Moody’s Investors Service Tuesday affirmed state-owned ONGC’s Baa1 local and foreign currency issuer ratings, saying it reflect an improvement in the firm’s credit metrics because of rise in oil prices. Oil and Natural Gas Corporation’s (ONGC) consolidated credit metrics – as measured by retained cash flow (RCF) to net debt – improved to 51 per cent for the fiscal ended March 31, 2019 (fiscal 2019) as compared to 40 per cent for fiscal 2018. “The improvement was largely driven by better earnings, which in turn was because of higher realized crude oil prices,” Moody’s said in a statement.
This should result in ONGC generating positive free cash flow – despite the company’s high level of capital spending and shareholder returns – which Moody’s expects the company will use to reduce its borrowings. Its credit metrics will likely remain appropriate for its rating category over the next 12-18 months. “The rating affirmation reflects our expectation that ONGC’s credit metrics, which have improved over the last 12 months because of the high net realized oil price, will remain appropriate for its ratings,” said Vikas Halan, a Moody’s Senior Vice President.
“Based on an average net realized oil price assumption of USD 65 per barrel, we expect that the company’s earnings for fiscal 2020 will be broadly in line with fiscal 2019.” ONGC’s Baa1 issuer ratings are primarily driven by its standalone credit profile, as captured in its baa1 Baseline Credit Assessment (BCA). The company’s BCA reflects in turn its position as the largest integrated oil and gas company in India with significant reserves, production and crude distillation capacity; substantial operating cash flow generation capacity; and credit metrics that have improved but will remain constrained by volatile – although range-bound – oil prices and high shareholder returns, it said.
“At the same time, the BCA incorporates Moody’s expectation that the company will not be asked to share fuel subsidies, as long as oil prices stay below USD 70 per barrel,” Moody’s said. ONGC’s rating also incorporates a high likelihood of extraordinary support from and very high dependence on the government. However, this assumption does not result in any rating uplift, because the sovereign rating is below ONGC’s BCA.
ONGC generates sufficient cash flow to fund its capital spending and shareholder returns. However, the company’s cash and cash equivalents of Rs 10,20 crore as of March 31, 2019, are insufficient to cover its debt maturing over the next 12 months of Rs 54,500 crore.
Of this, about Rs 25,500 crore represents working capital loans and scheduled debt maturities at its subsidiaries – HPCL and Mangalore Refinery and Petrochemical Ltd – and are not guaranteed by ONGC. Of the remaining Rs 29,000 crore, ONGC has already repaid or refinanced about Rs 10,000 crore as of July 15, 2019. “Given ONGC’s strong credit metrics and status as a government-owned company, it maintains strong access to debt funding markets and can refinance its remaining short-term borrowings,” Moody’s said.
Also, the company maintains substantial financial flexibility, as seen by its stakes in Indian Oil Corp (IOC) and Gail (India) Ltd (Baa2 stable), which were valued at about Rs 22,600 crore at July 15. The government owns a 64.25 per cent direct stake in ONGC and appoints all the directors on the company’s board. Moreover, the risk from government influence was evident in January 2018, when the government sold its 51.11 per cent stake in HPCL to ONGC for Rs 36,900 crore, which resulted in the weakening of ONGC’s credit metrics. “Because of this risk, ONGC’s ratings are constrained to no more than one notch above the sovereign’s Baa2 rating,” Moody’s said, adding the rating outlook is stable on the expectation that shareholder returns and the company’s growth plans will continue to be executed within the tolerance level of its current ratings.
In addition, the stable outlook assumes the company will improve its debt maturity profile, such that its cash and cash equivalents, along with committed bank facilities, can cover debt maturing over the next 12 months. “A rating upgrade to A3 will require ONGC to improve its liquidity profile, maintain strong credit metrics, and also for Moody’s to upgrade India’s sovereign rating to at least Baa1,” the statement said. ONGC’s ratings could experience downward pressure if Moody’s downgrades the sovereign’s rating or the oil prices decline or the company increases its pace of acquisitions such that it faces higher business risk and a deterioration in its credit metrics.