US sanctions on Iran oil are credit negative for Indian refiners: Moody's

Moody's investor service expects US sanctions on Iran to be credit negative for Indian refiners with the estimated total decline in earnings for the Indian refiners to be about $400-$500 million. The move is also expected to increase refiners' exposure to oil price volatility.

"Assuming a complete cessation of imports of crude oil from Iran and a $3 per barrel negative impact on earnings because of that, on the barrels being substituted, we estimate the total decline in earnings for the Indian refiners to be about $400-$500 million, against combined EBITDA of about $10 billion for the three largest state-owned Indian refiners in the fiscal year ended March 2018. Thus we expect the impact on the refiners’ credit metrics to be limited," Moody's said in its note.

The report added that the sanction will increase supplier concentration for Indian refiners, which in turn makes it credit negative. “India is one of the largest buyers of Iranian crude, accounting for about 30% of total crude exports from Iran during April to August 2018. Over the same period, Indian refineries, which import over 80% of their crude feedstock from overseas, sourced about 14% of their imports from Iran," the report pointed out. Moody’s expects Indian refiners will either have to significantly reduce or completely stop importing crude oil from Iran over the next month or so. This is expected to force Indian refiners to increase dependence on the remaining Middle Eastern crude oil suppliers, mainly Saudi Arabia and Iraq, aside from Iran.

Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), Reliance Industries, HPCL-Mittal Energy Limited and Mangalore Refinery and Petrochemicals Ltd (MRPL) are those which imported Iranian crude oil. Of these, most with the exception of MRPL, source about 5%-10% of their feedstock requirement from Iran.

MRPL, on the other hand, sourced 38% of its 12.52 million MT of crude oil imports in the fiscal year 2018 from Iran. MRPL is a 71.63%-owned subsidiary of Oil and Natural Gas Corporation (ONGC). "The overall impact on ONGC, however, will be minimal as MRPL only accounted for about 7% of ONGC's consolidated EBITDA for the fiscal year ended March 2018," Moody’s added.