Moody’s assigns provisional Baa1 with stable outlook to ONGC

Singapore: Moody’s Investors Service has assigned a provisional Baa1 senior unsecured rating to the proposed two billion dollars (about Rs 14,400 crore) medium-term note (MTN) program established by Oil and Natural Gas Corporation (ONGC) and its subsidiary ONGC Videsh Limited.

An MTN program is an uncommitted facility and any drawdown under this document is subject to funding requirements. ONGC is among select few corporates and India’s first oil and gas public sector integrated energy major to set it up.

The notes will be guaranteed by ONGC if they are issued by ONGC Videsh or any other subsidiary of ONGC. Moody’s said the outlook for the rating is stable.

“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 (BCA),” said Moody’s Senior Vice President Vikas Halan.

ONGC’s Baa1 BCA reflects its position as the largest integrated oil and gas company in India with significant reserves, production, and crude distillation capacity; substantial operating cash flow generation capacity; and 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 dollars per barrel.

ONGC’s issuer rating also incorporates the company’s high likelihood of extraordinary support from and very high dependence on the government in times of need. However, this assumption of government support does not result in any rating 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 which also includes the full consolidation of HPCL’s 49 percent owned joint venture HPCL-Mittal Energy Ltd.

ONGC’s consolidated credit metrics — as measured by retained cash flow to net debt — improved to 51 percent for the fiscal year ended March 2019 compared to 40 percent 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 dollars per barrel, we expect that the company’s earnings for fiscal 2020 will be broadly in line with that recorded in fiscal 2019,” added Halan.

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 rating category over the next 12 to 18 months.