Oil price crash hits Oil and Gas stocks

Oil price has crashed, but natural gas has not. On April 20, WTI fell into negative territory to fall as low as -37.63 USD per barrel due to pressure from futures contracts expiry on April 21. As we write, WTI then rebounded and is trading at 13.6 USD / barrel, down from c.60 USD per barrel in early 2020. Even if the negative price effect is short-lived, low prices are likely to persist given weak demand due to COVID-19 and lack of storage availability. However, natural gas prices have been relatively stable. Natural gas is trading at 1.96 USD / mmBTU, which is up +8.35% YTD (albeit down -22.0% YoY).

O&G companies are not likely to achieve 2020 guidance. PVN and the majority of its subsidiaries in Vietnam built their 2020 business plans based on assumed oil prices of 50-60 USD / barrel (for Brent), as indicated in their recently published annual reports. Currently Brent is trading at 19.6 USD / barrel, down 73.6% YoY. We reiterate our view that it is nearly impossible for Brent to recover to levels where it averages USD 50-60 per barrel this year, which in turn implies underperformance against the O&G sector’s initial guidance.

O&G businesses are negatively affected by oil prices but the magnitude depends on the business model. We view upstream companies (i.e., mining, exploration) as most directly impacted by the oil price crash. However, some businesses have secured contracts to provide core services for the whole year of 2020, such as PVD (HOLD O/P, TP VND 10.425). In such cases, the impact of the oil price crash should be limited in the short-term. Gas distribution companies (GAS, not rated) will see limited impact from the oil price plunge because they earn the gap between purchasing and selling prices as transportation fees. Retail-oriented fuel companies (PLX and OIL, both Not Rated) are affected in the short term due to high inventory costs.

Beneficiaries of oil price crashes are sectors that have oil and gas as inputs, such as transportation (PVT-Not Rated), electricity generation firms through their non-Qc business (POW-Buy; NT2-Hold-O/P), and fertilizer suppliers (DPM and DCM, both Not Rated) in terms of input prices. Additionally, companies that have inputs the prices of which are highly correlated with oil should also benefit. These include plastics companies (BMP, NTP, and AAA – all Not Rated) which may benefit from lower related input prices.

For the complete report, please access here:20200421 OG sector note final

Analyst: Binh Truong, binh.truong@yuanta.com.vn