S&P lowers ONGC credit profile to BBB+

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Published: May 23, 2020 5:50:29 AM

S&P Global Ratings has lowered its assessment of state-run oil producer Oil and Natural Gas Corporation’s (ONGC’s) stand-alone credit profile to ‘BBB+’ from ‘A-’ due to lower oil and gas prices and disruption in demand for refined products, which is seen to weaken the company’s cash flow and leverage till FY22-end.

The agency estimated that ONGC’s consolidated earnings before interest taxes depreciation and amortisation (ebitda) would decline by 30%-35% during FY21.The agency estimated that ONGC’s consolidated earnings before interest taxes depreciation and amortisation (ebitda) would decline by 30%-35% during FY21.

S&P Global Ratings has lowered its assessment of state-run oil producer Oil and Natural Gas Corporation’s (ONGC’s) stand-alone credit profile to ‘BBB+’ from ‘A-’ due to lower oil and gas prices and disruption in demand for refined products, which is seen to weaken the company’s cash flow and leverage till FY22-end.

The agency estimated that ONGC’s consolidated earnings before interest taxes depreciation and amortisation (ebitda) would decline by 30%-35% during FY21. Though its refining business will likely benefit from the currently low crude prices, gradual recovery of the low demand scenario is seen to keep the margins subdued. With demand gradually recovering and oil prices strengthening from current levels, ONGC’s consolidated ebitda is seen to be Rs 58,000 –60,000 crore in FY22.

Softer cash flows will lower ONGC’s debt to ebitda ratio to 2.6x–3.0x in FY21, before it improves to 2.2x-2.6x in later years. “We understand that ONGC has requested the government to consider exempting it from payment of cess, royalties, and profit petroleum until crude prices are less than $45/barrel,” S&P noted. Analysts expect ONGC to pay between Rs 4,000 crore and Rs 4,500 crore in dividends in FY21, which will rise to Rs 6,500-Rs 8,000 crore in FY22.

ONGC’s annual capex is seen to be around Rs 36,000-Rs 40,000 crore over FY21-22, with exploration and production capex of Rs 28,000-Rs 30,000 crore to maintain its production volumes. S&P believes ONGC will curtail part of its capex at Hindustan Petroleum Corp (HPCL) in FY21, especially for the greenfield Barmer project. If feasible, it is seen to rather push ahead with the upgrade of its Mumbai and Vizag refineries.

S&P noted that ONGC might face ‘extraordinary negative government intervention’ if the country came under financial stress, therefore the company’s rating continued to be constrained by the sovereign rating on India. Apart from its position as the dominant energy company, ONGC’s role becomes more significant because HPCL, its recently acquired 51.1%-owned subsidiary, is also a major retail fuel player, which also distributes cooking fuels at government-determined prices. The government is seen to retain its majority shareholding in the company and will play a key role in appointing management and shaping its dividend, acquisition and capex policies.

The rating remains capped by the sovereign rating of BBB- (two notches below ONGC’s new rating) and will be further downgraded if S&P lowers the sovereign credit rating on India. An obligation rated ‘BBB’ exhibits adequate protection parameters, but adverse economic conditions are more likely to weaken their capacity to meet financial commitments. Moody’s Investors Service, in late March, had also downgraded the rating of ONGC mainly due to its weak cash reserves and the government’s mandate requiring all state-owned companies to pay a minimum annual dividend, equal to 5% of their net worth, even if they do not have sufficient profits.

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