Fitch sees no change in OIL rating post royalty math revision

Fitch Ratings today said it does not expect state-owned Oil India's rating to change following revision in how royalties on crude oil produced from onshore fields are calculated.
However, the resulting additional payments will lower the headroom under OIL's 'BBB-' standalone credit assessment, Fitch said in a statement.
The government last week announced that state-owned upstream oil producers must pay state royalties on the gross value of crude oil produced domestically instead of the previous method of using the net price after discounts to state-run refiners.
The new formula applies retrospectively from February 2014, resulting in a back-payment to cover the period up to 2015-16.

As per Fitch estimate, OIL will need to pay a one-time royalty fee of around Rs 1,150 crore, amounting to about a quarter of its projected Ebitda for 2016-17 end.
This, along with with payments for acquisition of a share in Taas Yuriakh and Vankor from Russia's national oil company, Rosneft, is expected to weaken OIL's leverage beyond what is comfortable for its standalone credit assessment.

"However, Fitch believes OIL's leverage will improve in 2017-18 in the absence of large M&A even though the higher royalty payments will reduce the company's netback," the statement said.
Netback is the revenue after all the costs for bringing one unit of oil to the market.

Fitch estimates OIL's royalty charges under the revised formula - and based on the existing subsidy-sharing mechanism between the state and state-owned upstream and downstream companies - to increase by around USD 0.2 per barrel (bbl) at a crude price of around USD 50 per bbl.
This compares with a netback of around USD 33-34 per bbl at that level after discounts and existing statutory levies.
"We also estimate royalty charges to rise by around USD 0.5 per bbl and USD 0.7 per bbl at higher crude oil prices of USD 55 and USD 60 per bbl, respectively, compared with the previous formula," Fitch said.

It said the government's 25 paise per litre increase in kerosene prices on July 1 is not likely to substantially change the subsidy burden for petroleum products if it remains just a one-time hike.
"However, if prices are hiked regularly, this could reduce under-recoveries, as kerosene accounted for over 40 per cent of total petroleum subsidies in 2015-16. Nevertheless, it remains uncertain how the Indian government will approach subsidies at higher crude prices, especially prices above USD 60 per bbl," it added.