A step-up in investments at Oil and Natural Gas Corp (ONGC) will slow down its deleveraging over the next 12-24 months, eroding headroom for the state-owned firm’s ‘bbb+’ standalone credit profile, S&P Global Ratings said on Monday. Stating that ONGC’s financial results for the fiscal year ended on March 31, 2024, were in line with expectations, S&P said despite a decline of 2-3% in the company’s domestic oil and gas production volumes and lower realizations in fiscal 2024, EBITDA grew to INR 1.1 lakh crore from INR 93,600 crore in fiscal 2023. “We attribute the higher EBITDA to the strong performance of downstream subsidiaries – Mangalore Refinery and Petrochemicals Ltd (MRPL) and Hindustan Petroleum Corp Ltd (HPCL), which together accounted for about 30% of the group’s EBITDA during the year. We forecast ONGC’s EBITDA will remain at about INR 1 lakh crore over fiscal years 2025 and 2026,” it said.
ONGC’s integrated operations will support earnings resilience.
The firm’s production volumes should rise gradually over fiscal years 2025 (April 2024 to March 2025) and FY2026 as the company scales up oil and gas production from its block in the Krishna Godavari (KG) basin in India.
“We expect output from the group’s international assets, held through ONGC Videsh Ltd (OVL), to grow by 2-5% during this period,” S&P said.
The higher output should mitigate the impact of moderating oil prices based on S&P Global Ratings’ Brent crude oil price assumption of USD 85 per barrel for the rest of 2024 and USD 80 per barrel for 2025 and 2026.
“Our base case also assumes the average realization on the company’s domestic gas production will be USD 9.5 per metric million British thermal unit (mmBtu) for the next two years. This is given the mix of output from nomination fields and difficult acreages, and India’s administered gas price formula,” the rating agency said.
It forecast ONGC’s annual capital expenditure will increase to INR 57,000-58,000 crore annually over the next 12-24 months, from about INR 52,000 crore in fiscal 2024 (April 2023 to March 2024).
Of this, the company is likely to spend INR 33,000-35,000 crore annually to primarily arrest declining output from its matured fields in India. The balance will be spent at its downstream subsidiaries, MRPL and HPCL, to enhance refining and petrochemical capacities.
“ONGC’s planned capital investments are likely to consume about 60% of the company’s operating cash flow. This, and ONGC’s stated financial policy on shareholder distributions, will leave limited headroom for the company to undertake sizable additional investments, in our view.
“We expect ONGC’s ratio of funds from operations (FFO)-to-debt to remain at 45-55% in fiscals 2025 and 2026, compared with about 55% in fiscal 2024, assuming the acquisition of ONGC Petro additions Ltd (OPaL) will be completed in fiscal 2025. This leaves limited headroom to our downside trigger of 40% FFO-to-debt for the ‘bbb+’ rating,” it said.
S&P said its rating on ONGC (BBB-/Stable) remains constrained by the sovereign credit rating on India (BBB-/Stable/A-3).
