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PetroVietnam Drilling (PVD VN) Summary

Core Content

PetroVietnam Drilling (PVD VN) is a drilling contractor in Vietnam's offshore oil and gas (O&G) sector, offering both drilling services and related technical support. It is a subsidiary of PetroVietnam (PVN), the dominant O&G player in Vietnam, which provides PVD with a strategic advantage in securing contracts. PVD's share price is currently VND43,900, with a market capitalization of USD701M. The target price is VND58,900, indicating a potential upside of +34%.

Main Business and Revenue Breakdown

PVD's operations are split between drilling and related services, contributing 60% and 38% to profit, respectively. Drilling accounts for 60% and 63% of revenue and gross profit, while services contribute 32% and 34%. This reflects PVD's focus on the drilling segment.

Investment Case

• Defensive Nature: PVD's young rig fleet (average age of 5 years) and strong relationship with PVN enhance job security and reduce profit volatility.
• Undervalued: Despite a 52% drop from its peak in 2014, PVD's valuation is considered undemanding relative to the VN-Index and regional peers.
• Strategic Position: Vietnam's O&G expansion plan and PVN's commitment to increasing national output support long-term demand for drilling services.

Key Catalysts

• Block B Omon Project: Expected to start in 2017, this project will generate significant job flows and is seen as a key driver for PVD's growth.
• New Rigs: PVD is planning to invest in one jack-up and one tender barge for the project, which is projected to lead to a 21% profit growth in 2017.

Valuation

• Conservative Target Price: The target price is based on a 25-year useful life for each rig, considering declining day rates and replacement costs.
• Financial Leverage: PVD's debt-to-equity ratio is 0.4x, which is lower than the industry average, indicating a strong balance sheet.
• Dividend Yield: The net dividend yield is expected to reach 6.2% in 2017, showing strong shareholder returns.

Risk Analysis

• Pricing Pressure: Day rates are sensitive to oil prices, but PVD's contracts allow for flexible adjustments and its young fleet requires less maintenance, mitigating this risk.
• Market Volatility: While pricing pressure is a risk, PVD's job security due to PVN's support leads to more stable profits compared to peers.

Market Share and Fleet Overview

• Market Share: PVD holds 70% of the local drilling market, excluding non-commercialized rigs of Vietsovpetro.
• Rig Fleet: PVD's fleet consists of young, high-efficiency rigs with an average age of 5 years, built by well-known shipyards. These rigs have an efficiency rate of 99% and are capable of performing in Vietnam's offshore waters.

Rig Fleet Expansion Strategy

• Prudent Growth: PVD has expanded its rig fleet over the past 8 years, with each new rig serving a specific drilling campaign.
• Future Plans: PVD is considering investing in new rigs for the Block B Omon project, including a jack-up and a tender barge, which are expected to boost profitability in 2017.

Financial Performance

• Revenue and EBITDA: FY13A to FY17E show fluctuating revenue and EBITDA, with FY17E expected to grow by 21%.
• Net DPS: Expected to rise to VND2,700 in 2017, reflecting improved profitability.
• Core EPS: Projected to grow to VND6,716 in 2017, showing strong earnings potential.

Industry and Market Outlook

• Global E&P Capex Cut: Has led to reduced rig demand and lower day rates globally, but PVD's young fleet and strategic position help it maintain stability.
• Vietnam's O&G Expansion: Vietnam's fourth-largest O&G reserves and its strategic plans for energy infrastructure development support long-term demand for drilling services.
• Rig Utilization: Declining globally, but PVD's rigs are expected to remain in use due to their efficiency and PVN's ongoing expansion.

Strategic Position

• NOC Relationship: PVD's relationship with PVN, the state-owned NOC, ensures access to drilling projects and job security.
• International Expansion: PVD is exploring international markets through a joint venture, PVD Overseas, with 80% ownership.

Summary of Key Financial Metrics

Conclusion

PVD is well-positioned in Vietnam's O&G sector with a strong relationship with PVN, a young and efficient rig fleet, and a strategic focus on the country's expansion plans. Despite current pricing pressures and a downturn in the market, the company's financial health and the upcoming Block B Omon project provide a solid foundation for future growth. With a target price indicating a 34% upside and a 70% market share, PVD is recommended as a BUY for investors willing to take calculated risks in the O&G sector.