Moody's affirms ONGC's Baa1 ratings with stable outlook

Moody's Investors Service on Tuesday affirmed Oil and Natural Gas Corporation Ltd's (ONGC) Baa1 local and foreign currency issuer ratings besides Baa1 ratings on the senior unsecured bonds guaranteed by ONGC and issued by ONGC Videsh Limited and ONGC Videsh Vankorneft Pte Ltd.

The outlook on all the ratings above is stable, it said.

"The ratings affirmation reflects our expectation that ONGC's credit metrics, which have improved over the last 12 months because of the high net realised oil price, will remain appropriate for its ratings," said Vikas Halan, Moody's Senior Vice President.

ONGC's consolidated credit metrics -- as measured by retained cash flow to net debt -- improved to 51 per cent for the fiscal year ended 31 March as compared to 40 per cent for fiscal 2018. The improvement was largely driven by better earnings, which in turn was because of higher realised crude oil prices.

"Based on an average net realised oil price assumption of 65 dollars per barrel, we expect that the company's earnings for fiscal 2020 will be broadly in line with fiscal 2019," added Halan.

This should result in ONGC generating positive free cash flow -- despite the company's high level of capital spending and shareholder returns -- which Moody's expects the company will use to reduce its borrowings. As such, ONGC's credit metrics will likely remain appropriate for its ratings category over the next 12 to 18 months.

Given ONGC's strong credit metrics and status as a government-owned company, said Moody's, it maintains strong access to debt funding markets and can refinance its remaining short-term borrowings.

Furthermore, ONGC maintains substantial financial flexibility as seen by its stakes in Indian Oil Corporation Ltd (Baa2 stable) and Gail India Limited (Baa2 stable) which are valued at about Rs 22,600 crore. The government owns a 64.25 per cent direct stake in ONGC and appoints all the directors on the company's board.

A ratings upgrade to A3 will require ONGC to improve its liquidity profile, maintain strong credit metrics, and also for Moody's to upgrade India's sovereign rating to at least Baa1.