What outlook for Vietnam oil and gas sector?

>> Upstream enterprises in oil and gas industry see bright prospects this year

Crude oil prices rebounded stronger than predicted in the first quarter of 2024. The Brent crude oil price increased from USD76/barrel at the beginning of the year to roughly USD85/barrel in March 2024, resulting in an average price of USD81.3/barrel in 1Q2024. The factors driving the oil price increase include (1) the OPEC policy of cutting 2.2 million barrels per day; (2) disputes in the Red Sea disrupting the global crude oil supply chain; (3) lower-than-expected global crude oil inventories, indicating favorable consumption demand; and (4) at least seven Russian oil refineries (equivalent to 25% of maximum refinery capacity) suffering severe damage following Ukraine's attacks, potentially leading to Russia reducing crud.

Oil prices are expected to stay high in 2024, at least at the level seen in 2023. The International Energy Agency (IEA) has revised its prediction for 2024F global crude oil demand growth to 1.3 million barrels per day, while supply is expected to rise only by 0.8 million barrels per day.

"We take a cautious approach, considering that China's dismal economic forecast may have a detrimental influence on global crude oil consumption by 2024. However, factors such as drilling rig shortages, OPEC's continued production cutbacks, and hostilities in the Red Sea and Russia-Ukraine may constrain crude oil output, preserving the supply-demand balance. We predict the average Brent crude oil price in 2024 to remain steady year on year, hitting USD83/barrel," stated Pham Minh Hieu, Analyst at KB Securities.

The rig rental market is likely to remain tight over the 2024-2025 decade. Brent crude oil prices have already surpassed USD70 per barrel, encouraging upstream businesses to increase exploration efforts since high oil prices promise revenue growth, which increases demand for jack-up (JU) rigs. S&P worldwide predicts that investment in the worldwide upstream industry will expand at a 4% CAGR between 2023 and 2027.

As a result, the Middle East will require around 180 JU rigs between 2024 and 2025 (compared to only 122 in 2022). JU rigs from Southeast Asia will also be tempted to the Middle East, creating a possible supply bottleneck in the area. Furthermore, the worldwide fleet is aging, and the order book is at an all-time low (accounting for only 4% of total existing rigs), implying that rig supply will likely stay tight for at least another two years.

The domestic oil and gas sector will enter a long-term growth cycle beginning in 2024. PV Technical Services (PVS) was awarded the EPC1, EPC2, and pipeline contracts for the O Mon-Block B gas pipeline project in 4Q2023, for a total of about USD1.05 billion. Pham Minh Hieu anticipates that the final investment decision (FID) will be formally given in late Q1 or early Q2 2024, allowing associated parties to speed the work. Other large-scale projects, such as Lac Da Vang (which has already gained FID), Nam Du U Minh (which has signed a framework agreement for gas purchase), and Su Tu Trang 2B (which is negotiating a new petroleum product sharing deal), will create a significant amount of work for upstream firms between 2024 and 2028.

>> How to pick oil and gas stocks

The forecast for upstream firms such as PV Drilling & Well Services (PVD) and PV Technical Services (PVS) remains positive due to increasing investment in global exploration and production (E&P) and a large backlog of domestic E&P projects in 2024. Midstream firms, specifically PV Transportation (PVT), will be propelled by (1) contributions from boats bought in late 2023; (2) sustained fleet expansion in 2024; and (3) high charter prices as a result of instability in the Red and Black Sea. Downstream firms in general will benefit from rising crude oil prices.

However, PV Gas (GAS) may experience subdued growth due to liquified natural gas (LNG) consumption issues, whereas Binh Son Refinery (BSR) may see its business performance harmed by prolonged major maintenance and a possible decline in crack spreads as China raises fuel export quotas.

"We retain our bullish outlook on the oil and gas industry, citing our predictions of high oil prices and a recovery in the global and local E&P markets. Our best selections are PVS and PVD, as their present pricing do not completely reflect the substantial growth potential of 2024-2025. PVT equities are expected to increase significantly in the following year, but they are now unattractive because the price has hit our objective. Meanwhile, GAS and BSR equities would require bigger price reductions to reflect the dismal growth forecasts for 2024," said Phan Minh Hieu.