SK Innovation Q1 Profit Surges 632%, Yet Nomura Maintains Reduce Rating

Overview

Nomura Securities released its commentary on SK Innovation’s Q1 2026 results. The company reported Q1 revenue of KRW 24.2 trillion, operating profit of KRW 2.2 trillion, and net profit of KRW 964.4 billion—representing a 632% YoY surge in profit and exceeding market expectations by 132%, primarily driven by significantly improved export refining margins. However, Nomura maintains its Reduce rating with a KRW 90,000 target price, arguing that the current exceptional earnings are unlikely to persist as refining margins gradually normalize.

Core views

Performance: SK Innovation delivered its strongest results since Q2 2022. Q1 operating profit of KRW 2.2 trillion grew 632% both QoQ and YoY, while net profit turned positive at KRW 964.4 billion. Revenue of KRW 24.2 trillion rose 15.2% YoY. This robust performance was primarily driven by refining exports (not domestic operations), with Asian refining gross margin (GRM) rising from an average of USD 4.8/barrel in 2025 to USD 8.1/barrel in Q1. Additionally, the company recorded KRW 1 trillion in inventory valuation gains, accounting for 46% of Q1 operating profit—a key driver behind the profit surge. Business Segments: In batteries, subsidiary SK On saw QoQ shipment growth and received KRW 79 billion in U.S. IRA tax credits (down 22% QoQ). Despite higher shipments, U.S. operations remained weak overall, partially offset by resilient sales in the EU and Asia, leading to a narrower loss in Q2. Management highlighted growth opportunities in the U.S. energy storage market, EU EV market, and Korean government-led energy storage tenders during the earnings call. Capex totaled KRW 800 billion in Q1—KRW 300 billion for batteries, KRW 200 billion for E&S, and KRW 300 billion for maintenance/strategic investments—with full-year capex guidance at KRW 3.5 trillion. Industry Outlook: Nomura identifies the key question as whether the currently elevated refining margins (especially for diesel and jet fuel) can be sustained and when they might revert to historical averages. The firm estimates global refining outages account for 5–8% of capacity, yet demand is clearly weakening—the IEA forecasts 2026 global oil demand to decline by 420,000 bpd to 104 million bpd (compared to +0.8% growth in 2025). Industry surveys indicate most segments of the oil value chain—including distributors, refiners, and traders—are operating with low inventories, amplifying market sensitivity to crude and refined product price volatility. Nomura believes that although supply constraints and refining margins may remain tight in the near term, share prices could front-run the eventual reversal of these exceptional earnings.

Analysis framework

Nomura employs a Sum-of-the-Parts (SOTP) valuation approach for SK Innovation, valuing the company by summing the standalone values of its four core business segments: batteries (KRW 12.1 trillion), refining/petrochemicals/lubricants (KRW 13.8 trillion), E&P (KRW 4.0 trillion), and E&S (KRW 11.9 trillion), resulting in a target price of KRW 90,000. This method is well-suited for diversified energy conglomerates, enabling more accurate reflection of each segment’s intrinsic value. For industry analysis, Nomura uses a supply-demand framework for the refining sector while also monitoring how inventory cycles affect price sensitivity. The firm notes that low-inventory operations amplify price volatility—a critical factor in assessing the sustainability of current high margins. Additionally, the report cites IEA demand forecasts to validate its view that margins will eventually revert toward historical averages.

Methodology notes

• Company Fundamentals & Financial FrameworkSOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  Breaks down a diversified company into individual business segments, applies distinct valuation methodologies to each, and sums the results. Particularly suitable for complex conglomerates like SK Innovation, which operates across refining, batteries, and energy services—segments too heterogeneous for a single valuation metric.

• Industry/ Sector Analysis FrameworkSupply-demand framework

  Refining Industry Supply-Demand Analysis

  Assesses the balance between supply-side factors (e.g., % of refining capacity offline) and demand-side trends (e.g., IEA oil demand forecasts) to evaluate the sustainability of industry margins. High margins are typically unsustainable when supply is tight but demand is weakening.

• Cyclical & Sentiment FrameworkInventory Cycle Analysis

  Low Inventories Amplify Price Sensitivity

  When distributors, refiners, and traders across the value chain operate with low inventories, the market becomes more sensitive to supply-demand shocks, magnifying price volatility. This dynamic is crucial for evaluating whether current high refining margins can persist.

• Valuation MethodologyPE/PEG valuation

  2026F P/E 15.0x

  The report provides 2026 forward valuation multiples: P/E of 15.0x, P/BV of 1.0x (ROE: 5.5%), and EV/EBITDA of 13.6x—used to benchmark against peers and assess whether the current share price is overvalued.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SK Innovation (096770.KS)

  Covered stock; Q1 earnings beat expectations but Reduce rating maintained

  Strengths

  Significantly improved export refining margins, QoQ growth in battery shipments, diversified business portfolio

  Weaknesses

  Weak U.S. battery operations still unprofitable, current share price trades at ~44% premium to target, sustainability of exceptional earnings in doubt

  Comparison

  Report does not provide detailed peer comparisons

  Risks

  Continued losses, stronger-than-expected refining/lubricants profits (upside risk)

Key data

• Q1 RevenueKRW 24.2 TrillionUp 23.1% QoQ, 15.2% YoY; beat market expectations by 14%
• Q1 Operating ProfitKRW 2.2 TrillionUp 632% QoQ and YoY; highest since Q2 2022; beat market expectations by 132%
• Q1 Net ProfitKRW 964.4 BillionTurned positive QoQ and YoY
• Asian Refining Gross Margin (GRM)USD 8.1/barrelUp from 2025 average of USD 4.8/barrel
• Inventory Valuation GainsKRW 1 TrillionAccounted for 46% of Q1 operating profit
• IRA Tax CreditsKRW 79 BillionReceived by battery business; down 22% QoQ
• 2026 Capex GuidanceKRW 3.5 TrillionKRW 800 billion already spent in Q1
• Global Refining Capacity Outages5–8%Nomura estimate
• 2026 Global Oil Demand Forecast104 Million bpdIEA forecast: down 420,000 bpd (-0.4%) YoY vs. +0.8% in 2025
• 2026F Valuation MultiplesP/E 15.0x, P/BV 1.0x, EV/EBITDA 13.6xROE: 5.5%

Impact & implications

Impact on the Company: Despite stellar Q1 results, Nomura believes the current exceptional earnings are unsustainable. Elevated refining margins (particularly for diesel and jet fuel) stem largely from geopolitical disruptions like Middle East supply outages. As supply chains stabilize and geopolitical tensions ease, margins are expected to revert toward historical averages—and share prices may anticipate this reversal. In batteries, although shipments grew and IRA credits were secured, U.S. operations remain weak, relying on EU and Asian markets for support. The segment remains unprofitable but is expected to narrow losses. Impact on the Industry: The report highlights that most oil value chain participants operate with low inventories, amplifying sensitivity to price swings. With the IEA revising down oil demand forecasts, weakening demand contrasts with tight supply, putting downward pressure on industry margins. Investors should monitor how long high margins can last and when normalization begins.

Risks

• Risk of continued losses
• Geopolitical uncertainty affecting feedstock prices, chemical spreads, and inventory-related gains/losses
• Potential reversal of exceptional earnings as supply chains stabilize and geopolitical tensions ease
• Weakening global oil demand (IEA forecasts -0.4% YoY decline in 2026)

What to watch

• Sustainability of refining margins (especially diesel and jet fuel) and timing of reversion to mean
• Status of global refining outages (currently estimated at 5–8% of capacity)
• Progress in U.S. energy storage, EU EV markets, and Korean government energy storage tenders for battery business
• Evolution of supply chain stability and geopolitical developments