S&P rates ONGC 'BBB-' with negative outlook

Standard & Poor's Ratings Services assigned its 'BBB-' long-term corporate credit rating to ONGC Ltd. The outlook on the company is negative, said a press release issued by S&P.

The proposed senior unsecured notes to be issued by ONGC Videsh, a wholly owned subsidiary of ONGC and guaranteed by ONGC have also been assigned 'BBB-' rating.

"The sovereign credit rating on India constrains the rating on ONGC because of the potential for extraordinary negative government intervention in case of severe sovereign fiscal or external stress," said S&P's credit analyst Andrew Wong.

According to S&P the company's business risk profile as "strong" and its financial risk profile as "modest,"

ONGC's stand-alone credit profile (SACP) reflects the company's strong market position, particularly in the domestic exploration and production (E&P) sector, its stable production, and conservative financial management. These factors result in good profitability and low leverage. However, ONGC's contribution to the funding of the government's oil subsidy tempers the above strengths, S&P said.

"We believe ONGC has a good competitive position, mostly due to its solid domestic market position and its large size," Wong said. The company is one of the largest E&P companies in Asia, producing about 1.2 million barrels of oil equivalent per day.

However, ONGC faces geographic-concentration risk, with India accounting for about 80% of the company's oil and about 90% of gas production. Within India, offshore fields in the Mumbai basin account for about two-thirds of the company's Indian oil and gas production.

In addition, ONGC's international business is exposed to countries such as Sudan and Syria, which have higher operating risks than India, said S&P. The company also has counterparty credit risk relating to its customers, the government-owned oil marketing companies in India.

S&P may lower the rating on ONGC if it lowers the sovereign credit rating for India. “We do not expect to lower the rating on ONGC on account of the company's own operating or financial performance. This is because a lower rating would require ONGC's SACP to fall by more than five notches, which we consider highly unlikely. We may revise the outlook to stable if we take a similar action on the sovereign rating,'' the release said.

Shares of ONGC were down 0.35% at Rs 327.25 on the BSE.