Singapore, March 24, 2020 -- Moody's Investors Service has downgraded Oil and Natural Gas Corporation
Ltd.'s (ONGC) local and foreign currency issuer ratings to Baa2
from Baa1.
At the same time, Moody's has downgraded (1) ONGC's
baseline credit assessment (BCA) to baa2 from baa1; (2) the senior
unsecured bonds issued by ONGC to Baa2 from Baa1; (3) the senior
unsecured bonds guaranteed by ONGC and issued by ONGC Videsh Limited and
ONGC Videsh Vankorneft Pte. Ltd. to Baa2 from Baa1;
and (4) the foreign and local senior unsecured ratings on ONGC Videsh
Limited and ONGC's MTN program to (P)Baa2 from (P)Baa1.
The outlook on all ratings remains negative.
RATINGS RATIONALE
"Given the increasingly uncertain oil price environment, ONGC's
depleted cash reserves, and government guidelines that constrains
state-owned enterprises' ability to lower dividends,
ONGC's BCA and ratings are materially challenged at the previous
rating level and its credit profile insufficient to remain above India's
Baa2 sovereign rating. The rating outlook is negative in line with
the outlook on India's sovereign rating," says Vikas
Halan, a Moody's Senior Vice President.
"Further, the downgrade reflects our expectation that ONGC's
credit metrics will weaken beyond the tolerance level for its ratings,
if oil prices remain low for a prolonged period," says Halan,
who is also Moody's Lead Analyst for ONGC.
There has been a significant deterioration in oil prices over the last
month, which could persist for most of 2020. However,
the company decided to pay an interim dividend of INR5 per share on 16
March 2020, resulting in cash outflows of INR63 billion, which
has reduced its cash reserves. ONGC had consolidated cash and cash
equivalents of INR67 billion at 30 September 2019.
ONGC's dividend policy is based on the guidelines issued by the
Government of India (Baa2 negative) in May 2016, which requires
all government-owned companies to pay a minimum annual dividend
equal to 5% of their net worth even if they do not have sufficient
profits.
"Despite depleted cash reserves, we expect ONGC to meet is
debt repayment obligations given its access to capital as a state-owned
company. However, its lower cash reserves have diminished
the company's capacity to protect its credit profile from oil price
shocks," says Halan.
ONGC's cash reserves, which provided protection against the
oil price decline in 2016, have been depleting over the last three
years because of high dividends, share buyback in 2019, and
its acquisition of Hindustan Petroleum Corporation Ltd. (HPCL,
Baa2 negative) in 2018.
ONGC's cash and cash equivalents declined to INR67 billion at 30
September 2019 from INR247 billion at 31 March 2016. Over the same
period, ONGC's net borrowings increased to about INR1 trillion
from INR215 billion.
In Moody's base case scenario, the effects from the virus
will persist into the second quarter of 2020, with improving economic
fundamentals in the second half of the year. Under this scenario,
Moody's expects oil prices to average $40-$45
per barrel in 2020, returning to $50-$55 per
barrel in 2021. However, in a downside scenario, where
economic weakness persists longer, oil would average $30-$35
per barrel in 2020 and $35-$40 in 2021.
Moody's expects ONGC's RCF/net debt to decline below 30%
under its base case scenario and below 20% under its downside case
scenario, assuming there are no changes to the company's cost
structure, shareholder returns or investment plans.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The oil & gas sector
has been one of the sectors most significantly affected by the shock given
its sensitivity to demand and oil prices.
More specifically, the weaknesses in ONGC's credit profile
have left it vulnerable to shifts in market sentiment in these unprecedented
operating conditions, and ONGC remains vulnerable to the outbreak
continuing to spread and oil prices remaining weak. Moody's
regards the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
Today's action reflects the impact on ONGC of the breadth and severity
of the oil demand and supply shocks, and the broad deterioration
in credit quality it has triggered.
ONGC Baa2 issuer ratings are primarily driven by its baa2 BCA, which
reflects the company's position as the largest integrated oil and gas
company in India, with significant oil & gas reserves,
production volume and crude distillation capacity.
Moody's assume a high likelihood of extraordinary support,
and a very high dependence on the Indian government for ONGC in times
of need. However, this assumption does not result in any
rating uplift, because the sovereign rating is the same as ONGC's
BCA.
In addition, Moody's support assessment reflects ONGC's
importance as the country's largest integrated oil and gas company,
its strategic role in the development of oil and gas reserves in India,
and the government's strong influence on the company's financial
and business policies.
In terms of environmental, social and governance (ESG) factors,
the rating considers ONGC's exposure to carbon transition risk and close
links to its largest shareholder, the Government of India,
which has a significant influence over the company's financial policy
and business strategy. As of 31 December 2019, the government
owns 62.78% of ONGC's equity and has the ability to appoint
all of its board of directors.
ONGC's cash and cash equivalents of INR67 billion as of 30 September
2019 were inadequate to repay its short term borrowings of about INR350
billion. Given the company's status as a government-owned
company, it maintains strong access to funding markets and will
be able to refinance its short-term borrowings.
The company is also looking to term out some of its borrowings to maintain
a better balance between short-term and long-term borrowings.
However, the government guidelines for state owned companies in
India discourages maintenance of large cash reserves and it is highly
unlikely that ONGC's liquidity profile will improve without appropriate
changes to government guidelines.
While ONGC also maintains substantial investments in marketable securities
such as its investments in Indian Oil Corporation Ltd (Baa2 negative)
and Gail (India) Limited (Baa2 negative) which are valued at about INR140
billion, they are unlikely to be liquidated at current market prices.
In addition ONGC also maintains deposits of INR181 billion in site restoration
fund which can be withdrawn after payment of applicable taxes.
Given the negative outlook, the ratings are unlikely to be upgraded.
The outlook on the ratings could return to stable if Moody's changes
the outlook on the sovereign rating to stable.
The ratings and BCA will be downgraded if Moody's downgrades India's
sovereign rating.
Moody's can downgrade ONGC's BCA if oil prices remain weak
for a prolonged period and the company continues to pursue high shareholder
returns. Downward pressure on ONGC will also arise if the company
embarks on large debt funded acquisitions. Credit metric indicative
of a downgrade include ONGC's RCF/net debt staying below 20%-25%
and EBIT/ Interest staying below 5x-6x.
The methodologies used in this rating were Integrated Oil and Gas Methodology
published in September 2019, and Government-Related Issuers Methodology
published in February 2020. 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 62.78% owned by the Government of India (Baa2 negative).
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
Ian Lewis
Associate Managing Director
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
