Fitch Ratings has assigned state-run energy firm Vietnam Oil and Gas Group's (PetroVietnam or PVN for short) first-time Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Positive Outlook.
Flag of Vietnam, PetroVietnam and the Communist Party of Vietnam at the headquarters of PetroVietnam in Hanoi. Photo: WSJ
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The company is wholly owned by the state, which exerts significant influence over its operating and financial policies. Fitch assesses PVN's Standalone Credit Profile (SCP) at 'bb+', reflecting the company's high degree of integration, diversification and conservative financial profile.
However, the SCP is constrained by PVN's relatively high oil production costs compared with other Asian-Pacific (APAC) national oil companies, and Fitch’s expectations of negative free cash flow due to its large capex and investment program.
In the statement, Fitch highlights the robust state linkages with PVN. PVN's annual targets are set and approved by Vietnam's government and its management is state-appointed. PVN is also Vietnam's national oil company and benefits from exclusive rights to Vietnam's oil and gas reserves by regulation. Fitch regards the support record as 'Strong'.
Fitch assesses the socio-political implications of a PVN default as 'Very Strong'. Any disruptions in PVN's operations would have material implications for the entire energy value chain in Vietnam. PVN holds interests in all of Vietnam's upstream oil and gas assets, accounts for about a third of the country's refined product output, and supplies gas for power plants which make up about 15% of Vietnam's power generation.
PVN also accounts for about 80% of Vietnam's fertilizer production. Fitch assesses the financial implications of a default as 'Very Strong'. PVN is a one of Vietnam's largest and most important GREs. A default by PVN could affect significantly the availability and cost of domestic and foreign financing options for the state and other GREs.
Fitch expects PVN's investment to rise significantly to VND321 trillion (US$13.83 billion) over the next five years from VND38 trillion in 2018. PVN estimates over half of its expected consolidated capex and investment will be used to develop its upstream resources, mainly gas fields.
“We expect the investment to result in a meaningful increase in PVN's gas production after four to five years, and could improve its upstream business risk profile over the long term, taking into account the generally fixed-price gas sale contracts, while also driving up its gas transmission and distribution volumes.”
Fitch also warned that PVN’s financial profile would weaken. PVN's free cash flow is expected to turn negative from 2019 and adjusted net debt/EBITDA leverage to increase gradually to over 2x by 2021, due to its investment, capex and dividend policy which is set by the government.
PVN has estimated VND380 trillion (around US$16 billion) in capex and investment from 2019 to 2023, mostly on developing its upstream operations. However, Fitch expects PVN to spend about VND321 trillion in this period, taking into consideration the company's record of falling short of its capex estimates.
PVN also expects meaningful cash inflows from a planned sale of partial equity stakes in some of its subsidiaries, but the timing and amount of such sales remain uncertain. Therefore, Fitch does not incorporate these sales in our forecasts.
