Vietnam's oil and gas sector: A rising tide lifts all boats

GAS could be the biggest beneficiary as an infrastructure developer and LNG provider.

What are the obstacles to LNG projects?

Brent oil price in uptrend

Brent oil prices peaked at US $86/bbl in October, the highest level since October 2018, and are expected to average around US $71.5/bbl in 2021 (65% YoY). The impressive oil price rally came from global oil demand recovery after the pandemic combined with the natural gas crisis amidst the sluggish supply response.

VNDirect expects oil prices to remain high in 2022F as demand continues to recover strongly, while supply cannot rise quickly enough to catch up with demand due to lower new investments in upstream activities for many years, causing difficulties in increasing oil production.Overall, it forecasts the average Brent oil price at around 75 USD/bbl in 2022. "The main concern for our forecast comes from the US-Iran nuclear talks, as it could lead to the return of an Iranian exporter with an additional capacity of up to 2.1 mbd", VNDirect said.

Advantages of upstream companies

VNDirect believes a strong oil price rally will heat up E&P activities globally, boosting the drilling market in Southeast Asia and benefiting drilling services companies like PVD.

For Vietnam's upstream activities in 2022, investors should keep their eyes on the Block B-O Mon project, which is expected to kick off in 2H22F after the O Mon 3 power plant project is expected to be approved in 1H22F. "We consider this project to be a great growth motivation for the industry in the coming period,", VNDirect said.

Forming the LNG value chain from 2022

LNG Thi Vai will be completed in 2H22F, marking the first LNG project coming onstream in Vietnam. According to Vietnam's National Energy Development Strategy, the government highlights the priority of developing the LNG infrastructure for both imports and consumption, turning gas-fired plants into a key power source by 2030.

Riding on this trend, VNDirect believes GAS will be the biggest beneficiary as an infrastructure developer and LNG provider.

Riding on the petroleum demand rebound

Downstream companies may benefit from a rebound in domestic demand as the government eases social distancing, as well as an improvement in crack spread given the expected high oil price in 2022.

Notably, VNDirect believes Vietnam’s petroleum consumption has lots of room for growth, supported by (1) low refined products consumption per capita, and (2) the increasing middle-class population to boost automobile demand, thus benefiting petroleum consumption.

Vietnam’s power development plan to drive LNG growth

Stock picks

Due to the high correlation with the Brent oil price, the oil price will remain one of the key drivers for oil and gas stocks next year. The expected strong oil price will not only drive share price sentiments in the short-term, but also improve the industry’s fundamentals in coming years as it could give more incentives for relevant units to restart the major projects in Vietnam, providing huge opportunities for upstream companies like PVD and PVS.

In general, this stock prefers players like GAS and PVD that can benefit from both the energy infrastructure storey in Vietnam and the expected strong oil price.Besides, it also believes downstream companies like PLX will gain benefits from the recovery in petroleum consumption in Vietnam after the pandemic.

However, VNDirect said the main downside risks to Vietnam’s oil and gas industry come from (1) lower-than-expected oil prices, as the decline in oil prices would hamper the industry’s fundamental recovery; (2) further delays in major projects, possibly caused by a lack of financial resources, as they could lead to gas supply shortages in coming years; and (3) the prolonged COVID-19 pandemic, which could hurt the demand for oil and gas-related products.