Oil and gas stocks fail to interest investors

Saigon Investment
(Saigon Investment) - Global demand for oil and gas has fallen drastically and the entire oil and gas industry has taken a heavy toll from the current and ongoing global Covid-19 pandemic. This is the reason why investors will fail to show any interest in oil and gas stocks in 2021.

Illustrative photo.

Illustrative photo.

ll from the current and ongoing global Covid-19 pandemic. This is the reason why investors will fail to show any interest in oil and gas stocks in 2021.

Bleak future

The oil and gas industry in Vietnam depends heavily on fluctuations in the world oil market, therefore, the situation in the oil and gas industry is still not very positive in 2021. The disadvantage of high upstream project costs lowers motivation to invest and exploit in new oil and gas fields. Many companies in the oil and gas industry have made business plans for the year 2021 with the assumption that oil prices will remain below USD 50 per barrel and hence are looking at conservative profit growth margins.

Based on these expectations of leaders in the oil and gas industry, we can believe that 2021 will not be the year that stocks in oil and gas will stay strong. One rare positive sign in the industry comes from the liquefied natural gas (LNG) global market. The sharp decline in global LNG prices throughout 2020, helped power plants and a group of other industrial manufacturers to benefit from low input prices. The LNG industry will also serve as the biggest job provider in the oil and gas industry in the next ten years. Investors in gas fields, infrastructure contractors for gas extraction, importers and port operators will be direct beneficiaries of natural gas usage in industrial production.

The current oil price outlook in short, medium and long term is quite bleak. The expectation for global oil and gas demand to go up, which was not optimistic before the outbreak of oversupply and the US-China trade war, became even more negative due to the impact of the unending Covid-19 pandemic. Decline in travel demand, poor consumption due to reduced incomes, and delay in industrial production activities due to social distancing are three major reasons that are affecting the global oil and gas industry. After oil prices fell drastically during peak social distancing and lockdown periods in the second quarter of 2020, oil prices were seen to recover. However, according to forecasts of oil prices in 2021, they are likely to fluctuate between USD 40 to USD 50 per barrel.

Difficult to forecast

All oil and gas industrial activities have been seriously affected by drop in oil prices, mostly the upstream activities. Although the number of new projects are not many, the world demand is difficult to predict. This makes upstream companies unable to implement new exploration projects. Therefore, disbursement in the future is likely to decrease, leading to a decline in the value of unrealized contracts of oil and gas construction enterprises. In addition, crude oil and gas production will also face difficulties in long-term growth.

The facts above show that mining output will surely decrease in 2021. According to forecast made by Fitch Solutions, based on the five-year plan of the Vietnam National Oil and Gas Group (PVN), Vietnam's 2021 crude oil output fell 4%. Due to  limited resources of the state economic conglomerate, the growth of crude oil output in the long term will depend on attracting private capital into the industry.

Currently, the Ministry of Industry and Trade is proposing to develop a revised Petroleum Law to create a legal corridor for investors. However, we believe that the opening of the State to private capital flow is not yet possible. Thus, enterprises in the oil and gas industry will not be able to expect job growth in the next few years.

Investors uncertain

With reference to oil and gas stocks, it is impossible not to mention the leading company in the industry, namely, the PetroVietnam Gas Joint Stock Corporation (GAS). GAS development strategy, natural gas fields, gas pipelines, LNG ports, and cooperation contracts with gas power plants are expected to bring growth for the company as well as for the gas industry in general.

However, up until now, only the Sao Vang-Dai Nguyet gas field project is being developed. Other projects that are in the pipeline can only come into operation from 2023 onwards, including the LNG Thi Vai warehouse and expansion project; gas collection and transportation pipes project; LNG Son My port warehouse project; and a series of gas power plants, including Nhon Trach 3 and Nhon Trach 4. All future LNG imports are also expected to be active due to plentiful and cheap LNG supply from international gas fields.

Although profits from domestic gas extraction are not high, GAS can still exploit the imported LNG market, while preserving its position as the sole gas supplier for downstream projects. In addition to GAS, the list of companies that can benefit from the world LNG trend include PetroVietnam Power Nhon Trach 2 Joint Stock Company (NT2), Petrovietnam Fertilizer and Chemical Corporation (DPM), and PetroVietNam CaMau Fertilizer Joint Stock Company (DCM). These are companies that have factories using natural gas inputs and will widen their gross margins when input gas prices fall.

Currently, there are not too many oil and gas stocks that are expected to stay strong, therefore, it is difficult for investors to select enterprises showing prospective growth results in 2021. However, opportunities may still come when the market price drops sharply, especially for healthy and strong stocks, and there is a good amount of cash flow and stable dividend policies for shareholders. Investors can hold on to these shares for when there is a surge in oil and gas world prices.

Nguyen Ha Trinh, Rong Viet Securities (VDSC)

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