ONGC, OIL ratings may come under pressure: Moody's

Drop in oil prices and weak natural gas prices have caused a fundamental change in energy industry

Ratings of state-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) might come under pressure if oil prices fall more than expected and companies carry on with their growth and expansion plans aggressively, said Moody’s Investors Service. “Oil prices have dropped substantially, reflecting continued oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line,” it said.

The drop and weak natural gas prices have caused a fundamental change in the energy industry, and the sector’s ability to generate cash flow has fallen substantially. “Moody’s believes this situation will persist over several years. As a result, it is recalibrating the ratings of many energy companies to reflect this industry shift,” it stated.

It confirmed the ratings of ONGC and OIL but warned that the “ratings could come under pressure if oil prices fall more sharply than Moody’s expects and the companies cannot reduce their capex and dividends correspondingly... also if the companies pursue a more aggressive — either organic or inorganic — growth strategy and/or higher shareholder returns”.

The drop in energy prices and corresponding capital market concerns will raise financing costs and increase refinancing risks for exploration and production companies.

However, the impact of the drop in oil prices and low natural gas prices will vary substantially from issuer to issuer, depending on their production mix between oil and gas, the ability to reduce lifting cost and operating expenditure, flexibility to reduce capital expenditure without affecting production, reserve replenishment needs and the expected deterioration of financial profiles relative to ratings.  

National oil companies “went into the downturn with relatively low leverage and continue to maintain strong liquidity levels and access to the capital markets", it said.

Last week, JP Morgan in its global E&P Capex Survey said upstream exploration and production capex was likely to fall 23 per cent year on year globally in 2016. “We remain cautious on the oil services sector, with more adjustments to the 2016/17 consensus likely. However, some relatively safe patches of value do exist,” the survey stated.

It reported ONGC was said to have cut its capex by 26 per cent from $6,157 million to $4,553 m. However, D K Sarraf, the company's chairman, had said in a media interaction that at a time when companies world over were rationalising investments, ONGC was taking a contrarian view, to continue investing upstream. "We are taking advantage of a lower cost environment to drive exploration.  Planned capital expenditure for the next fiscal is about Rs 30,000 crore but at lower cost of services this time. Investment in the Krishna-Godavari basin will be over and above this figure," he'd added.