Oil and gas stocks may experience a strong breakout in 2023 from their lows the previous year, said Saigon Securities (SSI), a leading brokerage house in Vietnam.
In a new report, SSI Research forecast that oil prices may fall from their peak set in 2022, but will remain high and fluctuate in the range of $80-90 per barrel this year. Factors supporting oil prices could include the reopening of China - the world's largest oil importer - and the easing of the U.S Federal Reserve's (Fed) interest rate hikes in the second half of this year.
According to the broker, the oil drilling industry could benefit from increasing demand in the Asia Pacific Accreditation Cooperation Incorporated (APAC) and Middle East regions, providing a better outlook for daily rig rents. The main demand will come from markets like Indonesia, Malaysia and the Middle East.
In Southeast Asia, the utilization rate of jack-up rigs reached 90% in August 2022, while daily rents have been stable at around $90,000 per day for the past three months, with some contracts recording a rental rate of $100,000 per day, according to IHS Markit, a global information company. This is the first time since 2015 that daily rents have reached that level.
SSI analysts held that one of the main reasons for such positive developments in the oil drilling industry were recent changes in the global energy outlook. In previous years, low oil prices and the carbon neutralization prompted many regions to move towards renewable energy sources like wind, solar and hydrogen.
However, the recent energy crisis in Europe caused by the Russia-Ukraine conflict has provided a more positive outlook for fossil fuels. In its latest world oil outlook report, OPEC expected global oil demand to grow by 10 million barrels per day to 107 million by 2027, with most coming from non-OECD regions.
"We see strong demand for jack-up rigs in the Middle East, as major players like Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) plan to expand their production capacity. For example, Saudi Aramco intends to double its jack-up rig fleet by 2024. Moreover, the supply is quite limited with the number of newly built rigs equivalent to only 5% of the current fleet," SSI wrote.
The broker assessed that in 2023, the positive impact of high oil prices on stocks of upstream businesses will arrive later than on other stocks. For example, Petrovietnam Drilling Investment Corporation (PVD) is likely to start making profits after suffering losses in 2022 due to higher daily rents for jack-up rigs and utilization rates. Meanwhile, the Petrovietnam Technical Services Corporation (PVS) may take time to wait for large domestic oil and gas projects to kick off.
SSI sees positive signs from the fact that PVS is currently participating in the potential offshore wind power market, which is forecast to grow rapidly in the coming years. Overall, the outlook is better than that in late 2021 when there were signs showing a busier regional exploration and production (E&P) market. Stocks of midstream companies like Petrovietnam Transportation Corporation (PVT) may record a slower year-on-year growth in 2023, but maintain a stable earnings outlook thanks to strong demand from related markets.
Meanwhile, Petrovietnam Gas Joint Stock Corporation (GAS) and Binh Son Refinery and Petrochemical Joint Stock Company (BSR) will see profit declines due to lower average oil prices, although gas volume sold to power plants may still grow in 2023. BSR, the operator of Dung Quat oil refinery, may have lower output due to the shutdown of its plant for 50 days for routine maintenance.
Downstream players like the Vietnam National Petroleum Group (PLX) could also experience a year of strong breakout from its low in 2022 thanks to a more stable supply chain and oil prices.
"In general, for the stocks we are analyzing, after-tax profit is estimated to increase by 11.2% year-on-year in 2023, with PLX, PVD and PVS leading the way," said SSI Research.