PVD – Fully recovery ahead – Update

• PVDrilling reported a net loss of VND103.8bn in 1Q21 as the drilling segment operated under break-even level.
• We expect PVD’s drilling activities to recover from 2Q21 on the drilling contracts obtained and the expected stronger oil price.
• Upgrade to Add with a higher TP of VND26,600 (+16.2%).

Bleak drilling market defeated 1Q21 results
PVD reported a 67% yoy slump in 1Q21 revenue to VND550bn due to: (1) the drop in jack-up utilisation rate from 100% in 1Q20 (all of 4 jack-up rigs operated in Malaysia) to 52% in 1Q21, (2) the 9% yoy decline in jack-up day rate, and (3) no leased rigs comparing to the average of 2.37 leased rigs in 1Q20. As fixed cost eroded gross profit, drilling segment recorded a gross loss of VND75bn (vs. a gross profit of VND65.2bn in 1Q20), leading to a total gross loss of VND27.8bn in 1Q21. Despite the SG&A cost savings (-9.3% yoy) and a 97% yoy drop in net financial expenses thanks to stable FX rate, PVD posted a net loss of VND103.8bn in 1Q21.

Oil price to be resilient on a new base
We see similarities in global macroeconomic affecting oil prices between 2009-2010 and 2020-2021 period, including (1) the low interest rate environment which is a strong support for oil prices, and (2) the commodity prices significantly increased from the trough caused by Covid-19 (vs. 2008 crisis), which will stimulate production expansion and lift oil demand. Based on these similarities and the different prospects between supply and demand, in which supplies would not rise fast enough to keep pace with the expected demand recovery as the US oil industry has been choked up by the dramatic low oil price in 2020, we expect oil price to remain stable in the band around US$70/bbl in coming period.

What to expect in PVD in quarters ahead?
For drilling companies, higher oil price would positively impact on the company core business with a time lag on both day rate and utilisation rate, as their partners need time to restart the Exploration & Production (E&P) activities. Therefore, we expect PVD’s drilling activities to gradually recover from 2Q21 when PVD has obtained both short and long term drilling contracts from domestic and foreign partners, which would remain PVD’s FY21 utilisation rate and day rate of jack-up rigs at the same level of 2020 and increase FY21 TAD rig utilisation rate to 50% compared to the cold stacking in 2020 (0%). Overall we forecast PVD net profit to growth 22.5% yoy to VND228.1bn.

Upgrade to Add with a higher TP of VND26,600
Upside risks is higher-than-expected oil price. Downside risks come from (1) lower-than-expected jack-up utilisation rate, and (2) lower-than-expected oil price that could hamper the E&P activities.

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