Moody's downgrades ONGC to Baa2 with negative outlook

Moody's Investors Service on Tuesday downgraded Oil and Natural Gas Corporation Ltd's (ONGC's) local and foreign currency issuer ratings to Baa2 from Baa1.

The outlook on all ratings remains negative.

"Given the increasingly uncertain oil price environment, ONGC's depleted cash reserves and government guidelines that constrains state-owned enterprises' ability to lower dividends, ONGC's BCA and ratings are materially challenged at the previous rating level and its credit profile insufficient to remain above India's Baa2 sovereign rating," said Moody's Senior Vice President Vikas Halan.

The rating outlook is negative in line with the outlook on India's sovereign rating, he said.

"Further, the downgrade reflects our expectation that ONGC's credit metrics will weaken beyond the tolerance level for its ratings, if oil prices remain low for a prolonged period," said Halan.

There has been a significant deterioration in oil prices over the last month which could persist for most of 2020. However, the company decided to pay an interim dividend of Rs 5 per share on March 16, resulting in cash outflows of Rs 6,300 crore which has reduced its cash reserves.

ONGC had consolidated cash and cash equivalents of Rs 6,700 crore on September 30 last year.

Moody's said the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

The combined credit effects of these developments are unprecedented. The oil and gas sector has been one of the sectors most significantly affected by the shock given its sensitivity to demand and oil prices.