Moody’s assigns Baa1 rating to ONGC’s proposed senior unsecured notes

Moody’s Investors Service on Wednesday said it has assigned a ‘Baa1’ rating to the proposed senior unsecured notes to be issued by Oil and Natural Gas Corporation (ONGC) under its $2 billion medium-term note program. The outlook on the rating is negative, Moody’s said in a statement.

“The notes’ rating is in line with ONGC’s Baa1 issuer rating, which is in turn primarily driven by its standalone credit profile as captured by the company’s baa1 Baseline Credit Assessment (BCA),” says Vikas Halan, a Moody’s Senior vice president.

The rating reflects ONGC’s position as the largest integrated oil and gas company in India with significant reserves, production and crude distillation capacity as also its substantial operating cash flow generation capacity. It also factors the firm’s solid credit metrics that have improved but remain constrained by volatile — although range-bound — oil prices and high shareholder returns.

At the same time, Moody’s expected that ONGC will not be asked to share fuel subsidies, as long as oil prices stay below USD 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, in times of need. However, this assumption of government support has not resulted in any rating uplift, as the sovereign’s rating is below ONGC’s BCA,” it said.

Given ONGC’s strong credit metrics and status as a government-owned company, it enjoys strong access to debt capital markets and has substantial financial flexibility through equity stakes in Indian Oil Corp and GAIL India, which together were valued at about Rs 21,000 crore as on November 14, 2019.

Moody’s ratings for ONGC are based on the full consolidation of Hindustan Petroleum Corp Ltd (HPCL) which includes the full consolidation of HPCL’s 49 per cent-owned joint venture, HPCL-Mittal Energy. The government owns 62.98 per cent of ONGC’s equity and has the ability to appoint all of its board of directors.

“The negative outlook on ONGC is in line with the negative outlook on the Government of India’s rating and reflects Moody’s view that ONGC’s ratings will be downgraded if India’s sovereign rating is downgraded to Baa3 from Baa2,” Moody’s said. “Given the negative outlook, an upgrade is unlikely. The outlook will return to stable if the outlook on the sovereign rating moves to stable.”

ONGC’s ratings may experience downward pressure if the sovereign rating is downgraded, ONGC increases its pace of acquisitions such that it results in higher business risk and a deterioration in its credit metrics, or oil prices decline on a sustained basis resulting in weak cash flow generation and a deterioration in ONGC’s credit metrics, it added.