Time for an Overweight call
Overweight oil refining sector; SK Energy as top pick We recommend an
OVERWEIGHT rating on the oil refining sector in view of the industry’s
coming up cycle and the three Korean refiners’ profit momentum and
valuation merits. Refinery margins and related indicators support the view
that Korean refiners are bouncing off their 2009 lows. Even better, the
China momentum will take shape in 2010. On top of improving market
conditions, profit momentum is putting the three Korean refiners in a
positive light. Our top pick is SK Energy firing on all cylinders – E&P,
separator films and electric car batteries – for growth. SK Energy stands out
in terms of the share upside potential and share price catalysts.
The case for a new refining up cycle Scheduled maintenance works at
U.S. refineries in February-March, industrial output picking up pace
worldwide and the Shanghai EXPO set to open in May are factors that will
boost refining margins in the short term. In the medium term, oil product
demand (imports) growth will likely accelerate on China’s 45% auto sales
growth in 2009, Chinese teapot refineries’ output cutbacks (when oil prices
top US$80) under a government-induced pricing policy, and China’s
infrastructure and housing construction drive after delays in 2009.
Growth stories E&P output growth (Brazil, Yemen and Peru) is boosting
SK Energy’s profit momentum. The catalyst for GS Caltex is its #2 HOU rampup
toward end-2010, which should lift its refining profits. In the case of SOil,
large chemical capacity additions in 2Q11 will upgrade its chemical
division sales and profits. These growth stories will combine with the
market’s improving outlook to catalyze the stocks’ upside.
Contents
Refining margin recovery is real 3
Three near-term momentum catalysts
7
The case for a new refining up cycle
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SK Energy, GS Caltex and S-Oil business comparison and profit forecasts
14
SK, GS and S-Oil taking different growth paths
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Investment strategy and valuation: top pick – SK Energy
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<Reference> Earnings estimates and financial statements
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