Oil and Natural Gas Corporation Limited: Ratings reaffirmed

Oil and Natural Gas Corporation Limited: Ratings reaffirmed

Summary of rating action

Instrument*

Previous Rated Amount (Rs. crore)

Current Rated Amount (Rs. crore)

Rating Action Commercial paper

10,000

10,000

[ICRA]A1+; reaffirmed Non-convertible debentures

12,500

12,500

[ICRA]AAA(Stable); reaffirmed Long-term cash credit limits

4,000

4,500

[ICRA]AAA(Stable); reaffirmed Short-term working capital Limits

1,500

5,000

[ICRA]A1+; reaffirmed Short-term non-fund based limits

8,561

10,160

[ICRA]A1+; reaffirmed Unallocated limits - Short term and long term

10,939

5,340

[ICRA]AAA(Stable)/[ICRA]A1+; reaffirmed Total

47,500

47,500

*Instrument details are provided in Annexure-I

Rationale

For arriving at the ratings, ICRA has considered the consolidated financials of Oil and Natural Gas Corporation Limited (ONGC), along with ONGC Videsh Limited (OVL), Mangalore Refinery and Petrochemicals Limited (MRPL), Hindustan Petroleum Corporation Limited (HPCL) and some of the SPVs undertaking forward integration projects.

The rating reaffirmation takes into account the dominant market position of ONGC in the domestic crude oil and natural gas production business with large proven reserves, a globally competitive cost structure, stable performance of its subsidiaries and its healthy financial position. There has been a significant increase in crude oil prices in FY2022, which has led to a healthy growth in ONGC's operating income. The increase in domestic natural gas prices in the last revision is also a credit positive.

The ratings also take into account the company's excellent financial flexibility arising from its moderate gearing, large liquid investments, sovereign ownership and strategic importance. Crude production has also been declining in the mature fields. However, the volumes for both oil and gas are estimated to increase, going forward, with new fields expected to start production. The growth is likely to come from the KG-98/2 basin, where production ramp-up is expected shortly.

However, ONGC is facing increasing challenges to replace reserves and grow production, and is exposed to geological, technological and execution risks inherent in exploration and production (E&P) activities. In addition, it is exposed to commodity price risk and significant geopolitical risks because of OVL as the latter is present in countries having political instability.

The company's large capital expenditure (capex) plan would entail implementation risks associated with new projects even though reliance on external debt is expected to be limited and is a comfort from a credit perspective. The credit profile of the ONGC Group at a consolidated level remains robust. Additionally, any further large debt-funded acquisition impacting its capital structure and coverage metrics adversely could put pressure on its credit profile.

The Stable outlook on the rating reflects ICRA's opinion of ONGC's strategic importance and expectations that the Maharatna PSU will continue to maintain a healthy financial risk profile owing to its status as the largest oil producer in the country.

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Key rating drivers and their description

Credit strengths

Dominant market position in domestic crude oil and natural gas production business with large proven reserves - Maharatna ONGC is the largest crude oil and natural gas company in India, contributing around 71 per cent to domestic production. The company has explored 19 of the country's 26 sedimentary basins for their hydrocarbon potential via seismic survey and/or drilling, having established eight producing basins till date. These basins include Mumbai offshore, Cambay, Rajasthan, Cauvery, Krishna-Godavari, Assam-Arakan, Upper Assam and Asoknagar-1. With its track record of several decades, ONGC has built significant proven reserves in both the offshore and onshore regions which stood at 571.53 MMTOE as on March 31, 2022.

Access to significant E&P infrastructure; competitive cost structure as reflected in low finding and development (F&D) costs - ONGC owns significant drilling infrastructure, making its operating cost competitive vis-à-vis its global peers. However, in the offshore areas, the company's reliance on third-party agencies has been high. ONGC also has other infrastructure such as work over rigs, offshore logistics vessels, cementing units, logging services units and well stimulation units. With its significant infrastructure and low manpower costs, it has been able to maintain competitive F&D costs.

Strong financial position - ONGC's financial position remains strong owing to its robust profitability (operating profit margin of 16.13% in FY2022) and comfortable debt protection metrics with interest coverage of more than 15 times for FY2022. The company enjoys significant financial flexibility, given its large liquid investments, ability to raise both debt and equity capital from the capital markets at finer rates and the large value of its investments in IOC and GAIL.

Stable performance of overseas subsidiary, OVL- Over the years, OVL has been acquiring participating interests in overseas oil and gas assets and participates either directly or through wholly-owned subsidiaries/joint venture companies in 35 projects in 15 countries. However, the top three investments (Mozambique, Russia and Brazil) drive the bulk of its investments. OVL's total O+OEG production stood at 12.33 MMTOE in FY2022 against 13.04 MMTOE in FY2021. Further, amid the ongoing geo-political issues, the Russian assets were impacted, although normal operations in these are expected to resume shortly.

Significant sovereign ownership and strategic importance - ONGC enjoys significant sovereign ownership with a 58.89% GoI stake as on date and a dominant and strategically important position in the Indian energy sector as the largest domestic producer of crude oil and natural gas. It plays a significant role in fulfilling the socio-political objectives of the GoI in controlling domestic energy prices.

Credit challenges

Increasing challenge to replace reserves and grow production, given high dependence on Mumbai High for bulk of existing production and moderate track record in new discoveries and reserve replacement - A large share of ONGC's production comes from the offshore region for both crude oil and natural gas. While Mumbai High is a key asset for crude oil, the Bassein asset in the western offshore region is the same for natural gas. Of the producing fields, the top 15 fields account for about 80% of the production. Production has also been declining in the mature fields. To arrest this decline and improve the recovery, the company has launched improved oil recovery (IOR) and enhanced oil recovery (EOR) programmes. Going forward, replacing the reserves and growing production while maintaining a favourable cost structure would remain a key challenge for ONGC. OVL is also facing increasing challenges of adding reserves at competitive costs and growing its production and is exposed to geological, technological and execution risks that are inherent in E&P activities. Moreover, it is exposed to significant geopolitical risks because of its presence in some countries with a history of political instability and commodity price risk.

Geological, technological and execution risks inherent in E&P activities, in addition to commodity risks - As an upstream company, ONGC is exposed to geological, technological and execution risks inherent in E&P activities, especially considering the vastly different geographies and geologies that the ONGC Group is exposed to. As bulk of the revenues at a standalone level is derived from the sale of crude oil, ONGC remains exposed to the commodity price risk associated with the same.

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Large capital expenditure plans - ONGC incurs significant capex every year on the exploration, development and purchase of capital assets entailing new project implementation risks.

Environmental and Social Risks

Environmental considerations: ONGC is exposed to the risks of tightening regulations on environment and safety. It also remains exposed to the longer-term risk of the ongoing shift towards a future that is less dependent on fossil fuels. But this is a risk that will play out only over the distant future as India remains heavily dependent on oil and gas imports. However, ONGC is making efforts to increase its presence in renewable projects and has made some collaborations for the same.

Social considerations: The worldwide societal trend towards a shift to less carbon-intensive sources of energy could structurally reduce demand for oil and refined products and weigh on the prices. However, for emerging markets like India, such change in consumer behaviour or any other driver of change is expected to be relatively slow paced. Therefore, while ONGC remains exposed to the aforementioned social risk, it does not materially affect its credit profile as of now.

Liquidity position: Strong

The liquidity position of the company has remained strong, reflected in its strong cash balance and investments in Government bonds and other reputed PSUs. Further, the company maintains a high site restoration fund, which can be utilised by the management, in case of any pressure on liquidity. While the company has an annual planned capex of Rs. 30,000 crore/annum over the medium term, the internal accruals are expected to remain adequate to meet the requirement. The company has been able to raise funds from banks and capital markets at significantly lower interest rates. Additionally, it enjoys strong support from the Government of India.

Rating sensitivities

Positive factors - Not applicable. Negative factors - Pressure on ONGC's long-term rating could arise if there is significant deterioration in the consolidated credit metrics of the ONGC Group.

Analytical approach Analytical Approach Comments Applicable rating methodologies

Corporate Credit Rating Methodology

Rating Methodology for Upstream Oil Companies Parent/Group support

Not Applicable Consolidation/Standalone

For arriving at the ratings, ICRA has considered the consolidated financials of ONGC. List of the companies are enlisted in Annexure-2. Furthermore, ICRA has adjusted the financials to consider the consolidation of ONGC with some of its JVs as well.

About the company

Maharatna ONGC is the largest crude oil and natural gas company in India, contributing around 71 per cent to Indian domestic production. It is also a significant producer of value-added products such as liquefied petroleum gas (LPG), superior kerosene oil (SKO) and naphtha. The GoI is the majority shareholder in ONGC, with a 58.89% equity stake as on September 30, 2022. ONGC set up OVL in 1965 as its fully-owned overseas E&P arm. But given the focus on domestic E&P at that time, OVL remained more or less dormant for nearly three and a half decades. However, this changed since the early 2000's with the issue of acquiring energy security assuming critical importance for the country. Today, OVL has equity stake in 35 projects across 15 countries, of which 14 are producing properties. ONGC also has a 71.63% equity stake in Mangalore Refinery and Petrochemicals Limited (MRPL), a standalone refinery with an installed capacity of 15 million metric tonnes per annum

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(MMTPA) and 54.90% stake in Hindustan Petroleum Corporation Limited (HPCL) which operates two refineries with a total capacity of 17.8 MMTPA. Besides, ONGC is also a co-promoter of many companies.

Key financial indicators (audited) ONGC Consolidated FY2021 FY2022 9MFY2023 Operating income

360,463

531,762

520,762 PAT

21,360

49,294

27,076 OPBDIT/OI

16.32%

16.13%

10.47% PAT/OI

5.92%

9.27%

5.19% Total outside liabilities/Tangible net worth (times)

1.2

1.1

- Total debt/OPBDIT (times)

2.2

1.4

- Interest coverage (times)

11.2

15.1

9.4

PAT: Profit after tax; OPBDIT: Operating profit before depreciation, interest, taxes and amortisation; Amount in Rs crore

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years Instrument Current rating (FY2023) Chronology of rating history for the past 3 years Type Amount rated (Rs. crore) Amount outstanding as of March 31, 2022 (Rs. crore) Date & rating in FY2023 Date & rating in FY2022 Date & rating in FY2021 Date & rating in FY2020 Mar 24, 2023 Dec 27, 2022 Dec 28, 2021 Sep 07, 2021 Jul 23, 2021 Jul 24, 2020 May 05, 2020 Jul 29, 2019 1 Commercial paper

Short term

10,000

--

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+ 2 Non-convertible debentures

Long term

12,500

4,140

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

-

- 3 Cash credit limits

Long term

4,500

--

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

[ICRA]AAA (Stable)

-

-

-

- 4 Working capital limits

Short term

5,000

--

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

-

-

-

- 5 Non-fund based limits

Short term

10,160

--

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

[ICRA]A1+

-

-

-

- 6 Unallocated limits

Long term/Short term

5,340

--

[ICRA]AAA (Stable)/

[ICRA]A1+

[ICRA]AAA (Stable)/

[ICRA]A1+

[ICRA]AAA (Stable)/

[ICRA]A1+

[ICRA]AAA (Stable)/

[ICRA]A1+

-

-

-

-

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Complexity level of the rated instruments

Instrument Complexity Indicator Commercial paper

Very Simple Non-convertible debentures

Very Simple Long-term cash credit limits

Simple Short-term working capital limits

Simple Short-term non-fund based limits

Very Simple Unallocated limits - Short term and long term

Not Applicable

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated. It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are available on ICRA's website: Click Here

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Annexure I: Instrument details ISIN Instrument Name Date of Issuance Coupon Rate Maturity Amount Rated (Rs. crore) Current Rating and Outlook INE213A08016 NCD

Jul 31, 2020

5.25%

Apr 11, 2025

500

[ICRA]AAA(Stable) INE213A08024 NCD

Aug 11, 2020

6.40%

Apr 11, 2031

1000

[ICRA]AAA(Stable) INE213A08032 NCD

Oct 21, 2020

4.64%

Nov 21, 2023

1140

[ICRA]AAA(Stable) INE213A08040 NCD

Jan 11, 2021

4.50%

Feb 09, 2024

1500

[ICRA]AAA(Stable) NA* NCD

NA

NA

NA

8360

[ICRA]AAA(Stable) NA* CP

NA

NA

NA

10000

[ICRA]A1+ NA Cash Credit

-

-

-

4,500

[ICRA]AAA(Stable) NA Short-term Working capital Limits

-

-

-

5,000

[ICRA]A1+ NA Short-term Non-Fund Based Limits

-

-

-

10,160

[ICRA]A1+ NA Unallocated Limits

-

-

-

5,340

[ICRA]AAA(Stable)/[ICRA]A1+

Source: Company

* - Unplaced

Please click here to view details of lender-wise facilities rated by ICRA

Annexure II: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach ONGC Videsh Limited

100.00%

Full Consolidation Mangalore Refinery & Petrochemicals Limited

80.94%

Full Consolidation Hindustan Petroleum Corporation Limited

54.90%

Full Consolidation ONGC Nile Ganga B.V.

100.00%

Full Consolidation ONGC Campos Ltda.

100.00%

Full Consolidation ONGC Nile Ganga (San Cristobal) B.V.

100.00%

Full Consolidation ONGC Amazon Alaknanda Limited

100.00%

Full Consolidation ONGC Narmada Limited

100.00%

Full Consolidation ONGC (BTC) Limited

100.00%

Full Consolidation Carabobo One AB

100.00%

Full Consolidation Petro Carabobo Ganga B.V.

100.00%

Full Consolidation Imperial Energy Limited

100.00%

Full Consolidation Imperial Energy Tomsk Limited

100.00%

Full Consolidation Imperial Energy (Cyprus) Limited

100.00%

Full Consolidation Imperial Energy Nord Limited

100.00%

Full Consolidation Biancus Holdings Limited

100.00%

Full Consolidation Redcliffe Holdings Limited

100.00%

Full Consolidation Imperial Frac Services (Cyprus) Limited

100.00%

Full Consolidation San Agio Investments Limited

100.00%

Full Consolidation LLC Sibinterneft

55.90%

Full Consolidation LLC llianceneftegaz

100.00%

Full Consolidation

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Company Name Ownership Consolidation Approach LLC Nord Imperial

100.00%

Full Consolidation LLC Rus Imperial Group

100.00%

Full Consolidation LLC Imperial Frac Services

100.00%

Full Consolidation Beas Rovuma Energy Mozambique Ltd.

60.00%

Full Consolidation ONGC Videsh Atlantic Inc.

100.00%

Full Consolidation ONGC Videsh Singapore Pte. Ltd.

100.00%

Full Consolidation ONGC Videsh Vankorneft Pte. Ltd.

100.00%

Full Consolidation Indus East Mediterranean Exploration Ltd.

100.00%

Full Consolidation ONGC Videsh Rovuma Ltd., India

100.00%

Full Consolidation HPCL Biofuels Ltd.

100.00%

Full Consolidation Prize Petroleum Company Ltd.#

100.00%

Full Consolidation HPCL Middle East FZCO

100.00%

Full Consolidation HPCL Rajasthan Refinery Ltd.*

74.00%

Full Consolidation HPCL LNG Ltd. (erstwhile HPCL Shapoorji Energy Private Ltd.)

100.00%

Full Consolidation Petronet MHB Ltd (PMHBL) **

77.44%

Full Consolidation Mangalore SEZ Ltd (MSEZ)

26.78%

Equity Method ONGC Petro additions Ltd. (OPaL)

49.36%

Equity Method ONGC Tripura Power Company Ltd. (OTPC)

50.00%

Equity Method ONGC Teri Biotech Ltd. (OTBL)

40.98%

Equity Method Dahej SEZ Limited (DSEZ)

50.00%

Equity Method Shell MRPL Aviation Fuels & Services Limited (SMASL)

50.00%

Equity Method North East Transmission Company Ltd. (NETC) (through OTPC)

13.00%

Equity Method Mangalore STP Limited (through MSEZ)

18.75%

Equity Method MSEZ Power Ltd (through MSEZ)

26.78%

Equity Method Adani Petronet Dahej Port Pvt Ltd (APPPL) (through PLL)

3.25%

Equity Method India LNG Transport Co Pvt. Ltd(through PLL)

3.25%

Equity Method HPCL Mittal Pipelines Ltd. (through HPCL)

48.99%

Equity Method Dust-A-Side Hincol Limited

25.00%

Equity Method ONGC Mittal Energy Limited

49.98%

Equity Method Mansarovar Energy Colombia Limited

50.00%

Equity Method Himalya Energy Syria BV

50.00%

Equity Method SUDD Petroleum Operating Company

24.13%

Equity Method Hindustan Colas Pvt. Ltd.

50.00%

Equity Method HPCL-Mittal Energy Ltd.

48.99%

Equity Method South Asia LPG Co. Pvt. Ltd.

50.00%

Equity Method Bhagyanagar Gas Ltd.

48.73%

Equity Method Petronet India Ltd.

16.00%

Equity Method HPOIL Gas Pvt Ltd.

50.00%

Equity Method Godavari Gas Pvt Ltd.

26.00%

Equity Method Aavantika Gas Ltd.

49.99%

Equity Method Mumbai Aviation Fuel Farm Facilities Pvt. Ltd.

25.00%

Equity Method Ratnagiri Refinery & Petrochemical Ltd.

25.00%

Equity Method IHB Pvt. Ltd.

25.00%

Equity Method Indradhanush Gas Grid Ltd.

20.00%

Equity Method

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Company Name Ownership Consolidation Approach Petronet LNG Limited (PLL)

12.50%

Equity Method Pawan Hans Limited. (PHL)

49.00%

Equity Method Rohini Heliport Limited

49.00%

Equity Method Petro Carabobo S.A.

11.00%

Equity Method Carabobo Ingeniería Y Construcciones, S.A.

37.93%

Equity Method Petrolera Indovenezolana S.A.

40.00%

Equity Method South-East Asia Gas Pipeline Company Limited

8.35%

Equity Method Tamba B.V.

27.00%

Equity Method JSC Vankorneft

26.00%

Equity Method Moz LNG1 Holding Company Ltd.

16.00%

Equity Method Falcon Oil & Gas BV

40.00%

Equity Method Bharat Energy Office LLC

20.00%

Equity Method GSPL India Gasnet Ltd.

11.00%

Equity Method GSPL India Transco Ltd.

11.00%

Equity Method

Source: ONGC annual report FY2022

# Figures based on Consolidated Financial Statements of the Company.

*HPCL Rajasthan Refinery Ltd. is considered as subsidiary as per Sec 2(87) of Companies Act, 2013.

** Petronet MHB Ltd. has been reclassified from joint venture to a subsidiary during the year 2017-18 as the company holds 49.996% ownership interest and its subsidary HPCL holds 49.996% ownership interest.

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ANALYST CONTACTS

Sabyasachi Majumdar

+91 124 4454 5304

sabyasachi@icraindia.com

Prashant Vasisht

+91 12 4454 5322

Prashant.vasisht@icraindia.com

Ankit Jain

+91 12 4454 5865

ankit.jain@icraindia.com

Himani Sanghvi

+91 79 42027 1547

himani.sanghvi@icraindia.com

RELATIONSHIP CONTACT

Jayanta Chatterjee

+91 80 4332 6401

jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani

Tel: +91 124 4545 860

communications@icraindia.com

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

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ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA's current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

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