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Announcement:

Moody's affirms ONGC's issuer rating at A2

02 Jun 2010

Singapore, June 02, 2010 -- Moody's Investors Service has today affirmed the A2 long-term local currency rating of Oil and Natural Gas Corporation Ltd (ONGC). The rating outlook is stable.

The affirmation follows ONGC's FY2010 results, which were in line with Moody's expectations.

ONGC reported EBITDA of Rs. 497.4 billion, compared to Rs. 468.4 billion in FY2009. Its subsidy burden has also reduced from Rs. 282.3 billion to Rs.115.5 billion, being restricted only to losses on automobile fuels.

"We expect ONGC's financial profile to further improve following the government's decision to increase prices under the federal Administrative Pricing Mechanism (APM) from US$1.80/mmbtu to US$4.20/mmbtu up to March 2015," says Philipp Lotter, a Moody's Senior Vice President.

"At current output levels, this price increase should contribute Rs. 58.3 billion to the company's earnings."

"ONGC has also been granted greater autonomy with regard to making investment decisions for up to Rs.50 billion under its newly acquired 'Maharatna' status. This will help ONGC in furthering its overseas expansion strategy, with a view to improve its reserve diversification," adds Lotter, also Moody's lead analyst for ONGC.

"These developments have strengthened ONGC's baseline credit assessment (BCA), which now maps to Moody's global scale of A2," adds Lotter.

ONGC's BCA continues to reflect the following strengths: 1) very low financial leverage, including negligible financial debt; 2) significant reserves and production; 3) substantial cash flow generation capacity, and 4) a solid liquidity profile.

At the same time, it considers 1) the burden of the oil subsidy-sharing scheme, which considerably reduces realized oil prices for ONGC in high oil price environments; 2) customer and production concentration risk; and 3) ONGC's appetite for acquiring and developing overseas assets, which are located mainly in countries with varied -- and greater -- operating challenges.

As a Government-Related Issuer, ONGC's rating also reflects the high level of support from the Indian government under Moody's joint default analysis approach. The high support reflects ONGC's national importance and strategic role in economic development, translating into strong incentives for government support.

However, Moody's now also gives greater weight to ONGC's very high dependence on the government, reflecting its domestic market focus and the high degree of correlation between the company and the government, given that it is one of the largest contributors to the state's exchequer.

Furthermore, ONGC's operating and financial performance is highly reliant on regulations for the energy sector. Despite the sector's deregulated status, the government subsidizes and controls the prices of several oil and gas products.

Such high support and dependence have no impact on the final A2 rating, which mainly reflects ONGC's standalone credit strength.

"The stable outlook reflects Moody's expectation that ONGC will maintain strong credit protection measures over the next 12-24 months, despite the possibility of the company stepping up its foreign investments," adds Lotter.

It also incorporates positive ongoing measures set by the government to introduce a more competitive market environment, which should improve ONGC's profitability over time.

Upside potential for the rating is limited in the near term, however, given the regulatory overhang and risks related to the company's overseas acquisitions.

Upward rating pressure could evolve over time if ONGC can 1) successfully implement its expansion plans; 2) establish a solid track record in managing its overseas investments and achieve good diversification over time; and 3) maintain its current strong financial profile and liquidity.

The rating may experience downward pressure if 1) any major adverse changes are made to the regulatory scheme; or 2) the company makes any aggressive acquisitions that substantially weaken its financial profile -- although this is unlikely, based on ONGC's track record. Credit metrics that Moody's would look for include adjusted debt/proved developed reserves exceeding US$2/boe and (RCF - maintenance capex)/adjusted debt falling below 50%.

In addition, ONGC's ratings could be pressured in the event of a downgrade to India's sovereign rating (which is unlikely given Moody's positive outlook), or of deterioration in the domestic downstream petroleum sector.

The last rating action with regard to ONGC was taken on August 27, 2008, when Moody's stated that ONGC's proposed acquisition of Imperial Energy had no impact on the company's A2 long-term local currency rating.

The principal methodology used in rating ONGC was "Rating Methodology: Independent Exploration & Production (E&P) Industry," which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Oil & Natural Gas Corporation Ltd is India's flagship exploration and production company, accounting for 75% of total proved reserves in India. ONGC has proved reserves of over 7 billion boe and annual production of around 425 million boe. It is listed on the Indian stock exchange and is 74.14%-owned by the Indian government.

Singapore
Philipp L. Lotter
Senior Vice President
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (65) 6398-8308

Hong Kong
Gary Lau
Managing Director
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms ONGC's issuer rating at A2
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