New Delhi: Moody’s Investors Service today 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.
