Energy Sector Update - Limited US production supports higher oil price outlook

We raise our Brent oil price base case forecast for 2021F-2022F and maintain our forecasts for 2023-2025F. OPEC+ recently agreed to ease production cuts by only 400,000 bpd per month through December 2022. In addition, the US Energy Information Administration (EIA) maintains its forecasts for US production in 2021 and trims its forecasts for 2022F. 2021F global oil demand forecasts from the EIA and International Energy Agency (IEA) are also nearly unchanged vs previously. We expect these factors will support oil prices in Q4 2021 and 2022 despite short-term challenges in Q3 2021 due to seasonally weak demand and the ongoing COVID-19 Delta variant. The average Brent oil price in H1 2021 was USD65/bbl. We raise our 2021F-2022F average Brent crude oil price forecast ~8% from USD60/bbl to USD65/bbl. However, we maintain our average Brent oil price assumption for 2023-2025F at USD60/bbl as we assume the return of OPEC+ to full production will offset a demand recovery post COVID-19.

We raise our 2021-2022F fuel oil (FO) price forecast (the traditional benchmark for Vietnam’s domestic gas price) but maintain our 2023-2025F assumptions. The average FO price in H1 2021 was USD367/ton. We increase our 2021F average FO price assumption 20% from USD290/ton to USD350/ton and 2022F average FO price assumption 6% to USD350/ton, following our higher oil price forecast. We keep our 2023-2025F average FO price assumption at USD330/ton.

We raise our gas price forecast by ~3% for 2021F-2022F and maintain our long-term gas price base case. Given our higher Brent and FO price forecasts, we raise our gas price forecast for Vietnam’s southeast region by ~3% to USD7.2/MMBTU for 2021F and USD7.5/MMBTU for 2022F; however, we maintain our gas price assumption for 2023-2025F. We forecast Vietnam’s gas price to increase as the country will run out of cheap domestic gas in 2023 and have to import liquefied natural gas (LNG), which will be competitive with new domestic gas fields but more expensive than the old cheap gas fields. We expect gas prices to reach USD10/MMBTU by 2025F.

Domestic coal price unchanged so far in 2021 despite a surge in international coal prices.  Australia Newcastle thermal coal (6,000 kcal/kg) prices have surged 55% YTD, while the domestic coal price has remained unchanged. We believe this situation is due to several reasons, including 1) domestic coal demand being affected by COVID-19 (volume from coal-fired power plants declined 4% YoY in H1 2021) while Vinacomin does not have bargaining power to push for a price increase, and 2) Vinacomin’s domestic supply (+4% YoY in H1 2021) is enough to supply power plants; therefore, its imports are very limited and its average input cost has not changed significantly. Notably, Vietnam’s coal imports were down 35% YoY in H1 2021.

We keep our coal price assumption for coal-fired power plants under our coverage. Our 2021 coal price forecast is VND1.8mn/ton (USD80/ton; flat YoY); we forecast it increases ~3% p.a. in 2022-2025F.  

Higher oil prices benefit five oil & gas stocks. Our increased oil price base case implies upside risk to our forecast for GAS due to the direct impact on its output prices. In addition, we expect PLX and BSR will benefit from consistently high oil prices that are expected in H2 2021. We see limited positive impact for PVS and PVD as oil & gas operators are concerned about the sustainability of high oil prices and have thus not increased spending for new oil & gas developments.

Meanwhile, higher oil prices imply a slightly negative impact for fertilizer producers and power plants. We see a limited negative impact on DPM and DCM as we expect higher urea prices to offset higher input gas prices. We also see a nominally negative impact for POW and NT2 as increased gas prices are 100% passed through to Vietnam Electricity Group (EVN) for contracted volume (~80% of total volume). We see no impact on PVT.

We have not made changes to our earnings forecasts/target prices in this report but will factor in our revised oil/coal price forecasts in our forthcoming company updates following Q2 2021 results.