profitability and constraining improvement in net margins.
  
• Sector overcapacity as newer, more efficient mega-refineries in Asia and the Middle East come online, coupled with anticipated long-term declines in transportation fuels demand due to EV adoption and efficiency gains, will likely compress industry-wide margins and could result in lower earnings and weaker revenue for S-Oil.

Valuation

• The assumed bullish price target for S-Oil is ₩90000.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of S-Oil's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩90000.0, and the most bearish reporting a price target of just ₩52000.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₩38249.5 billion, earnings will come to ₩1862.6 billion, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of ₩61200.0, the bullish analyst price target of ₩90000.0 is 32.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.