NATIONAL ECONOMICS UNIVERSITY

CENTER FOR ADVANCED EDUCATION PROGRAMS

---------------  ---------------

MIDTERM ASSIGNMENT
Course Title: Financial Valuation
PETROVIETNAM OIL CORPORATION

EEP Corporate Finance 59: Tran Tu Quyen – 11173965

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 Table of Contents
Introduction.............................................................................................................2
PetroVietnam Oil Corporation overview..............................................................3
1. General information...............................................................................................................3
2. Shareholders structure............................................................................................................3
3. Establishment and development history.................................................................................3
4. Business segments..................................................................................................................6
5. Facilities & location...............................................................................................................7
Valuation of PVOil..................................................................................................9
1. PVOil’s Cost of Capital determination..................................................................................9
1.1. Calculation of Cost of Equity...........................................................................................9
1.2. Calculation of Cost of Debt............................................................................................11
1.3. Weight of Debt and Equity.............................................................................................12
1.4. Calculation of Weighted Average Cost of Capital (WACC)..........................................13
2. PVOil’s FCFF determination...............................................................................................14
2.1. Calculation of Reinvestment Rate..................................................................................14
2.2. Calculation of Return on Capital (ROC)........................................................................15
2.3. Calculation of current FCFF...........................................................................................16
2.4. Calculation of FCFF in 14-year period...........................................................................17
2.5. Terminal value of stable growing period........................................................................19
3. PVOil’s present value determination...................................................................................20
Conclusion..............................................................................................................22
References..............................................................................................................23

1
 Introduction
In this assignment report, our group focus on valuation of a company in petroleum
industry in Vietnam, Petrovietnam Oil Corporation (PVOil) using Free Cash Flow
to Firm approach.
To give a brief description on the company, it can be said that PVOil is a
subsidiary of Vietnam Oil and Gas Group (PVN), established pursuant to Decision
No. 1250/QD-DKVN dated June 16th 2008 of the Board of Members of
PetroVietnam based on the consolidation of PetroVietnam Trading Company
(Petechim) and PetroVietnam Oil Processing and Distribution Company (PDC).
On January 25th, 2018, PVOil successfully launched its initial public offering
(IPO); then held its first general meeting of shareholders on July 30th, 2018, which
has set forth to transform the company to a joint stock company from August 01st,
2018.
PVOil’s vision is becoming the leading brand name in Vietnam in the field of
importing, trading crude oil and field, trading oil products. PVOil constantly works
for improvement of service quality, professionalism and efficiency business
activities in the journey to grow to the future.

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 PetroVietnam Oil Corporation overview
1. General information
 Full name in English: PETROVIETNAM OIL CORPORATION
 Abbreviated English name: PVOIL
 Business registration certificate number: 0305795054
 Charter capital: VND 10,342,295,000.000
 Owner’s capital: VND 10,342,295,000,000
 Securities ticker: OIL, trading on UpCom exchange since March 7, 2018
2. Shareholders structure
 Securities name: Shares of PetroVietnam Oil Corporation - Joint Stock
Company
 Securities ticker: OIL
 Par value: VND10,000 (Ten thousand dong)
 Securities type: common stock
 Maximum foreign ownership room: 6.621%
 Number of outstanding shares: 1,034,229,500 shares
 Number of free float shares: 201,425,936 shares

Shareholder structure as of december 31, 2019

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3. Establishment and development history
PetroVietnam Oil Corporation (the “Corporation” or “PVOIL”) formerly known as
PetroVietnam Oil Corporation – One-member Limited Company, was incorporated
in Vietnam as an independent accounting member of Vietnam Oil and Gas Group.
As per Decision No. 1250/QD-DKVN dated 06 June 2008 issued by Vietnam Oil
and Gas Group, the Parent company - the Corporation was established on the basis
of consolidation of Petroleum Trading Company Limited (Petechim) and
PetroVietnam Oil Processing and Distribution Company Limited (PDC).
From 01 August 2018, PetroVietnam Oil Corporation – One-member Limited
Company officially transformed its operation model to a joint stock company with
the name of PetroVietnam Oil Corporation under the 17th amended Business
Registration Certificate dated 01 August 2018. The charter capital of the
Corporation after being transformed into a joint stock company is VND
10,342,295,000,000.
Throughout more than 10 years of operation under PVOIL brand, PVOIL has
continuously expanded its domestic and international network through mergers and
acquisitions. PVOIL has also continually restructured, rearranged and reformed
itself with a view to optimizing the company’s structure, concentrating on core
activities to increase operational efficiency.
Time
Establishment and development Company’s scale
period
Petroleum Trading Corporation (Petechim) was
incorporated on April 08, 1994 on splitting the
Import-Export Company (Petechim) of the
1994 Ministry of Commerce (incorporated in 1981).
Its principal line of business is ex-importing
crude oil and petroleum equipment and
supplies.
1996 - 2007 Petrovietnam Oil Processing and Distribution
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 Company Limited (PDC) launched in 1996
upon reorganization of two companies: Tuy Ha
Petrochemical Company and VIDAMO
Lubricant Company. By 2001, two petroleum
undertakings under PTCS were merged into
PDC. In October 2007, the Group transferred
its share in PetroMekong to PDC.
PVOIL was incorporated under Decision No.
1250/QD- DKVN dated June 06, 2008 of the
35 branches,
Group by merging Petroleum Trading
04 subsidiaries
Corporation (Petechim) and Petrovietnam Oil
10 affiliates and
2008 Processing and Distribution Company Limited
financial
(PDC) in attempt to become the only Group
investment
member to be engaged in developing and
entities
completing the downstream stratum of the oil
and gas industry
Converted 10 subsidiaries into joint stock
company
- Acquired 08 petroleum companies of SCIC;
- Acquired 05 companies in Vinh Long, Ninh
30 subsidiaries
Binh, Thai Nguyen, Kien Giang, Binh Duong
2010 - 2012 5 branches
provinces;
17 affiliates
- Acquired 100% of Shell Laos' capital and
incorporated PVOIL Laos; - Exited and
dissolved some companies outside its principal
business lines.
- Took in the Group's capital in PETEC; 31 subsidiaries
2013 - Exited from Bac Giang General Trading Joint 13 branches
Stock Company. 12 affiliates
- Took over Vinapco's ground petroleum
30 subsidiaries
trading system;
2014 11 branches
- Acquired Thu Duc Trading and Import Export
12 affiliates
Joint Stock Company (Timexco).
2016 Transferred its capital in PVOIL Singapore and 30 subsidiaries

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 transformed from one-member limited liability
05 branches
company to two members company.
11 affiliates
Split PVOIL Thai Binh into Thai Binh PSC.
- Transferred its capital in PVOIL Kien Giang
and transformed into an affiliate
2017 - Withdrew its all capital in PVOIL Quang 28 subsidiaries
Ninh, Thai Nguyen - Incorporated PVOIL 09 branches
Cambodia 12 affiliates
- Corporation - the parent company changed to
2018
a Joint Stock Company

4. Business segments
a. Entrusted import and export of crude oil and international oil trading:
PVOIL is the only company in Vietnam that conducts marketing and provides
services for the export/sale of domestic crude oil and the crude oil of PetroVietnam
or its subsidiary exploited in the blocks overseas with an average quantity of 15
million tons per year. With 33-year operation in this sector, PVOIL has safely and
effectively sold a total of nearly 360 million tons of crude oil.
PVOIL also supplies all crude oil feedstock for Dung Quat Refinery with an
average quantity of 7 million tons per year from domestic and imported sources.
b. Petroleum distribution:
In the past 4 years, with the relaxation of State regulations, the petroleum market
has experienced a significant increase in the number of petroleum distributors.
However, 90% of the market share still belongs to five major distributors such as
Petrolimex, PVOIL, Thanh Le, Saigon Petro and Military Petroleum Corporation.
PVOIL consistently maintains the second position, accounting for over 20%
market share. During more than 10 years of operation, through merger &
acquisition (M&A) activities, PVOIL has strongly developed the distribution
system nationwide and in Laos.

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c. Petroleum, lubricant and biofuel production:
 Petroleum production: PVOIL produces and blends petroleum with a capacity of
600,000 m3 petroleum produced from domestic condensate sources of
PetroVietnam. Through the petroleum blending activities, PVOIL has helped to
increase the value of domestic commercial condensate products and be more
proactive in input source. The gasoline produced are used for E5 RON 92
biofuel blending.
 Biofuel production: Implementing the Government’s directives on developing
biofuel, PVOIL has invested in three mixing plans to produce biofuel (ethanol -
E100) in Binh Phuoc, Quang Ngai and Phu Tho provinces, with a capacity of
100,000 m3 of E100/year per factory. Two biofuel factories at Binh Phuoc and
Quang Ngai are now ready for production under the direction of authorities
when the market is favorable. In terms of Phu Tho biofuel plant, it has not yet
completed construction and has been suspended due to difficulties in raising
capital process. PVOIL is planning to divest from all these three plants.
 Lubricants production: PVOIL LUBE, a subsidiary of PVOIL, with a
longstanding brand name of over 27 years, inherited from VIDAMO - one of the
first companies in Vietnam that produce and trade lubricants. PVOIL LUBE’s
products portfolio consists of more than 140 types of lubricants, which are
produced from raw materials of high quality, mainly supplied to industrial
customers and oil & gas operators. PVOIL LUBE is gradually expanding to
retail customers through PVOIL’s petroleum distribution network. PVOIL’s
lubricant products are manufactured at Binh Chieu factory (Ho Chi Minh City)
with a capacity of 20,000 tons/year.
5. Facilities & location
a. Domestic:

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PVOIL possesses a petroleum distribution network in 63/63 provinces and cities
nationwide with more than 3,500 petroleum stations, of which there are over 550
petroleum stations directly managed and operated by PVOIL (COCO) and 3,000
petroleum stations that operated by dealers/agents/franchisees (DODO).
b. Overseas:
 PVOIL Laos operates a distribution network in 16 out of 18 provinces/cities
with 122 petroleum stations.
 PVOIL Singapore specializes in international trading of crude oil and petroleum
products.
c. Facilities:
 PVOIL currently manage and operate more than 550 COCO petroleum stations
in 63 provinces/cities.
 PVOIL owns tank trucks fleet of over 100 vehicles with a total capacity of over
2,000 m3 and 7 barges with a total capacity of 4,000 m3. This can meet
approximately 50% of the internal transport needs of PVOIL and its agents.
PVOIL is continuing in developing the transportation fleet to actively carry out
the petroleum transportation process, and at the same time ensure the best
control of quality of distribution products to the market.

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 Valuation of PVOil
Free Cash Flow to Firm is the cash flow available to all funding providers (debt
holders, preferred stockholders, common stockholders, convertible bond investors,
etc.). FCFF is an important part of the two-step DCF Model, which is an intrinsic
valuation method. The second step, where we calculate the terminal value of the
business, may use the FCFF with a terminal growth rate.
A positive FCFF value indicates that the firm has cash remaining after expenses. In
contrast, a negative value indicates that the firm has not generated enough revenue
to cover its costs and investment activities.
To determine the value of PVOil according to FCFF approach, we fist need to
define the Cash flow and then the discount rate, which is WACC (weighted
average cost of capital).
PVOil is a big company in petroleum industry in Vietnam which is ranked at
second place in the market. Therefore, our group will assume that the firm is in
stable growth.
1. PVOil’s Cost of Capital determination
1.1. Calculation of Cost of Equity
The cost of equity is the return a company requires to decide if an investment
meets capital return requirements. Firms often use it as a capital budgeting
threshold for the requỉed rate of return. A firm's cost of equity represents the
compensation the market demands in exchange for owning the asset and bearing
the risk of ownership.
The calculation of the cost of equity helps the company calculate its investment
project and compare the level of risk with other companies, since the basic
principle is that the higher the cost and risk of using equity, the higher the return
rate required by investors.

9
PVOIL’s cost of equity caculated according to the traditional formula - the
dividend capitalization model and the capital asset pricing model (CAPM).
ER = Rf + β x (RM – Rf)
However, in this assignment, our group choose to calculate cost of equity of PVOil
using indirect approach, which use some indicators from USA. As a result, we
have below formula:
ER = Rf (USA) + βUSA x (RM (USA) – Rf (USA)) + a
In which:
 ER: Cost of equity of PVOil
 Rf (USA): Risk-free rate of USA
 RM (USA) – Rf (USA): USA market risk premium
 βUSA: Beta of U.S. integrated oil/gas sector
 a: Vietnam country risk premium
To calculate the Beta in the fomula, we have to use the Hamada fomula as
following:
βL (USA) = βU (USA) x [1 + (1 – T) x D/E]
From the table summarizing betas by sector in U.S., we have unlevered beta of
integrated oil/gas of 1.08 and D/E ratio of the sector is 26.82%. The currect tax rate
in USA is 25.00% collected from Aswath Damodaran’s default spreads and risk
premiums table.
Applying to Hamada fomula, we have levered beta of the sector that PVOil is in:

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 Excel file, Beta sheet
Risk-free rate of USA can be collected on the website of U.S. Department of the
Treasury. After searching, we found the risk-free rate of USA, which is the
Treasury real long-term rate, of 0.16%
Using Aswath Damodaran’s table summarizing default spreads and risk premiums
of different countries, we have USA market risk premium, which is equal the
equity risk premium, of 6.01%. Also, from this table, we have Vietnam country
risk premium of 6.59%.
All the indicators needed for Cost of Equity of PVOil calculation have been
collected in the following table:
Risk-free rate of USA 0.16%
USA market risk premium 6.01%
Beta of
1.297
U.S. integrated oil/gas sector
Vietnam country risk premium 6.59%
Applying all indicators to CAPM fomula, we have the final figure of Cost of
Equity of PVOil of 26.74%.

Excel file, row 17-28, column C-E of Valuation Model sheet

1.2. Calculation of Cost of Debt
The cost of debt is the minimum rate of return that debt holder will accept for the
risk taken. Cost of debt is the effective interest rate that company pays on its

11
current liabilities to the creditor and debt holders. Generally, it is referred to after-
tax cost of debt.
After-tax Cost of Debt = Cost of Debt x (1 – Tax Rate)
First, we have to calculate the cost of debt (interest rate):
Rd = Interest expenses / Total Debt

Book value of total debt of VND 4,904,071.00 million calculated by sum of short-
term debt and long-term debt collected from the balance sheet of PVOil. The
interest expenses of VND 195,607.79 million is also collected from the balance
sheet.
 Cost of debt: Rd = 1.25%
Next, we have tax rate of 20% according to the default spreads and risk premiums
table of Aswath Damodaran.
Finally, we have all the input indicators to calculate the after-tax cost of debt in the
table below:
Cost of Debt 1.25%
Tax rate 20.00%
Applying the fomula and we have:
After-tax Cost of Debt = 1.25 x (1 – 20.00%) = 1.0026%
After-tax cost of debt is very important as income tax paid by the company will be
low as the company is having a loan on it and interest part paid by the company
will be deducted from taxable income. Hence, the cost for debt is crucial as it gives
a chance to a company to save its tax.
1.3. Weight of Debt and Equity
To calculate the weight of debt and equity of PVOil, we need to collect some
indicators in the balance sheet of the firm as the following table:
Book value of Equity 10,872,334.80

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 Book value of Debt 4,904,701.00
Unit: Million VND
Next, we calculate the debt ratio and equity ratio according to book value of the
firm using the fomulas:
Book value of Debt
Debt ratio according to book value = Book value of Debt + Book value of Equity

Book value of Equity

Equity ratio according to book value = Book value of Debt + Book value of Equity

= 1 - Debt ratio according to book value

Excel file, row 17/18/46, column B/F of Input sheet

Excel file, row 29/31, column C-E of Caluation Model sheet

1.4. Calculation of Weighted Average Cost of Capital (WACC)
A firm's Weighted Average Cost of Capital (WACC) represents its blended cost of
capital across all sources, including common shares, preferred shares, and debt.
The cost of each type of capital is weighted by its percentage of total capital and
they are added together. WACC is used in financial modeling as the discount rate
to calculate the net present value of a business.
WACC = Equity ratio x Cost of Equity + Debt ratio x After-tax Cost of Debt
In section 1.1, 1.2 and 1.3 we have calculated the relevant factors, so this section
will show PVOIL's WACC = 18.74%

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 Excel file, row 28-32, column C-E of Caluation Model sheet
2. PVOil’s FCFF determination
2.1. Calculation of Reinvestment Rate
Reinvestment rate, which is also known as retained earnings ratio, is a financial
ratio to assess the use of after-tax profits for reinvestment of a firm. This ratio
indicates how much VND is retained for every 1,000 dong of profit after tax.
Increase ∈¿ Assets∧WorkingCapital
Reinvestment ratio = Adjusted net cash flow
In which:
 Increase in Fixed Assets and Working Capital = Capital expenditure
- Depreciation of fixed assets
+ Changes in WC
 Adjusted net cash flow = Adjusted EBIT x (1 - Tax rate)
Adjusted earnings before interest and taxes, adjusted EBIT, is, as it suggests, the
earnings from a company's operations before adjusting for interest expense and
taxes and do not take into account the profit from financing activities. EBIT can be
found on the PVOIL's income statement. The free cash flow to firm formula does
adjust for taxes by multiplying EBIT by one minus the corporate tax rate, which
we can collect from the analysis of Aswath Damodaran.
Capital expenditures is the capital used to fund operations in the long run. Capital
expenditures can be found on a PVOIL's cash flow statement.
Capital expenditure = Fixed asset investment + Investment in associates
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In which: Fixed asset investment = Cost of tangible fixed assets
+ Cost of intangible fixed assets
+ Investments in subsidiaries
+ Construction in progress
Working capital is capital used to fund operations in the short run. Working capital
is current assets minus current liabilities. As opposed to longer term capital
expenditures, working capital connotes expenses due within one year or less. The
change in working capital can be calculated using a PVOIL's balance sheet.
All the indicators needed to calculate the reinvestment ratio of PVOil are
summarized in the table below:
Adjusted EBIT 260,128.38
Capital expenditure 164,689.71
Depreciation 385,038.80
Tax rate 20.00%
Change in WC 1,757,146.71
Unit: Million VND
 Reinvestment rate = 738.45% (Excel file, row 57, column B-C of Input sheet)
2.2. Calculation of Return on Capital (ROC)
Return on capital is a profitability ratio. It measures the return that an investment
generates for capital contributors. Return on capital indicates how effective a
company is at turning capital into profits.
In this assignment, our group decided to calculate ROC from ROE (return of
equity). The basic way long-term debt is expressed is as long-term debt to equity,
which refers to the fomula below:
Net operating profit after tax
ROC = Invested Capital

In which:

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 Net operating profit after tax = (EBIT – Profit from financial activities) x (1-
Tax rate)
 Investment Capital = Debt + Equity – (Cash and cash equivalent + Short-term
financial investment) - Net assets of discontinued operations
Return on Capital of PVOil is 3.13% using the fomula above:

Excel file, row 17-20 and 56 of Valuation Model sheet

Unit: Million VND
2.3. Calculation of current FCFF
FCFF can be calculated by the following formula:
FCFF = Adjusted EBIT*(1 – t) – (Capital expenditure + Depreciation)
– Change in WC
All the input indicators of PVOil in 2019 have been collected in the table below:

Adjusted EBIT 260,128.38

Capital expenditure 164,689.71
Depreciation 385,038.80
Tax rate 20.00%
Change in WC 1,757,146.71
Unit: Million VND
Current free cash flow to firrm is defined as the free cash flow to PVOil in 2019, which is
calculated as follow:

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 Excel file, row 42-47, column C-D of Valuation Model sheet
Unit: Million VND
2.4. Calculation of FCFF in 14-year period
First of all, to calculate the FCFF in the next years of growth, we need to pay
attention to the expected growth rate over each period to determine how EBIT in
the subsequent years will increase.
Expected growth rate = Reinvestment rate x Cost of Capital
These two indicators are calculated in section 2.2. and 2.3. As a result, in the first 7
years of the 14 years of rapid growth of PV Oil, the expected growth rate of
23.14% then decreases gradually. So, while calculating the FCFF for the period
We need to take a closer look at the expected growth rate to highlight the impact
on the index during the calculation, and should also pay attention to the WACC to
determine the amount of capital cost related. of the business. In year 14, the
expected growth rate is 17.4%.
Year Expected growth rate
1 23.14%
2 23.14%
3 23.14%
4 23.14%
5 23.14%
6 23.14%
7 23.14%
8 22.32%
9 21.50%
10 20.68%
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 11 19.86%
12 18.04%
13 18.22%
14 17.40%
According to the FCFF fomula, we have:
FCFF = EBIT*(1-Tax rate)-(Capital Expenditure-Depreciation) - Change in WC
In year 1 from beginning, we have:
 EBIT1 = EBIT2019 x (1+ Expected growth rate) = 320,331.94 (million VND)
 Tax rate =20.00%
 EBIT*(1- Tax rate) = 256,265.55 (million VND)
 (Capital expenditure – Depreciation) = 1,525,792.72 (million VND)
 Change in WC = 366,606.07 (million VND)
 FCFF1 = 256,265.55 - 1,525,792.72 - 366,606.07 = -1,633,240.81 (million VND)
The present value of FCFF1 can be calculated as:
FCFF 1 1 , 633 , 240. 81
PV1 = (1+WACC ) = 1.1874 = -1,377,955.56 (million VND)

Excel file, row 38-50, of Valuation Model sheet

Unit: Million VND

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Similar calculations for subsequent years:

Excel file, row 38-50, of Valuation Model sheet

Unit: Million VND
2.5. Terminal value of stable growing period
The last period we observe is the stable growth of 17.4% forever.
FCFF at year 15 is calculated as following:

Excel file, row 42-47, column S of Valuation Model sheet

Unit: Million VND

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The terminal value of the period is calculated according to the following
fomula:
FCFF 15
Terminal value = WACC−g

As a result, we have the terminal value of PVOil of VND 95,267,957.63 million

defined as below:

Excel file, row 52-60 of Valuation Model sheet

3. PVOil’s present value determination
First, to calculate the PV of FCFF, we add up all PV of FCFF in section 2.4.
PVfree cash flow = PVFCFF1 + PVFCFF2 + … + PVFCFF14
Secondly, we need to define the present value of the terminal value in section 2.5.
Terminal value
PVTerminal value = 14
(1−WACC)

Finally, the value of PVOil is calculated as following:

VPVOil = PVfree cash flow + PVTerminal value + Cash, securities and non-operating assets
In which:
Cash, securities and non-operating assets = Cash and cash equivalent
+ Short-term financial investment
+ Net assets of discontinued operations
To conclude, the value of PVOil is determined as below:

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21
 Conclusion
After doing valuation of PVOil, our group notice that the valuation process
involved many steps with complicated calculation. In this assignment we choose
FCFF approach to determine the value of the company. Thereby, we divide the
process into 2 main parts which are: First, calculation of discounted rate which is
basically WACC; Secondly, calculation of the free cash flow to the firrm.
While calculating, our group has to make some assumptions about the future
development of the company. However, these assumption still base on the
historical data basis.
With our analysis of the company and then, doing valuation, we hope that this
document can be a reference material for students, and even investors before
making investment decisions.

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 References
CFI, Free Cash Flow to Firm. [Online] Available at:

https://corporatefinanceinstitute.com/resources/knowledge/modeling/free-cash-
flow-to-firm-fcff/

Investing Answers (October 2019), Return on Capital (ROC). [Online] Available

at: https://investinganswers.com/dictionary/r/return-capital

Aswath Damodaran (January 2020), Betas by Sector (US). [Online] Available at:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

Aswath Damodaran (April 2020), Country Default Spreads and Risk Premiums.
[Online] Available at:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

U.S. Department of the Treasury, Daily Treasury Rates. [Online] Available at:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/

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