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Oil & Gas sector – Undemanding valuation

Sector note 16/12/2022    391

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  • We expect Brent oil price to stay on the high base, averaging around US$90/bbl in 2023F due to lingering Russia – Ukraine crisis.
  • The companies possessing strong financial health, dominating in their business fields and being able to ride on high oil price environment will be the good selection in this current market turbulence.
  • Our top picks are GAS, PVS and PLX.

We expect average Brent oil price to stay around US$90/bbl in 2023F
Though macroeconomic uncertainty rising due to stronger US$, China’s zero-Covid policy and Russia – Ukraine crisis could negatively affect crude oil consumption, we believe oil price to remain on high base in 2023F as: (1) EU embargo should cause Russian oil production to drop in 2023F, and (2) OPEC+ signaled that the group would be always ready to intervene to support oil prices. Thus, we expect Brent oil price to average around US$90/bbl in 2023F.

More growth opportunities for O&G service providers in coming year
As oil prices are expected to remain high, we think demand for O&G services to gradually increase in coming years. Besides, the new Petroleum Law promises to attract new investment in Vietnam’s upstream segment. Generally, we expect some E&P projects like Block B, Nam Du – U Minh and Kinh Ngu Trang to be likely kickoff within the next two years, firstly providing more job opportunities for O&G service providers (EPC, drilling) in coming years.

Potential bounce back for petroleum distribution sector in 2023F
2022 is a tough year for petroleum distributors due to the instability of market coming from Nghi Son problem in 1H22 and related costs surging globally. For 2023F, we believe in the potential bounce back of giant distributors on the back of: (1) domestic supply re-stabilization, (2) adjustments on costs constituting fuel base prices, and (3) the growing petroleum demand in Vietnam.

Strong financial position to be the pedestal during market turbulence
Amid macroeconomic uncertainty rising, the companies with strong financial position and minimal risk against stronger US$ will not only sail through the rough water, but also gain benefits from rising interest rates. We see some O&G companies (GAS and PVS) have accumulated a huge amount of cash during many years thanks to strong business model, underpinning the companies’ position in this tough market.

Stock picks: We prefer GAS, PVS and PLX
In this market turbulence, we prefer the companies possessing strong financial health, dominating in their business fields and being able to ride on high oil price environment like GAS and PVS. Additionally, we also believe a petroleum distributor like PLX to strongly rebound in 2023F. The downside risks include: (1) lower-than-expected oil price, and (2) further delays in major projects.

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