Fitch Ratings affirms 'BBB-' rating on ONGC with a outlook stable

Fitch Ratings has affirmed Oil and Natural Gas Corporation's (ONGC) rating at 'BBB-' with stable outlook.

"ONGC's ratings are constrained by the ratings of the state of India (BBB-/Stable), its majority owner," Fitch said.

"We maintain ONGC's Standalone Credit Profile (SCP) at 'bbb+', which reflects ONGC's scale as the largest oil and gas (O&G) producer in India, its significant reserves and production, and its vertically integrated and geographically diversified business model."

The SCP also considers Fitch's expectations that ONGC's credit metrics will improve over the financial years ending March 2024 (FY24) to FY27.

ONGC's credit strength, however, is counterbalanced by its long track record of declining domestic oil and gas production, which we expect to reverse over the next few years, though there is less certainty on its ability to sustain organic production growth through the cycle in the longer term.

"We believe ONGC's status, ownership and control by the sovereign is 'strong' due to the state's majority ownership and board appointments.

"ONGC receives subsidies and other government grants, although these are limited, given its strong credit profile. We expect the state to extend support to ONGC, if needed, due to its importance in India's energy security as the largest national upstream company and third-largest refiner and marketer of petroleum products," it said.

ONGC accounts for 68 per cent of domestic oil and gas production and a default would significantly affect its operations and investments, hampering India's energy security.

"We expect ONGC's domestic oil and gas production to increase by low single-digit percentages over FY24-FY27. This will be supported by ramp-up at its KG-DWN-98/2 deep-water offshore field, and efforts to arrest output declines at mature oil fields.

"ONGC's oil production over FY11-FY23 fell by a compounded annual rate of 2 per cent and that for gas declined by 1 per cent, which we believe is not consistent with that of higher rated peers," it said.

Fitch expected ONGC's upstream EBITDA over FY24-FY27 to improve, driven by an increase in oil price assumptions, given lower uncertainty on demand destruction related to energy transition risks.

"We also estimate higher mid-to-long term gas prices under India's new market-linked gas pricing regime for fields allocated to ONGC on a nomination basis, based on 10 per cent of the Indian crude basket, with prices restricted within a range of USD 4-6.5 per British thermal unit," it added.

The rating agency expected ONGC's consolidated capex to rise to Rs 60,300 crore by FY27 from Rs 49,000 crore in FY23 as its core capex remains high and green investments increase.

This includes Rs 30,000-32,500 crore of domestic upstream capex to accelerate development and exploratory drilling, for capital projects, and for completion of the KG-DWN-98/2 project on India's eastern coast, and around Rs 20,000 crore of annual capex at ONGC's various subsidiaries.

"The rising capex also reflects ONGC's increasing green capex, as it tries to achieve net zero Scope 1 and 2 emissions by 2038, through various initiatives including expanding its renewable energy portfolio, petrochemicals operations, and building green ammonia and carbon capture plants. Nonetheless, we expect ONGC's cash flow from operations to be sufficient to meet its capex needs over FY24-FY27," it added.