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Rating Action:

Moody's assigns Baa2 foreign currency issuer rating to ONGC

23 Apr 2013

Singapore, April 23, 2013 -- Moody's Investors Service has assigned a Baa2 foreign currency issuer rating to Oil and Natural Gas Corporation (ONGC).

Moody's has also assigned a provisional (P)Baa2 senior unsecured foreign currency debt rating to the proposed issuance of senior unsecured bonds by ONGC Videsh Limited (OVL), a wholly owned subsidiary of ONGC.

The bonds will be unconditionally and irrevocably guaranteed by ONGC. The proceeds from the proposed bonds will be used to refinance bridge loans for the acquisition of participating interests in upstream and midstream oil and gas assets in Azerbaijan.

Moody's points out that ONGC's Baa2 foreign currency ratings are constrained by India's foreign currency country ceiling of Baa2.

At the same time, Moody's has affirmed ONGC's Baa1 local currency issuer rating.

The outlook on all ratings is stable.

Moody's will remove the provisional status of the bonds on review of the final terms and conditions of the bonds.

RATINGS RATIONALE

"ONGC's Baa1 local currency issuer rating reflects its strong credit metrics, even after its two recent acquisitions in the Caspian Sea oil and gas fields, totaling $6 billion," says Vikas Halan, a Moody's Vice President and Senior Analyst.

"While the acquisitions are substantial and will result in higher leverage, the company's elevated leverage position would still remain within our tolerance level for the company's current rating. Moreover, we expect ONGC's credit metrics to remain strong over the next three years," adds Halan, who is also the Lead Analyst for ONGC.

Moody's expects ONGC's adjusted debt/EBITDA to stay below 1.5x and its retained cash flow (RCF)/adjusted debt to exceed 50% between 2013 and 2015.

The details of ONGC's two acquisitions are: 1) $1 billion acquisition from Hess Corporation (Baa2 stable) of its 2.7% participating interest in the Azeri, Chirag and the deep water portion of the Guneshli fields in the Azerbaijan sector of the Caspian Sea, and its 2.36% interest in the Baku-Tbilisi-Ceyhan pipeline, and 2) the $5 billion acquisition from ConocoPhillips' (A1 stable) 8.4% participating interest in the Kashagan field in Kazakhstan. This second acquisition, however, is subject to government approvals.

"For the proposed bonds, the guarantee to be provided by ONGC constitutes a direct, unconditional, unsecured and unsubordinated obligation, and the bonds would rank pari passu with all other outstanding unsecured and unsubordinated obligations of ONGC," says Halan.

ONGC estimates that the two acquisitions would likely add an average annual production of 2.5 million tonnes of oil equivalent (toe) or 18.3 million barrels oil equivalent (boe) to its total annual production of around 440 million boe.

These acquisitions are in line with the company's recently revised long term strategy to double its production to about 2,610 thousand boe per day by 2030, from the current 1,205 thousand boe per day.

In terms of its oil and gas operations overseas, the company aims to achieve a production target of 440 million boe by 2030, from the current 65 million boe, with an intermediate target in 2018 of 146 million boe.

Moody's notes that in order to achieve these ambitious targets, ONGC's planned capital expenditure (including acquisitions) over the next 17 years is nearly $200 billion.

"While such a large scale capex plan may result in a deterioration of ONGC's credit profile, we understand that the expenditures will not be entirely funded with debt," says Halan.

Moody's believes ONGC's capex plan involves maintaining: 1) a mix of organic and inorganic growth 2) a healthy mix of assets, and 3) a credit profile consistent with its current ratings, even as the company uses a mix of debt and equity to fund capex, when it has insufficient internally generated funds.

Moody's also notes that ONGC's funding shortfall -- in achieving its production targets -- will depend on the amount of subsidy burden it has to absorb. The issue of subsidies has adversely affected its cash flows over the last 18 months.

"ONGC's subsidy burden this year will be at even higher levels than in FY 2012. Given the decline in ONGC's free cash flow last year because of the record high subsidy cost it had to absorb in FY 2012, the company's free cash flow may once again be low in FY 2013," says Halan.

Moody's estimates that ONGC's share of the subsidy burden will increase to INR495 billion in FY2013, a 11% increase from its highest-ever subsidy burden of INR445 billion in FY 2012.

ONGC's local currency rating remains constrained to within two notches of India's sovereign rating of Baa3, in line with Moody's Rating Implementation Guidance, titled "How Sovereign Credit Quality may Affect Other Ratings," published on 13 February 2012, and available on www.moodys.com.

Nonetheless, the local currency rating may be upgraded if the sovereign rating is upgraded, or if ONGC generates a substantially greater share of revenue from exports and sources outside India. However, the latter scenario seems unlikely over the next 2-3 years.

On the other hand, the local currency rating may experience downward pressure if: 1) India's sovereign rating is downgraded, or 2) any major adverse changes are made to the regulations for the oil and gas industry; or 3) ONGC increases its pace of acquisitions such that it results in the company facing higher business risks and a deterioration in its credit metrics.

Specific credit metrics that would indicate downward pressure on ONGC's local currency rating include: 1) RCF/adjusted debt below 45%, and 2) adjusted debt/proved developed reserves of over USD5.0.

The principal methodology used in these ratings was the Global Independent Exploration and Production Industry Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Oil and Natural Gas Corporation Ltd. is India's flagship exploration and production company, accounting for over 60% of the total proved reserves in the country. ONGC has proved reserves of over 7 billion boe and annual production of around 375 million boe. It is listed on the Indian stock exchanges and is 69.23%-owned by the Indian government.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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
Vice President - Senior Analyst
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
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's assigns Baa2 foreign currency issuer rating to ONGC
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