JP Morgan maintained its Overweight rating on Korean refining stocks on the 21st and changed its top pick from S-Oil to SK Innovation, citing record-high refining margins driven by renewed conflict in the Strait of Hormuz. The investment bank noted that strong refining margins would offset minor inventory valuation losses in the second quarter. Van Eck reported that the 3-2-1 crack spread, a key profitability indicator for US refiners, reached approximately $70 per barrel on the 20th, surpassing 2022 energy crisis levels. JP Morgan attributed the margin surge to production facility damage in the Middle East conflict, which has disrupted supply of Group III high-grade lubricant base oils for several months, with affected facilities representing 35% of global actual production capacity.
JP Morgan Upgrades Korean Refining Sector and Switches Top Pick to SK Innovation
According to the financial investment industry on the 21st, JP Morgan recently maintained its Overweight rating on the Korean refining sector. The bank changed its top pick within the sector from S-Oil to SK Innovation, citing SK Innovation's relative undervaluation following S-Oil's recent sharp stock price increase. Year-to-date, S-Oil's stock price has risen 82.7% (as of the 20th), while SK Innovation gained 17.0% during the same period, making S-Oil's increase approximately 65 percentage points higher.
Refining Margins Reach Record Highs Amid Strait of Hormuz Conflict
JP Morgan cited soaring refining margins resulting from the rekindled Middle East conflict as the primary reason for its sector upgrade. The bank analyzed that Group III lubricant base oil supply has been disrupted for several months due to damage to lubricant production facilities in the Middle East conflict. The production capacity of recently damaged facilities for Group III is estimated at 35% of global actual production. As a result, Group III margins have risen to record-high levels, which is positive for domestic refiner performance.
JP Morgan Raises Q2 Operating Profit Forecasts for Korean Refiners
JP Morgan estimated the second-quarter operating profit for Korea's refining and chemical sector at 3.7 trillion won. This figure is approximately 36% higher than the Bloomberg consensus market expectation of 2.7 trillion won. The bank also projected that a 4.2 trillion won refiner compensation fund would serve as additional upward momentum in the fourth quarter.
JP Morgan raised its second-quarter operating profit estimates for SK Innovation and S-Oil to 1.8 trillion won and 1.1 trillion won, respectively, following upward revisions to refining margin and lubricant base oil margin forecasts. These estimates exceed market consensus by 77% and 30%, respectively. For 2026 and 2027 earnings per share (EPS) forecasts, the bank raised SK Innovation's projections by 52% and 63%, respectively, and increased S-Oil's by 20% and 25%.
SK Innovation Gains Favor Due to Relative Undervaluation and Restructuring Progress
JP Morgan evaluated SK Innovation's risk-versus-reward profile as favorable. The bank assessed that cash burn in the battery division has stopped, and financial stability is improving as battery asset sales and restructuring proceed. Combined with strong performance in the refining and lubricant base oil businesses, SK Innovation is likely to provide the highest net profit to shareholders among Korea's three battery manufacturers in 2026-2027.
JP Morgan revised its 2026 dividend per share (DPS) forecast for SK Innovation from 0 won to 1,000 won, reflecting improved cash flow projections, reduced capital expenditures (CAPEX), and financial structure stabilization. The bank stated, "The market is fixated on SK Innovation's battery business losses and excessive CAPEX burden, but much of this has already been reflected in the stock price. After restructuring, SK Innovation is transforming from a Korean refiner with a cash-consuming battery subsidiary into an integrated Asian energy platform with a stabilized financial structure."
Additionally, JP Morgan evaluated that SK Enmove, a global core supplier of Group III lubricants, could benefit in the mid-to-long term as supply disruptions of high-grade lubricant base oils expand worldwide due to the Middle East crisis. Considering the shortage of vacuum gas oil supply, the bank projected that SK Enmove's lubricant base oil production volume could conservatively increase by 11% this year, and in a scenario where it fully replaces competitors' lost volumes, production could increase by more than 55%.
FAQ
Why did JP Morgan change its top pick from S-Oil to SK Innovation?
JP Morgan changed its top pick to SK Innovation due to SK Innovation's relative undervaluation after S-Oil's stock price surged 82.7% year-to-date compared to SK Innovation's 17.0% gain during the same period.
What is driving the record-high refining margins in Korean stocks?
Record-high refining margins are driven by renewed conflict in the Strait of Hormuz, which has damaged production facilities and disrupted Group III lubricant base oil supply. Van Eck reported the 3-2-1 crack spread reached approximately $70 per barrel on the 20th, surpassing 2022 energy crisis levels.
How much did JP Morgan raise its Q2 operating profit forecast for SK Innovation?
JP Morgan raised SK Innovation's second-quarter operating profit estimate to 1.8 trillion won, which is 77% above market consensus expectations.
