Moody’s downgrades ONGC rating to Baa2

Our Bureau Mumbai | Updated on March 25, 2020 Published on March 25, 2020

File Photo   -  Reuters

Ratings agency Moody's has downgraded Oil and Natural Gas Corporation Ltd.'s (ONGC) local and foreign currency issuer ratings to Baa2 from Baa1. The outlook on all ratings on ONGC remains negative, Moody's has said.

Giving a rational of its ratings, Moody's said, "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," said 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.

According to Moody's, 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 ₹5 per share on 16 March 2020, resulting in cash outflows of ₹63 billion, which has reduced its cash reserves. ONGC had consolidated cash and cash equivalents of ₹67 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 per cent 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," sayid 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 ₹67 billion at 30 September 2019 from ₹247 billion at 31 March 2016. Over the same period, ONGC's net borrowings increased to about ₹1 trillion from ₹215 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 per cent under its base case scenario and below 20 per cent under its downside case scenario, assuming there are no changes to the company's cost structure, shareholder returns or investment plans.

The stocks of ONGC were trading 2.96 per cent lower at ₹60.65 at 11.10 am on the BSE.

Published on March 25, 2020

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.