ONGC's improved earnings outlook for 12-18 months to support deleveraging

Rating agency Standard and Poor's on Tuesday said state-owned Oil and Natural Gas Corporation Ltd's (ONGC) improved earnings outlook for the next 12-18 months will support deleveraging.

"We expect the India-based company to benefit from favorable crude oil prices over FY22 (year ending March 31, 2022)," S&P said in a statement.

"It is rated at "BBB-/Stable". Our 'BBB-' issuer credit rating on ONGC remains constrained by the sovereign credit rating on India (BBB-/Stable/A-3)," the agency added.

The rating agency has revised Brent crude oil price expectations for the rest of 2021 to $65 per barrel from $60 per barrel earlier. This forecast is significantly higher than about $43 per barrel that ONGC realised in FY21.

The higher crude prices, along with a modest 5-7 per cent growth in the company's production volume, should push its EBITDA up by 20-25 per cent to about Rs 85,000 crore during FY22.

"We estimate the company's debt-to-EBITDA ratio will strengthen to about 1.6x during this period, from about 1.9x in FY21," agency added.

ONGC will maintain prudent capital investments over FY22, largely funded with operating cash flows. The company showed good flexibility in scaling back investments over FY21 amid challenges due to the Covid-19 pandemic. Its capital expenditure fell to about Rs 43,000 crore in FY21 from close to Rs 55,000 crore in the previous year.

"While we estimate ONGC will spend around Rs 45,000 crore in FY22, a prolonged second wave of Covid-19 infections in India could result in lower spending," S&P said.

"The cushion in ONGC's stand-alone credit profile (SACP) assessment of 'bbb+' has increased. The company's improved earnings and flexibility in capital spending should push its ratio of funds from operations to debt toward 50 per cent over the next 12-18 months, from about 45 per cent in FY21. This is well above our threshold of 40 per cent for a lower SACP," the agency said.