"We expect ONGC's EBITDA to improve by at least US$2bn each year on average from fiscal 2015 once India implements the gas price increase," said Standard & Poor's credit analyst Andrew Wong.
India-based Oil and Natural Gas Corp. Ltd. (ONGC) is likely to strengthen its cash flow and profitability from the next fiscal year, exceeding the earlier expectations of Standard & Poor's Ratings Services. The credit rating agency bases its view on a recent hike in domestic natural gas prices and ONGC's latest acquisition activity.
"We expect ONGC's EBITDA to improve by at least US$2.0 billion each year on average from fiscal 2015 [ended March 31, 2015] once India implements the gas price increase," said Standard & Poor's credit analyst Andrew Wong. "Our 'BBB-' rating and negative outlook on the company remain unchanged."
Standard & Poor's bases its EBITDA forecast on its current assumptions for oil and gas production, oil prices, and ONGC's contribution to the government's oil subsidies. On June 27, 2013, the Indian government announced an increase in domestic natural gas prices to US$8.4 per million British thermal units (mmbtu) from US$4.2 per mmbtu, starting April 2014.
We now believe ONGC's acquisition investments over 2014-2016 could be lower than we originally forecast. Our view reflects the company's failure to acquire a US$5 billion investment in the Kashagan Field in Kazakhstan, which we previously included in our forecasts. On July 2, 2013, the government of Kazakhstan announced its intention to use its pre-emption right to acquire ConocoPhillips' 8.4% stake in the field. Nevertheless, we still anticipate that ONGC's investment requirements will remain high.
"We expect ONGC to continue to pursue overseas investments to improve the country's fuel security. The increase in gas prices is also likely to encourage higher investments to boost domestic oil and gas production," said Mr. Wong.
Recently, ONGC Videsh Ltd., a wholly owned subsidiary of ONGC, and Oil India Ltd. entered an agreement to acquire Videocon Mozambique Rovuma 1 Ltd., which holds a 10% participating interest in the Rovuma Area 1 Offshore Block in Mozambique. We expect ONGC to hold a 60% stake in this investment. The transaction is still subject to certain government and regulatory approvals in India and Mozambique, as well as pre-emption rights.
"We believe ONGC's financial metrics will be stronger than we previously expected over the next three years, given the company's improving cash flows and its acquisition profile," said Mr. Wong. "We now estimate that ONGC's ratio of funds from operations to total debt will remain above 80%. The company's financial position should remain very strong for the rating despite its aggressive growth plans."
Nevertheless, ONGC continues to face high geographic concentration risk in India. Its international businesses also have higher operating risks than in India, in our view. In addition, the company remains exposed to the country risks of India, given its "very important" role for and "very strong" link to the government, as our criteria define those terms.
In our opinion, ONGC is sensitive to negative intervention by the Indian government. Our 'a' stand-alone credit profile for ONGC already factors in the company's ongoing contribution to the funding of the government's oil subsidies, which were higher than we expected for fiscal 2013.
In an extraordinary situation of severe sovereign stress, we believe the government could significantly increase ONGC's share of the oil-subsidy burden. ONGC also has counterparty credit risk relating to its customers: the government-owned oil marketing companies in India.
India-based Oil and Natural Gas Corp. Ltd. (ONGC) is likely to strengthen its cash flow and profitability from the next fiscal year, exceeding the earlier expectations of Standard & Poor's Ratings Services. The credit rating agency bases its view on a recent hike in domestic natural gas prices and ONGC's latest acquisition activity."We expect ONGC's EBITDA to improve by at least US$2.0 billion each year on average from fiscal 2015 [ended March 31, 2015] once India implements the gas price increase," said Standard & Poor's credit analyst Andrew Wong. "Our 'BBB-' rating and negative outlook on the company remain unchanged."
Standard & Poor's bases its EBITDA forecast on its current assumptions for oil and gas production, oil prices, and ONGC's contribution to the government's oil subsidies. On June 27, 2013, the Indian government announced an increase in domestic natural gas prices to US$8.4 per million British thermal units (mmbtu) from US$4.2 per mmbtu, starting April 2014.
We now believe ONGC's acquisition investments over 2014-2016 could be lower than we originally forecast. Our view reflects the company's failure to acquire a US$5 billion investment in the Kashagan Field in Kazakhstan, which we previously included in our forecasts. On July 2, 2013, the government of Kazakhstan announced its intention to use its pre-emption right to acquire ConocoPhillips' 8.4% stake in the field. Nevertheless, we still anticipate that ONGC's investment requirements will remain high.
"We expect ONGC to continue to pursue overseas investments to improve the country's fuel security. The increase in gas prices is also likely to encourage higher investments to boost domestic oil and gas production," said Mr. Wong.
Recently, ONGC Videsh Ltd., a wholly owned subsidiary of ONGC, and Oil India Ltd. entered an agreement to acquire Videocon Mozambique Rovuma 1 Ltd., which holds a 10% participating interest in the Rovuma Area 1 Offshore Block in Mozambique. We expect ONGC to hold a 60% stake in this investment. The transaction is still subject to certain government and regulatory approvals in India and Mozambique, as well as pre-emption rights.
"We believe ONGC's financial metrics will be stronger than we previously expected over the next three years, given the company's improving cash flows and its acquisition profile," said Mr. Wong. "We now estimate that ONGC's ratio of funds from operations to total debt will remain above 80%. The company's financial position should remain very strong for the rating despite its aggressive growth plans."
Nevertheless, ONGC continues to face high geographic concentration risk in India. Its international businesses also have higher operating risks than in India, in our view. In addition, the company remains exposed to the country risks of India, given its "very important" role for and "very strong" link to the government, as our criteria define those terms.
In our opinion, ONGC is sensitive to negative intervention by the Indian government. Our 'a' stand-alone credit profile for ONGC already factors in the company's ongoing contribution to the funding of the government's oil subsidies, which were higher than we expected for fiscal 2013.
In an extraordinary situation of severe sovereign stress, we believe the government could significantly increase ONGC's share of the oil-subsidy burden. ONGC also has counterparty credit risk relating to its customers: the government-owned oil marketing companies in India.
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