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Rating Action:

Moody's affirms Oil India's Baa2 ratings; lowers BCA to baa3

26 Dec 2017

Singapore, December 26, 2017 -- Moody's Investors Service has affirmed the Baa2 issuer ratings and senior unsecured bond ratings of Oil India Limited (OIL).

Moody's has also affirmed the Baa2 rating on the senior unsecured notes issued by Oil India International Pte. Ltd. and guaranteed by OIL.

At the same time, Moody's has lowered OIL's baseline credit assessment (BCA) to baa3 from baa2.

The outlook on all ratings is stable.

RATINGS RATIONALE

"The lowering of the BCA to baa3 from baa2 is driven by our expectation that the company's credit metrics, which have weakened on the back of acquisition and shareholder payments, are unlikely to recover to a level more appropriate for a baa2 BCA," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

"Furthermore, we expect OIL's retained cash flow (RCF) to debt will remain around 20%-22% in fiscal 2018 ending March 2018 and in fiscal 2019, which will be in line with the 22% (excluding the effect of one-time royalty payments) in fiscal 2017, but lower than 31% in fiscal 2016. Such a level of RCF to debt is lower than our threshold of 25% for a baa2 BCA," says Halan.

OIL acquired stakes in oil & gas fields in Russia for $1 billion in 2016 and also executed share buybacks of INR15,270 million in June 2017. These exercises resulted in an increase in its net borrowings to over INR80 billion as of September 2017, compared to a net cash position in March 2016.

Even though an improvement in oil prices will result in higher cash flows, OIL will continue to generate negative free cash flows as its dividend payments and capital expenditures will remain high.

The company may also need to make further buybacks under the guidelines issued by the government of India for the state-owned companies.

Consequently, Moody's expects OIL's borrowings to remain high over the next 2-3 years, unless the company decides to monetize some of its non-core investments, such as its stake in Indian Oil Corporation Ltd (IOC, Baa2 stable).

"The affirmation of OIL's Baa2 issuer rating reflects our expectation of the high likelihood of extraordinary support that results in a one-notch uplift from its baa3 BCA," says Halan.

OIL's BCA also reflects the company's strategically important position as India's second largest state-owned exploration and production (E&P) company. It is a significant contributor of the country's upstream production, accounting for about 8% of India's total crude oil (excluding condensate) and natural gas production, along with 8% of its proved crude oil reserves in fiscal 2017.

OIL also benefits from the competitive cost structure of its onshore operations, resulting in high profitability and solid operating cash flow generation.

At the same time, the ratings take into account OIL's small scale, level of asset concentration, moderate financial profile, exposure to the Indian government's (Baa2 stable) credit risk, and the execution risks associated with its inorganic growth strategy for overseas.

The ratings also incorporate OIL's strong financial flexibility, provided by its investment in Indian Oil Corporation, with a market value of approximately INR100 billion as of 26 December 2017. The company can monetize this investment to reduce its borrowings.

OIL also has a robust liquidity profile with cash and cash equivalents (including investments in liquid muutal funds) of INR44 billion as of 30 September 2017 against no short-term debt.

The outlook on the ratings is stable, reflecting the stable outlook of India's sovereign rating.

At the same time, Moody's expects OIL to manage its capital spending and shareholder distributions in such a way that its financial metrics will remain supportive of its ratings.

An upgrade of OIL's ratings to Baa1 will require an upgrade of India's sovereign rating to Baa1.

OIL's BCA could be raised to baa2 if the company demonstrates sustained improvements in its credit metrics and maintains financial discipline as it pursues growth. Specific indicators include retained cash flow to debt exceeding 25% on a consistent basis.

OIL's issuer rating could be downgraded to Baa3 if (a) its BCA falls to ba3; or (b) India's sovereign rating is downgraded; or (c) there is a change in the relationship between OIL and the Indian government, resulting in a lower expectation of extraordinary support.

The BCA could be lowered to ba1 if a) OIL makes any debt-funded acquisitions or shareholder returns, or b) its earnings and cash flow generation decline more than Moody's expects owing to an unexpectedly protracted or steep decline in oil prices.

Credit metrics indicative of such downward pressure include adjusted RCF to debt staying below 20%.

The methodologies used in these ratings were Independent Exploration and Production Industry published in May 2017, 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 India Limited (OIL) is a state-owned upstream oil and gas company based in India. Its business is primarily focused on the exploration and production of crude oil and natural gas in India.

OIL also conducts international exploration activity through joint venture arrangements. In addition, it owns pipelines for crude oil and product transportation, and has diversified into downstream refining and other unconventional resources businesses.

OIL was incorporated as a private limited company in 1959 and listed in September 2009 on the National Stock Exchange and the Bombay Stock Exchange of India. At 30 September 2017, OIL was 66.13% owned by the Government of India.

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

No Related Data.
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