ONGC, OIL earnings to decline, credit metrics weaken due to lower oil prices: Moody’s

New Delhi: State-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd are probably to see earnings decline and credit metrics weaken due to fall in oil costs, Moody’s Investors Service stated on Thursday.

ONGC and OIL get charges equal to these prevalent within the worldwide markets. Oil costs within the worldwide markets final month slumped to a two-decade low of USD 18 per barrel earlier than rebounding by some measure.

In addition to the decline in oil costs, ONGC and OIL additionally face a discount in government-regulated costs for the pure fuel 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 stated in a report on Asian nationwide oil and fuel corporations.

Although ONGC is an built-in oil and fuel firm, its downstream phase contributed solely about 30 per cent of its consolidated EBITDA for the yr ended March 31, 2019 (fiscal 2019).

Crude oil, which accounted for about half of its whole manufacturing, contributed practically 80 per cent of its upstream income 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 stated.

ONGC’s credit metrics, it stated, will weaken however nonetheless stay acceptable for its baa2 score.

“However, if prices remain depressed for longer than we expect, its credit metrics will weaken beyond our downgrade threshold,” it stated.

Although it’s probably that ONGC shall be in a position to scale back its capital spending, the corporate is but to announce any such reductions. As a government-owned firm, will probably be difficult for ONGC to meaningfully scale back its dividends, the score company stated.

“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 stated, including it had already downgraded ONGC to the identical degree because the sovereign score on India (Baa2 unfavorable).

A sovereign score downgrade will end in a downgrade of the corporate’s score.

“ONGC also remains exposed to a possible consolidation in the oil and gas sector in India and may be asked by the government to acquire other oil and gas companies,” it added.

For OIL, crude oil accounted for about 60 per cent of its whole manufacturing and about 80 per cent of its whole income in FY19.

“Based on our price assumptions, we expect OIL’s EBITDA for FY21 will be about 55 per cent lower as compared with FY20 and its credit metrics will be weaker than the tolerance level,” it stated, including OIL’s credit metrics will get better to ranges acceptable for its baa3 score by fiscal 2022.

In phrases of liquidity, OIL has no materials near-term debt maturity and thus could have enough liquidity, offered it generates sufficient money movement to fund its capital spending and shareholder returns.

Moody’s stated authorities help will proceed to underpin Asian nationwide oil corporations’ credit high quality by means of the market downturn.

Sharply lower oil costs will damage the earnings and pressure their credit metrics.

“Should their credit metrics weaken materially and result in a decline in their Baseline Credit Assessment (BCA), we expect that the degree of rating movement for NOCs will be low,” it stated.

The score company stated corporations are anticipated to embark on austerity measures to preserve money.

“National oil companies (NOCs) will likely scale back capital spending and investments to preserve cash to tide over the low price environment. Some NOCs will be able to reduce dividends, while others will find it more challenging to do so given their government’s dependence on oil and gas sector revenue, especially as governments announce further economic stimulus packages,” it stated.

ONGC had introduced an interim dividend in March.

“Most Asian NOCs will have adequate internal cash sources to fund planned capital spending and dividend payments in the low oil price environment. We expect the NOCs will continue to have strong access to capital given their strategic importance to their respective governments,” it added. 

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