Singapore, June 27, 2014 -- Moody's Investors Service has assigned a provisional (P)Baa2 to the proposed
issuance of foreign currency 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 the bridge
loans for the acquisition of stake in Rovuma Basin in Mozambique.
At the same time, Moody's has affirmed ONGC's Baa1 local currency
issuer rating, Baa2 foreign currency issuer rating, and the
Baa2 ratings on the senior unsecured bonds issued OVL and guaranteed by
ONGC in 2013.
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 issuer rating reflects its strong credit metrics, even after
increase in its borrowings following the recent acquisitions in Mozambique
and also after the decline in its cash flows following the increase in
its fuel subsidy burden," says Vikas Halan, a Moody's Vice
President and Senior Credit Officer.
ONGC spent INR616 billion on capex and acquisition in FYE3/2014,
highest amount ever spent by ONGC in a year. During the same year,
ONGC's share of fuel subsidy burden was increased to highest ever
amount of INR564 billion, despite a decline in total fuel subsidy
of the country. This situation resulted in increase in its Moody's
adjusted consolidated net borrowings to INR301 billion as of March 2014
from INR39billion a year ago.
"We expect the company to continue to make investments, in
line with its long term strategy to more than double its production to
about 2,610 thousand barrels of oil equivalent (boe) per day by
2030, from the current 1,157 thousand boe per day,"
says Halan.
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 2013-2030
is nearly $200 billion.
"While such a large scale capex plan may result in a deterioration of
ONGC's credit profile, we anticipate 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 3 years.
"ONGC's share of the subsidy burden may stay elevated in FYE3/2015,
despite decline in the total under recoveries as the government reduces
its own subsidy burden," says Halan.
"The funding shortfall will also depend on the timing and extent
of increase in the domestic natural gas prices," adds Halan.
The natural gas produced in India is currently being sold at $4.2
per million British thermal units (mmbtu). In terms of Pricing
Guidelines notified on January 10 2014, the prices were scheduled
to be revised to a market linked formula from April 1 2014, which
would have nearly doubled the gas prices to $8.0 -
$8.4 per mmbtu. The price increase was delayed due
to the election in May 2014 and is still awaiting clearance from the new
government.
For the fiscal year ended March 2014 (FYE3/2014), ONGC's adjusted
debt to proved developed reserves was below $2 per barrel and retained
cash flow (RCF)/ adjusted debt was above 70%. Moody's expects
ONGC's adjusted debt/proved developed reserves to stay below $3.0
per barrel and its retained cash flow (RCF)/adjusted debt to exceed 50%
over the next three fiscal years.
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.
ONGC's foreign currency rating is constrained by India's foreign currency
country ceiling of Baa2.
The principal methodology used in these ratings was the Global Independent
Exploration and Production Industry published in December 2011 and Government-Related
Issuers: Methodology Update published in July 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of these methodologies.
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 68.94%-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.
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
SUBSCRIBERS: (852) 3551-3077
Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
Moody's assigns (P)Baa2 to ONGC's bonds; affirms ratings
