'Sanctions on Russia may result in impairment losses for ONGC, others'

Indian companies' value of investments in Russia's oil and gas fields could be impaired as import bans and international sanctions may constraint future cash flow generating capacity, Moody's Investors Service said Thursday.

Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Ltd (BPCL) have invested in upstream oil and gas assets in Russia.

"Import bans and international sanctions on Russia may constrain the future cash flow generating capacity of these assets and lead to impairment losses for the companies," the rating agency said in a note.

While multinationals like BP and Shell have announced withdrawal from Russia after its invasion of Ukraine, Indian companies have not announced an exit from their Russian investments.

This, Moody's said, will lead to a limited impairment in the value of investments immediately, especially under the current oil price environment.

Indian firms have invested USD 16 billion in Russian assets such as the Sakhalin-1 oil and gas field in the far east.

Moody's said they may face hurdles in receiving dividend payments but the impact on earnings will not be significant.

"If an increasing number of Russian banks are excluded from the main financial messaging SWIFT system, Indian companies might not be able to receive future dividends from their upstream investments in Russia.

"However, even in a situation where the companies cannot access these cash flows, the impact on their financial profiles will not be significant," it said.

For most companies, dividend income from the Russian investments constitutes less than 5-6 per cent of consolidated EBITDA.

The US ban on the import of Russian oil and other international sanctions on Russia may constrain the future cash flow generating capacity of these assets. Such developments would lower the value of the Indian companies' investments and will likely result in impairment losses.

For IOC and BPCL, the Russian assets accounted for less than 5 per cent of their total asset bases as of December 31, 2021. The two firms receive earnings contributions from these assets in the form of dividends.

For ONGC, its Russian assets accounted for around 12 per cent and 20 per cent of its production volumes and proved reserves, respectively, for FY2021.

For OIL, these proportions stood at around 31 per cent and 24 per cent, respectively.

For ONGC, the Russian assets contributed to around 11 per cent of its consolidated EBITDA for FY2021. Around 8 per cent of this contribution came from the Sakhalin-1 project while the balance was in the form of dividends by CJSC Vankorneft.

"Even if ONGC loses its entire earnings contribution from the Russian assets, the impact can be accommodated into ONGC's credit profile," Moody's said.

A similar situation for IOC and BPCL would not have any material impact on their financial profiles as dividend income from the Russian investments accounted for just around 2-4 per cent of their consolidated EBITDA for the fiscal ended March 2021 (FY2021).