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.

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