ONGC’s Aggressive investments to stall deleveraging: S&P
Oil and Natural Gas Corporation (ONGC) Limited is poised to throttle back on its deleveraging efforts over the next 12-24 months, diminishing the wiggle room for the state-owned entity’s standalone credit profile of ‘bbb+’, according to S&P Global Ratings’ announcement.
The heightened investment trajectory at ONGC is anticipated to decelerate its deleveraging momentum over the coming 1-2 years, thus encroaching upon the headroom for the company’s standalone creditworthiness, noted S&P Global Ratings.
S&P Global Ratings highlighted that ONGC’s fiscal performance for the year ending March 31, 2024, fell in line with expectations. Despite a marginal 2-3% decrease in the company’s domestic oil and gas production volumes, coupled with reduced realizations in fiscal 2024, the EBITDA surged to Rs 1.1 lakh crore from Rs 93,600 crore in fiscal 2023.
The augmented EBITDA is ascribed to the robust performance of downstream subsidiaries, namely Mangalore Refinery and Petrochemicals Ltd (MRPL) and Hindustan Petroleum Corp Ltd (HPCL), which collectively contributed approximately 30% to the group’s EBITDA during the fiscal year. S&P anticipates ONGC’s EBITDA to hover around Rs 1 lakh crore throughout fiscal years 2025 and 2026.
ONGC’s streamlined operations are expected to bolster earnings resilience. The gradual uptick in production volumes over fiscal years 2025 and FY2026 is projected as the company ramps up oil and gas production from its block in the Krishna Godavari (KG) basin in India.
“We anticipate a 2-5% growth in output from the group’s international assets, held through ONGC Videsh Ltd (OVL), during this period,” stated S&P.
The heightened output is anticipated to cushion the impact of moderating oil prices, based on S&P Global Ratings’ assumption of Brent crude oil prices at USD 85 per barrel for the remainder of 2024 and USD 80 per barrel for 2025 and 2026.
“Our base case also assumes an average realization of USD 9.5 per metric million British thermal unit (mmBtu) for the company’s domestic gas production over the next two years. This is considering the mix of output from nomination fields and difficult acreages, alongside India’s administered gas price formula,” affirmed the rating agency.
S&P forecasted that ONGC’s annual capital expenditure would escalate to Rs 57,000-58,000 crore annually over the next 12-24 months, up from about Rs 52,000 crore in fiscal 2024.
Out of this, the bulk of the expenditure, approximately Rs 33,000-35,000 crore annually, is expected to be directed towards mitigating declining output from its matured fields in India. The remaining funds will be allocated to its downstream subsidiaries, MRPL and HPCL, to bolster refining and petrochemical capacities.
“ONGC’s planned capital investments are poised to absorb about 60% of the company’s operating cash flow. This, coupled with ONGC’s articulated financial policy on shareholder distributions, will leave minimal headroom for the company to undertake sizable additional investments, in our assessment,” stated S&P.
“We anticipate ONGC’s ratio of funds from operations (FFO)-to-debt to hover around 45-55% in fiscals 2025 and 2026, compared to about 55% in fiscal 2024, assuming the acquisition of ONGC Petro additions Ltd (OPaL) is completed in fiscal 2025. This leaves limited headroom relative to our downside trigger of 40% FFO-to-debt for the ‘bbb+’ rating,” S&P underscored. S&P reiterated that its rating on ONGC (BBB-/Stable) remains tethered to the sovereign credit rating on India (BBB-/Stable/A-3).
