Gas price reduction will lower earnings for ONGC, Oil India: Moody’s

The recently-announced 25% reduction in domestic natural gas prices to 1.79 dollars per million British thermal units (MMBtu) from 2.39 dollars per MMBtu on a gross calorific value basis is credit negative for upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) as it will lower their revenue from gas sales, according to Moody's Investors Service.

These companies are already grappling with low oil prices and a further reduction in natural gas prices will exacerbate their earnings decline. However, said Moody's, gas sales account for 18 to 19% of the companies' upstream revenues.

After three consecutive price reductions in 12 months, India's gas prices are at their lowest level since November 2014.

"We estimate ONGC's revenue and EBITDA will decline by ₹1,500 crore to 1,600 crore because of lower gas prices. The decline equates to around 0.4% of the company's expected consolidated revenue and around 3.5% of consolidated EBITDA for fiscal 2021," said Moody's.

However, ONGC's credit metrics have sufficient capacity to withstand the decline in gas prices and remain supportive of its baa3 baseline credit assessment and Baa3 ratings.

In comparison, reduction in gas prices will lower OIL's revenue and EBITDA by around ₹220 crore. The decline equates to around 2.5% of the company's expected consolidated revenue and around 8% of consolidated EBITDA for the fiscal year ending March 31, 2021.

"We expect OIL's credit metrics in fiscal 2021 to remain weakly positioned relative to its baa3 baseline credit assessment, but to improve and come back within its ratings thresholds by fiscal 2022 as oil prices start to recover," said Moody's.

Both companies are government-related issuers and their ratings incorporate the expectation of extraordinary support from the Indian government, it added. Consequently, their ratings can be maintained at the current level (assuming no change in the sovereign rating) as long as their baseline credit assessments do not fall below ba3.