New Delhi: State-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd are likely to see earnings decline and credit metrics weaken due to fall in oil prices, Moody’s Investors Service said on Thursday.
ONGC and OIL get rates equivalent to those prevalent in the international markets. Oil prices in the international markets last month slumped to a two-decade low of USD 18 per barrel before rebounding by some measure.
In addition to the decline in oil prices, ONGC and OIL also face a reduction in government-regulated prices for the natural gas they produce.
We expect ONGC’s earnings to decline and its credit metrics to weaken because of lower oil prices over the next 12-18 months, Moody’s said in a report on Asian national oil and gas companies.
Although ONGC is an integrated oil and gas company, its downstream segment contributed only about 30 per cent of its consolidated EBITDA for the year ended March 31, 2019 (fiscal 2019). Crude oil, which accounted for about half of its total production, contributed nearly 80 per cent of its upstream revenue in FY19.
In addition to the decline in oil prices, ONGC also faces a decline in natural gas selling price. The natural gas selling price in India is regulated by the government of India which has revised the price of natural gas with effect from April 1, 2020, to USD 2.39 per million British thermal units (btu) from USD 3.23 per million btu, Moody’s said.
ONGC’s credit metrics, it said, will weaken but still remain appropriate for its baa2 rating. However, if prices remain depressed for longer than we expect, its credit metrics will weaken beyond our downgrade threshold, it said.
Although it is likely that ONGC will be able to reduce its capital spending, the company is yet to announce any such reductions. As a government-owned company, it will be challenging for ONGC to meaningfully reduce its dividends, the rating agency said.
“In terms of liquidity, ONGC has insufficient cash to address its near-term debt maturities. However, given that the company is majority-owned by the government, we expect it to be able to refinance its upcoming debt maturities through its access to Indian banks,” it said, adding it had already downgraded ONGC to the same level as the sovereign rating on India (Baa2 negative).