Moody's affirms ONGC's stable ratings following HPCL buy

Mumbai: Rating agency Moody's on Tuesday affirmed the ratings for state-run ONGC as 'stable' following the oil major's recent acquisition of majority shareholding in Hindustan Petroleum Corporation (HPCL).

The transaction remains subject to requisite approvals from the shareholders of ONGC. ONGC has acquired 51.11 per cent equity stake in HPCL from the centre for a consideration of Rs 36,915 crore to be paid in cash by January 31, this year.

"Moody's Investors Service, affirmed Oil and Natural Gas Corporation Ltd's (ONGC) 'Baa1' local and foreign currency issuer ratings, and the 'Baa1' ratings on the senior unsecured bonds issued by ONGC Videsh Ltd and ONGC Videsh Vankorneft Pte Ltd, both guaranteed by ONGC," the rating agency said.

"The outlook on all ratings is stable," it added.

ONGC's 'Baa1' issuer ratings are primarily driven by its standalone credit profile. Moody's noted that ratings reflects ONGC's position as the only integrated oil and gas company in India with significant reserves, production and crude distillation capacity, post the acquisition.

Besides, it also incorporates substantial operating cash flow generation capacity as well as weakened but still appropriate credit metrics for its ratings following the HPCL acquisition.

Further, Moody's expects that the company will not be asked to share fuel subsidies as long as the oil prices stay below USD 60-65 per barrel.

"The rating outlook is stable reflecting Moody's expectation that the company will lower its borrowings through sale of stake in IOC and GAIL," the agency said.

"Further, the stable outlook also incorporates our expectation of benign oil price environment and that the company's growth plan will continue to be executed within the tolerance level of its current ratings," it added.

However, the agency noted that likelihood of a ratings upgrade for ONGC in the next 12 -18 months remains low given the high leverage. Moody's said that ONGC may finance HPCL equity stake will be funded by up to Rs 25,000 crore of incremental borrowings, with the balance being cash on hand.

"The payment of acquisition price will result in ONGC's net borrowings increasing by Rs 36,915 crore, irrespective of the mix of debt and cash used for such payment," it said.

Accordingly, post-acquisition, ONGC's proforma net borrowings for the fiscal year ending March 2018 will increase to Rs 1,26,500 crore as against Rs 47,200 crore without the acquisition.

It can be noted, post-acquisition the ONGC board had approved fresh debt raising of Rs 35,000 crore.

"ONGC's proforma credit metrics for fiscal 2018 will also weaken with retained cash flow/net debt declining to 28 per cent from 68 per cent without the acquisition," the agency said.