“The rating outlook is negative in line with the outlook on India's sovereign rating," said Vikas Halan, senior vice-president, Moody’s.
Moody’s Investors Service on Tuesday downgraded the credit quality rating of state-run Oil and Natural Gas Corporation (ONGC) by one notch to ‘Baa2’, mainly due to its weak cash reserves amid the increasingly uncertain global oil price environment.
The company’s rating was also adversely affected by the government’s 2016 mandate which requires all government-owned companies to pay a minimum annual dividend, equal to 5% of their net worth, even if they do not have sufficient profits.
“The rating outlook is negative in line with the outlook on India’s sovereign rating,” said Vikas Halan, senior vice-president, Moody’s.
As FE recently reported, ONGC is set to “adopt a balanced approach towards capital spending,” and expects the government to take favourable policy measures to boost the company’s performance.
Share price of ONGC on the BSE has fallen 33% from Rs 93.30 on March 3 to Rs 62.50 on Tuesday-end, as global crude oil prices continue to fall and the widening spread of the coronavirus outbreak.
ONGC has recently approved the payment of interim dividend at Rs 5 per share, which is at 100% of face value, to the shareholders. Moody’s noted that it resulted in cash outflows of about Rs 6,300 crore, reducing cash reserves.
ONGC had consolidated cash and cash equivalents of Rs 6,700 crore on September 30, 2019, which was much lower than the reserve of Rs 24,700 crore at FY16-end. The company’s cash reserves have been depleting over the past three years because of high dividends, the acquisition of Hindustan Petroleum Corporation Ltd in 2018 and share buyback in 2019. Over the same period, ONGC’s net borrowings increased to about Rs 1 lakh crore from Rs 21,500 crore.
Obligations rated ‘Baa’ by Moody’s are judged to be medium-grade and subject to moderate credit risk and “may possess certain speculative characteristics”.
ONGC’s Baa2 issuer ratings reflects the company’s position as the largest integrated oil and gas company in India, with significant oil and gas reserves, production volume and crude distillation capacity. “Moody’s assume a high likelihood of extraordinary support, and a very high dependence on the Indian government for ONGC in times of need,” the agency noted.