GTG And Shaheen Projects Will Optimize Operations And Reduce Costs

Key Takeaways

• Initiatives in self-generation and natural gas sourcing are expected to enhance operational efficiencies and improve net margins.
  
• Stable growth in global oil demand and refining capacity constraints are likely to boost revenues and market fundamentals.
  
• Rising debt levels and geopolitical uncertainties could strain S-Oil's financial stability and impact revenue growth amidst ongoing market challenges.

Catalysts

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

• The GTG project, a gas turbine cogeneration initiative, is expected to decrease carbon emissions and reduce utility costs through in-house power generation, enhancing net margins and potentially boosting earnings.
  
• The projected steady growth in global oil demand, coupled with a decline in net refining capacity expansion, is anticipated to improve market fundamentals, which should favorably impact revenues.
  
• The Shaheen project, progressing slightly ahead of schedule, aims for efficient self-generation of electricity, which could optimize operational efficiencies and positively influence net margins and earnings.
  
• A stable demand growth in key markets such as India and Southeast Asia, supported by China's economic stimulus measures, is forecasted to drive consistent revenue increases.
  
• Strategic long-term contracts for stable natural gas sourcing ensure cost control, potentially aiding in maintaining or improving net margins in the mid to long term.

S-Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S-Oil's revenue will decrease by -1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 3.2% in 3 years time.
• Analysts expect earnings to reach ₩1108.0 billion (and earnings per share of ₩9500.0) by about January 2028, up from ₩-163.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from -43.2x today. This future PE is lower than the current PE for the KR Oil and Gas industry at 12.0x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.08%, as per the Simply Wall St company report.

S-Oil Future Earnings Per Share Growth

Risks

• The petrochemical business experienced an operating loss in Q4 2024 due to a narrowed spread of major products, which might persist if market conditions do not improve, impacting net margins and earnings negatively.
  
• The company's financials were affected by FX losses in Q4 2024, resulting in a net FX loss of ₩415.7 billion. This kind of volatility could continue to pressure income before tax if not properly managed, impacting overall net earnings.
  
• The GTG project, while aiming for energy and cost efficiencies, requires significant CapEx of ₩263 billion, which could strain cash flow and potentially delay financial benefits until after the mechanical completion in 2026, affecting short-term profitability.
  
• The net debt-to-equity ratio increased to 69.3% by year-end 2024, indicating rising leverage that could affect financial stability, interest expenses, and potentially investor confidence if not managed carefully.
  
• Despite expectations of a steady oil demand growth, geopolitical and policy uncertainties, especially with China and the impact of EV sales on refining product demand, could disrupt regional market dynamics and subsequently S-OIL's revenue growth.

Valuation

• The analysts have a consensus price target of ₩80437.5 for S-Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩110000.0, and the most bearish reporting a price target of just ₩59000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩34901.0 billion, earnings will come to ₩1108.0 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of ₩60700.0, the analyst's price target of ₩80437.5 is 24.5% 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.