Singapore, August 30, 2019 -- Moody's Investors Service has assigned a provisional (P)Baa1 senior
unsecured rating to the proposed USD2 billion medium-term note
(MTN) program established by Oil and Natural Gas Corporation Ltd.
(ONGC, Baa1 stable) and its subsidiary, ONGC Videsh Limited.
The notes will be guaranteed by ONGC if they are issued by ONGC Videsh
Limited or any other subsidiary of ONGC.
The outlook for the rating is stable.
RATINGS RATIONALE
"The provisional program rating is in line with ONGC's Baa1 issuer
rating, which is in turn primarily driven by its standalone credit
profile, as captured in its baa1 Baseline Credit Assessment,"
says Vikas Halan, a Moody's Senior Vice President.
ONGC's baa1 Baseline Credit Assessment (BCA) reflects its 1) position
as the largest integrated oil and gas company in India with significant
reserves, production and crude distillation capacity; 2) substantial
operating cash flow generation capacity; and 3) credit metrics that
have improved but will remain constrained by volatile — although
range bound — oil prices and high shareholder returns.
At the same time, the BCA incorporates Moody's expectation that
the company will not be asked to share fuel subsidies, as long as
oil prices stay below $70 per barrel.
ONGC's issuer rating also incorporates the company's high likelihood
of extraordinary support from and very high dependence on the Government
of India (Baa2 stable), in times of need. However,
this assumption of government support does not result in any ratings uplift,
because the sovereign rating is below ONGC's BCA.
Moody's ratings for ONGC are based on the full consolidation of Hindustan
Petroleum Corporation Ltd. (HPCL, Baa2 stable), which
also includes the full consolidation of HPCL's 49%-owned
joint venture, HPCL-Mittal Energy Limited (Ba1 stable).
ONGC's consolidated credit metrics — as measured by retained cash
flow (RCF) to net debt — improved to 51% for the fiscal year
ended 31 March 2019 (fiscal 2019) compared to 40% for fiscal 2018.
The improvement was largely driven by better earnings, which in
turn was because of higher realized crude oil prices.
"Based on an average net realized oil price assumption of $65 per
barrel, we expect that the company's earnings for fiscal 2020 will
be broadly in line with that recorded in fiscal 2019," adds Halan,
who is also Moody's Lead Analyst for ONGC.
Such earnings will help ONGC generate positive free cash flow, despite
the company's high level of capital spending and shareholder returns.
Moody's expects that ONGC will use its free cash flow to reduce its borrowings;
thereby keeping its credit metrics appropriate for its ratings category
over the next 12-18 months.
ONGC generates sufficient cash flow to fund its capital spending and shareholder
returns.
However, the company's cash and cash equivalents of INR102 billion
as of 31 March 2019 were insufficient to cover its debt maturing over
the next 12 months of INR545 billion. Of this amount, about
INR255 billion represented working capital loans and scheduled debt maturities
at its subsidiaries (HPCL and Mangalore Refinery and Petrochemical Limited),
and are not guaranteed by ONGC. Of the remaining INR290 billion,
ONGC repaid or refinanced about INR100 billion as of 7 August 2019.
Given ONGC's strong credit metrics and status as a government-owned
company, it maintains strong access to the debt funding markets
and can refinance its remaining short-term borrowings.
Furthermore, ONGC maintains substantial financial flexibility,
as seen by its stakes in Indian Oil Corporation Ltd (Baa2 stable) and
Gail (India) Limited (Baa2 stable), which were valued at about a
total INR226 billion at 15 July 2019.
In terms of environmental, social and governance factors,
the ratings also consider the following:
1) ONGC's exposure to carbon transition risk, environmental regulations
for emissions and water shortages. The global efforts to transition
to low carbon energy will gradually lower demand for petroleum products
in the coming decades. However, the carbon transition risk
for ONGC is partly mitigated by India's significant dependence on imports
of oil and gas — which will continue until 2040 — as seen
in the Government of India's National Energy Policy of 2017.
ONGC also has a track record of compliance with environmental regulations
and has been implementing strategies to counter water shortages through
rain water harvesting and sea water desalination plants.
2) ONGC's close linkage to its largest shareholder, the Government
of India, with the relationship showing significant influence on
the company's financial policy and business strategy.
The government owns a 64.25% direct stake in ONGC and appoints
all the directors on the company's board.
Moreover, the risk from government influence was evident in January
2018, when the government sold its 51.11% stake in
HPCL to ONGC for INR369 billion, which resulted in the weakening
of ONGC's credit metrics. Because of this risk, ONGC's ratings
are constrained to no more than one notch above the sovereign's Baa2 rating.
The ratings outlook is stable, reflecting Moody's expectation that
shareholder returns and the company's growth plans will continue to be
executed within the tolerance level of its current ratings. In
addition, the stable outlook assumes the company will improve its
debt maturity profile, such that cash and cash equivalents,
along with committed bank facilities, can cover debt maturing over
the next 12 months.
A ratings upgrade to A3 will require ONGC to improve its liquidity profile,
maintain strong credit metrics, and for Moody's to upgrade India's
sovereign rating to at least Baa1.
Credit metrics indicative of higher ratings include RCF/net debt exceeding
40% and EBIT/interest below 8x, both on a sustained basis.
ONGC's ratings could experience downward pressure if 1) Moody's downgrades
India's sovereign rating; or 2) ONGC increases its pace of
acquisitions, such that the company faces higher business risk and
a deterioration in its credit metrics; or 3) there is a sustained
decline in oil prices, leading to weak cash flow generation for
ONGC and a deterioration in the company's credit metrics.
Credit metrics that would indicate downward pressure on the ratings include
RCF/net debt below 30% and EBIT/interest below 7x.
The methodologies used in these ratings were Global Integrated Oil &
Gas Industry published in October 2016, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Oil and Natural Gas Corporation Ltd. (ONGC) is India's largest
integrated oil and gas company. Its main operations include upstream
exploration and production. It also has operations in downstream
segments.
ONGC is 64.25% owned by the Government of India (Baa2 stable).
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
Senior Vice President
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
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Client Service: 852 3551 3077
