Fitch Ratings has assigned PetroVietnam Gas Joint Stock Corporation (PV Gas) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB'.
The Outlook is Positive.
We assess 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 our 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 we believe 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.
Our SCP assessment of 'bb+' recognises the counterparty diversification although it is constrained by the high exposure to 'BB' rated entities, which limits our assessment at the current level.
Robust Financial Profile Despite High Capex: We expect 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. We anticipate 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.
Derivation Summary
PV Gas's SCP of 'bb+' is at the same level as the SCP for PT Perusahaan Gas Negara (BBB-/Stable). Both entities are national monopolies in gas distribution and owned by their respective national oil companies. We think PV Gas's business profile is comparable with that of PGN. PGN's business profile does benefit from a better counterparty profile with more diversification, although its SCP assessment is constrained by higher regulatory risks. PGN's earning margins are affected by the state's control over the volumes it sells at capped prices, reducing earnings visibility compared with that of PV Gas. Still, PV Gas's SCP assessment is constrained by its high exposure to 'BB' rated counterparties. Both entities have a conservative financial profile for their SCP assessments.
PV Gas's rating is assessed based on the consolidated credit profile of its parent, PVN, in line with Fitch's PSL criteria following the strong subsidiary-weak parent path. The rating reflects our assessment of 'Open' legal ringfencing as well as 'Open' access and control by PVN over PV Gas.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Oil Price assumptions in line with Fitch's Brent price deck of USD85/barrel (bbl) in 2023, USD65/bbl in 2024 and USD53/bbl in 2025 and beyond;
VND/USD conversion rate of VND25,250 per US dollar in 2023 and VND24,500 in 2024 and beyond;
Gas supply volumes from existing fields in line with management guidance, which factors in the reserve and field development plan. Upcoming Block B project volumes at 10% discount 2026. LNG import volume at a 5% discount compared with management guidance;
LPG volumes to increase by 5% a year;
Dry gas sales price in line with the contracts, which are typically higher than the market-driven price and wellhead price (buying price);
Transportation tariff in line with contract prices adjusted for inflation.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on PV Gas's parent, PVN.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on PV Gas's parent, PVN.
PVN's ratings are linked and capped by that of the Vietnamese sovereign (BB/Positive), based on Fitch's Government-Related Entities Criteria.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: PV Gas's liquidity is strong. The company had about VND36.7 trillion in cash and cash equivalents, including term deposits with maturity within 12 months, as of June 2022, and only VND22.5 billion in short-term debt. PV Gas also maintained a net cash position with a total debt of VND8.2 trillion PV Gas maintains banking relationships with both domestic and international banks, with a total credit limit of VND11.0 trillion as of December 2022.
Issuer Profile
PV Gas is a 95.8%-owned subsidiary of PVN, Vietnam's national oil and gas company. PV Gas, established in 1990, focuses on gathering, transporting, storing, processing and distributing gas and gas products, as well as distributing LPG. It also leads the development of the country's LNG import market.
Date of Relevant Committee
15 February 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
PV Gas's rating is directly linked to parent PVN's credit quality. A change in Fitch's assessment of the credit quality of the parent would automatically result in a change in PV Gas's rating.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
PETROVIETNAM GASCORPORATION 
