Brent oil prices have fallen to almost US $40/bbl after reaching a 14-year high of $139.13/bbl on March 7, 2022.

Unpredictable oil prices

Brent oil prices have fallen to almost US $40/bbl after reaching a 14-year high of $139.13/bbl on March 7, owing to concerns about the global economic slowdown and China's current "zero-COVID" policy. Many uncontrollable forces are currently injecting increasing uncertainty into the global energy sector. On the one hand, the Russia-Ukraine conflict and OPEC's failure to meet its production targets could push up oil prices.

Following the crude oil price spike, Vietnam O&G share prices have rallied 60.2% since the beginning of 2021, even outperforming the VN-Index (31.1% in the same period). Among those, BSR gained 159%, PVD 105%, PVS 92%, and PVT 84%. However, Mr. Nguyen Ngoc Hai believes post-rally investors need to exercise more caution as downside risks are now larger than upside potential.

Meanwhile, the revival of Iran's nuclear accord, as well as the growing lockdowns in China, are expected to put downward pressure on oil prices. "The Brent oil price is expected to remain highly volatile in the short term due to global uncertain events, and then gradually rebalance toward the end of 2022 when geopolitical tensions in Ukraine have cooled and increasing oil supply from Iran, the US, and OPEC could catch up with demand," Mr. Nguyen Ngoc Hai said.

Risks for O&G stocks

Following the jump in crude oil prices, Vietnam O&G stock prices have risen 60.2 percent since the beginning of 2021, outpacing the VN-Index (31.1 percent). BSR increased by 159 percent, PVD by 105 percent, PVS by 92 percent, and PVT by 84 percent. However, Mr. Nguyen Ngoc Hai feels that post-rally investors should be more cautious because the negative risks are now greater than the upward prospects.

First, while increased oil prices are good for upstream businesses, some upstream companies' business performance (PVD, PVS, and others) will take longer to recover. Because oil prices should remain above $60-65 per barrel in the United States for long enough to reactivate exploration and production (E & P) activity. Despite the robust oil price increase, the performance of O&G listed businesses, with upstream companies like PVD and PVS reporting poor results in 2021 (and 2M22 according to PVN's early reports).

Second, the share prices of several O&G stocks have been largely factored in the improving outlook, resulting in a pretty fair valuation. Many oil and gas stocks, such as PVD, PVS, and PVT, have seen significant price increases as a result of the oil price increase, sending their P/BV multiples to their highest level since 2016. This may already reflect the positive impact of higher oil prices on companies' performance in the future, implying that the investment downside risks on these stocks are gradually increasing, especially in the current highly volatile energy market, where any negative oil price movements could harm market sentiment on share prices.

Longer-term prospect

Amidst the extreme volatility of the energy market, Mr. Nguyen Ngoc Hai believes investors should reorientate their focus on O & G stocks that are less sensitive to oil prices and benefit from a longer-term story. He sees a few rising trends shaping the outlook of the Vietnam oil and 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. Along with the expectation of major gas field development, importing LNG is considered a feasible measure to offset the quick depletion of mature fields amid the growing electricity demand in Vietnam in coming years. Power generation currently consumes 80% of total domestic natural gas 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 (making up 26% of total system capacity in 2030F from the current 11%). Currently, the LNG Thi Vai terminal is expected to operate in 2H22F, marking one of the first LNG-related projects coming online in Vietnam. This terminal would supplement gas supply for the users in the Southeast region before providing gas to two new gas-fired power plants in Nhon Trach by 2024. Riding on this LNG story, GAS would be the biggest beneficiary as an infrastructure developer as well as an LNG provider.

Second, the sky re-openings will bode well for the recovery of energy consumption, which has been hit hard due to strict lockdown measures to curb the pandemic outbreak, and PLX could be the biggest beneficiary. Most recently, on February 15, 2022, Vietnam lifted restrictions on the frequency of international flights, which could bring international air traffic back to normal operations from 2H22, benefiting jet fuel distributors. Moreover, as a developing country with high GDP growth (except for any other "black swan" events like the COVID-19 pandemic), Vietnamese petroleum consumption would come back to a growth trajectory in coming years, creating room for a market leader like PLX to grow in the long-term.

Downside risks come from the declines in oil prices, further delays in major energy projects, and any new complicated variants that could hamper energy consumption demand.