Oil price recovery poses downgrade risk to OIL, ONGC: Moody's

New Delhi: Moody's Investors Service Thursday said ratings of state-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) may come under pressure if oil prices fall more sharply than expected and companies carry on with their growth and expansion plans aggressively.

"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.

Expecting a slow recovery in oil prices over the next several years, the report said the drop in oil prices 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, Moody's is recalibrating the ratings of many energy companies to reflect this industry shift," the rating agency said in a statement.

It confirmed ratings of state-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd 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".

"The ratings could also come under further pressure if the companies pursue a more aggressive ? either organic or inorganic - growth strategy, and/or higher shareholder returns," it said.

The drop in energy prices and corresponding capital market concerns will also 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 natural gas, the ability to reduce lifting cost and operating expenditure, the flexibility to reduce capital expenditure without affecting production levels, reserve replenishment needs and the expected deterioration of the companies' financial profiles relative to its 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. 

"Despite Moody's expectation of a weakening in the credit

metrics for these companies, they will remain appropriately positioned for their ratings. Consequently, Moody's confirmed the ratings," the statement said, adding the outlooks on the national oil companies are stable.

Moody's said the confirmation of ONGC's Baa1 domestic currency issuer rating and Baa2 foreign currency issuer rating reflect the low impact of declining oil prices on the company's cash flows, as it benefits from a lowering of fuel subsidies, a reduction in taxes, and improved contributions from its downstream business.

"While the company's cash flow from operations will fall and its credit metrics will weaken, ONGC's financial metrics will remain within the tolerance levels for its current ratings," Moody's said.

It noted ONGC's strong liquidity position with cash and cash equivalents of Rs 16,000 crore as of March 31, 2015 against debt of Rs 6,300 crore maturing over the next 12 months.

"In addition, the company has access to other sources of liquidity on its balance sheet," it said.

Moody's said the confirmation of Oil India Ltd's Baa2 issuer and senior unsecured ratings reflects the low impact of falling oil prices on the company's cash flows, as it benefits from lower fuel subsidies and a fall in costs linked to crude oil prices.

While the company's cash flow from operations will fall and its credit metrics will weaken, its financial metrics will remain within the tolerance levels for its current ratings.

The company's liquidity position is strong, with cash and cash equivalents of Rs 8,800 crore as of March 31, 2015 with no debt maturing over the next 3 years and Rs 3,800 crore of negative free cash flows.

Moody's said OIL can tap into other sources of liquidity on its balance sheet.

The rating agency says Baa rating reflect moderate credit risk and as such may possess certain speculative characteristics.