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Oil & gas – Time for more caution

Sector note 21/03/2022    109

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  • Crude oil prices have grown more unpredictable under the mixed impact of geopolitical crisis, global macro growth and supply chain vulnerabilities.
  • We see increasing investment downside risks on O&G stocks following the oil price volatility and overpricing valuation.
  • Time to switch investment focus into longer-term prospect to capture the riding trends of O&G segment.

Oil prices in “highly unpredictable environment”
After touching 14-year high at US$139.13/bbl on 7 March, Brent oil price has slid nearly US$40/bbl following concerns over global economies growth slowdown, considering the current China‘s “zero-Covid” policy. Currently, we see many unpredictable factors pumping more uncertainties into global energy market. On the one hand, Ukraine crisis intensifying and OPEC falling short of target could lift oil prices. On the other hand, the revival of Iran nuclear deal and the growing lockdowns in China are likely to put downward pressure on oil prices. In our view, Brent oil price is expected to remain highly volatile for short term due to the global uncertain events, then gradually rebalancing toward the end of 2022 when the geopolitical tension in Ukraine is cooled down and the increasing oil supply from Iran, US and OPEC could catch up the demand.

We see increasing investment downside risks on O&G stocks
Following the Brent oil prices spike, Vietnam O&G share prices have been rallied 60.2% since the beginning of 2021, even outperformed the VN-index (+31.1% in the same period). We believe post-rally investors need to exercise more caution as downside risks are now larger than upside potential. First, though rising oil prices bode well for upstream players, we see that the earnings results of some upstream companies (PVD, PVS,…) need more time for a full recovery. That is because oil prices should stay above US$60-65/bbl level long enough to re-activate the exploring & production (E&P) activities. Secondly, the valuation of some O&G stocks has turned relatively fair as the share prices have been largely priced in the better outlook.

Time to switch investment focus into longer-term prospect
Amidst the extreme volatility of energy market, we believe investors should re-orientate focus into O&G stocks that are less sensitive to oil prices and benefit from a more longer-term story. We see a few rising trends to shape the outlook of Vietnam oil & gas segment. First, a series of megaprojects in the LNG-to-power value chain have been announced recently, making it the most promising segment in the next few years. Thus, we prefer stocks that have large exposure to LNG like GAS. Second, the sky re-openings will bode well for the recovery of energy consumption and PLX could be the biggest beneficiary. Downside risks include the declines in oil prices, further delay in major energy projects, and any new complicated variants which could hamper the energy demand.

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