Moody's shortlists ONGC, Oil India for downgrade

Weaker industry fundamentals triggers move

Rating agency Moody’s has put Oil and Natural Gas Corporation (ONGC), ONGC Videsh and Oil India up for review for a possible downgrade, even as the petroleum sector continued to grapple with weaker fundamentals on sharp fall in oil prices. The drop in oil prices has put oil exploration and production (E&P) companies and integrated oil companies the world over in a tight spot.

According to a Moody’s statement, the review for downgrade considers the fact that weaker industry fundamentals have the potential to warrant rating changes. While this review focuses on companies rated in the range from A1 to B3, Moody’s is also re-evaluating higher- and lower-rated companies in the context of industry conditions.

The ratings placed for downgrade are ONGC’s local currency rating at Baa1 and foreign currency rating at Baa2; ONGC Videsh’s unsecured bonds at Baa2; and Oil India’s issuer rating and unsecured bonds at Baa2.

The higher rated companies are somewhat more resilient to low oil prices and Moody's recently downgraded many of the lower rated companies. Lower oil prices will further weaken the cash flows of E&P companies and the upstream portion of integrated oil & gas companies.

This will cause further deterioration in financial ratios, including deeper negative free cash flow. Most companies are unable to internally fund sustaining levels of capital spending at current market prices.

Moody's said the current industry conditions also reduce the value of assets offered for sale and have made accessing capital markets more expensive for some companies and unavailable for others. While integrated oil & gas companies benefit from the profitability of their downstream operations, the upstream operations represent a much larger part of the capital employed and cash flow for most of these companies.

Oil prices have deteriorated substantially in the past few weeks and have reached nominal price lows not seen in more than a decade. The agency adjusted its view downward for the likely range of prices. “We see a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further,” Moody's said.

Even with modest recovery from current prices, producing companies, drillers and service companies that support them will experience rising financial stress with much lower cash flows, it added.