Singapore, January 30, 2018 -- Moody's Investors Service, ("Moody's") affirmed
Oil and Natural Gas Corporation Ltd.'s (ONGC) Baa1 local
and foreign currency issuer ratings, and the Baa1 ratings on the
senior unsecured bonds issued by ONGC Videsh Limited and ONGC Videsh Vankorneft
Pte. Ltd., both guaranteed by ONGC.
The outlook on all ratings is stable.
RATINGS RATIONALE
The rating affirmation follows ONGC's recent acquisition of 51.11%
equity stake in Hindustan Petroleum Corporation Ltd (HPCL, Baa2
stable) from the Government of India (Baa2 stable) for a consideration
of INR369.15 billion to be paid in cash by 31 January 2018.
The transaction remains subject to requisite approvals from the shareholders
of ONGC, which the company expects to achieve within 90 days from
the date of the agreement unless it manages to get an exemption from the
Ministry of Corporate Affairs of the Government of India.
ONGC has indicated that financing of HPCL equity stake will be funded
by up to INR250 billion of incremental borrowings, with the balance
being cash on hand.
The payment of acquisition price will result in ONGC's net borrowings
increasing by INR369.15 billion, irrespective of the mix
of debt and cash used for such payment. In addition, Moody's
post-acquisition rating of ONGC will be based on the full consolidation
of HPCL, which will also include full consolidation of HPCL's
49% owned joint venture - HPCL-Mittal Energy Limited
(HMEL, Ba1 stable)- as well.
Accordingly, post-acquisition, ONGC's pro forma
net borrowings for the fiscal year ended March 2017 (fiscal 2017) will
increase to INR1,265 billion as against INR472 billion without the
acquisition. ONGC's pro forma credit metrics for fiscal 2017
will also weaken with retained cash flow (RCF)/net debt declining to 28%
from 68% without the acquisition.
"Improvement in crude oil prices in fiscal 2018, however,
will result in better credit metrics than the pro forma credit metrics
based on fiscal 2017 numbers such that RCF/ net debt will be 32%.
Nonetheless, post-acquisition ONGC's leverage will
approach the upper limit for its Baa1 rating, diminishing the company's
financial cushion under the rating," says Vikas Halan,
Moody's Vice President and Senior Credit Officer.
ONGC remains committed to reduce borrowings on its balance sheet through
sale of its stake in Indian Oil Corporation Ltd (IOC, Baa2 stable)
and GAIL (India) Limited (GAIL, Baa2 stable), which are valued
at about INR300 billion as of 30 January 2018.
"Reduction in net borrowings through sale of investments will be
credit positive and provide ONGC the cushion to absorb a decline in oil
prices. On the other hand, a significant crude oil price
decline along with a failure of the company to liquidate its investments,
will result in downgrade of ONGC's ratings," says Halan,
who is also Moody's lead analyst for ONGC.
The purchase of HPCL's majority stake will create India's
first integrated oil and gas company with significant upstream and downstream
operations. Hence, the leverage increase will be partly offset
by a qualitative improvement in ONGC's business position as a vertically
integrated company.
ONGC Baa1 issuer ratings are primarily driven by its standalone credit
profile as captured in its baa1 baseline credit assessment (BCA).
Post-acquisition, ONGC's baa1 BCA reflects 1) the company's
position as the only integrated oil and gas company in India with significant
reserves, production and crude distillation capacity; 2) substantial
operating cash flow generation capacity; 3) weakened but still appropriate
credit metrics for its ratings following the HPCL acquisition.
At the same time, the BCA incorporates Moody's expectation
that the company will not be asked to share fuel subsidies as long as
the oil prices stay below $60-$65 per barrel.
The rating outlook is stable reflecting Moody's expectation that the company
will lower its borrowings through sale of stake in IOC and GAIL.
Further, the stable outlook also incorporates our expectation of
benign oil price environment and that the company's growth plan will continue
to be executed within the tolerance level of its current ratings.
The likelihood of a ratings upgrade in the next 12 -18 months remains
low given the high leverage. Also, ONGC's ratings will not
be more than one notch above the rating of the government of India.
Therefore, a rating upgrade to A3 will require both an improvement
in credit metrics as well as a sovereign rating upgrade to at least Baa1.
Credit metrics indicative of a higher ratings include RCF/ net debt >40%
and EBIT/ Interest >10x, both on a sustained basis.
ONGC's ratings may experience downward pressure if 1) the sovereign
rating is downgraded, or 2) ONGC is asked to share high fuel subsidies
resulting in lower net realized prices, or 3) ONGC increases its
pace of acquisitions such that it results in higher business risk and
deterioration of its credit metrics, or 4) sustained decline in
oil prices resulting in weak cash flow generation and deterioration of
credit metrics.
Credit metrics that would indicate a downward pressure on the rating include
a) RCF/net debt of below 30% and EBIT/interest of below 7x.
The methodologies used in these ratings were Global Integrated Oil &
Gas Industry published in October 2016, and Government-Related
Issuers published in August 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Oil and Natural Gas Corporation Ltd. (ONGC) is currently India's
largest exploration and production (E&P). With the completion
of the HPCL acquisition, ONGC will become India's largest
integrated oil and gas company. ONGC is 68.93% owned
by the government of India (Baa2 stable).
HPCL is the third largest state-owned downstream company in India
by refining capacity. It specializes in oil refining, marketing,
distribution, and the retailing of petroleum products. Through
its 3 refineries (including the Bhatinda refinery), with a combined
capacity of 498 thousand barrels per day, it has a share of around
10.1% of India's refining capacity.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vikas Halan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
