Fitch assesses PV Gas's Standalone Credit Profile (SCP) as 'bb+', but its IDR is capped by parent Vietnam Oil and Gas Group's (PVN, BB/Positive) IDR under Fitch’s Parent and Subsidiary Linkage (PSL) Rating Criteria. Fitch assesses both legal ringfencing and PVN's access to and control of PV Gas's cash and other assets as 'Open' under the criteria's stronger subsidiary path, and rates PV Gas based on the parent's consolidated credit profile.
PV Gas's SCP of 'bb+' reflects a strong market position as the sole midstream gas distributor and the first liquefied natural gas (LNG) importer in the country, as well as diversified earnings from a regulated liquefied petroleum gas (LPG) business, where it holds a 70% market share. Its position as the sole long-term gas supplier for a majority of its customers and long-term contracts with price protection provide a stable earnings source. PV Gas is well-positioned to benefit from PVN's plans for significant upstream expansion to increase gas production volumes.
KEY RATING DRIVERS
'Open' Legal Ringfencing: Fitch assesses that PV Gas is not ringfenced from PVN and does not have any covenant restrictions in existing debt - primarily bank loans - to limit PV Gas's cash outflow to PVN. PV Gas pays regular dividends to PVN and they have remained consistent at about VND6 trillion-8 trillion, even during 2020-2021 when PV Gas's performance was adversely affected by reduced demand from the power sector amid the Covid-19 pandemic.
'Open' Access and Control: PVN owns 95.8% of PV Gas and drives most of the subsidiary's key policies, defines overall strategy and approves all major projects with a total investment value of over VND1.5 trillion. PVN also appoints PV Gas's senior management and board members, underpinning our assessment of 'Open' effective control of PV Gas by PVN. Fitch assesses PV Gas's funding and cash management policy as 'Porous'. PV Gas has a separate treasury, but Fitch believes the parent can have significant influence on the funding and cash management strategy, if such a need arises.
High Earnings Visibility: PV Gas has high earnings visibility from its dry gas segment, due to a combination of long-term tariff-based contracts for gas transportation and gas sales contracts with a minimum selling price set at the wellhead price. This floor price mechanism, which the prime minister approves, ensures stable profitability with upside risk under a high oil price environment. The gas segment, including dry gas, condensate and self-produced LPG, will account for 90% of PV Gas's gross profit in 2023, before gradually declining to 70% in 2027.
LNG import and distribution will become PV Gas' second largest earnings contributor from 2025, accounting for around 20% of gross profit by 2026. This segment's earnings visibility is high, as the contracts will allow for the pass-through of LNG prices to customers. In addition, PV Gas's LPG business - with a diverse counterparty profile - is regulated by a cost pass-through mechanism and provides a steady source of diversified earnings.
Favourable Gas Demand Growth: PV Gas's stable cash flow generation is further bolstered by its low volume risk, as the demand for gas and LNG as sources of electricity is expected to increase according to Vietnam's National Energy Master Plan. The plan aims to reduce reliance on coal and achieve net-zero emissions by 2050.
Counterparty Profile Constraint: Fitch estimates that a sizeable portion of PV Gas's gross profit is attributed to two main counterparties, Vietnam Electricity (BB/Positive) and PetroVietnam Power Corporation - Joint Stock Company (BB/Positive), as PV Gas is the sole gas supplier to their gas-fired power plants. PV Gas is also the sole distributor of gas for PVN's fertiliser plant and has a business cooperation contract with PetroVietnam Oil Corporation, another PVN subsidiary, to sell its condensate. As a result, PV Gas's key counterparties, which contribute majority of its earnings, have 'BB' ratings.
Fitch’s SCP assessment of 'bb+' recognises the counterparty diversification although it is constrained by the high exposure to 'BB' rated entities, which limits the assessment at the current level.
Robust Financial Profile Despite High Capex: Fitch expects PV Gas's capex to remain high over the next four years, particularly during the construction of the next phase of LNG terminals in 2025-2026. Fitch anticipates capex to be between VND3.6 trillion-8.8 trillion in 2023-2024, rising to VND17.7 trillion in 2025 before declining to VND14.7 trillion in 2026. We expect its financial profile to remain robust, maintaining its current net cash position, despite high capex. This strong financial profile provides ample cushion for the SCP, even in the face of significant capex.