State-owned ONGC's operating cash flows will rise over the next 12-24 months due to higher production volumes, stable earnings from domestic gas production, and the removal of a windfall tax on crude oil, S&P Global Ratings said on Friday. "This should help the company maintain its good credit quality, despite its investment plans and healthy shareholder distributions," the rating agency said in a statement.

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ONGC is India's largest oil and gas producer. "We estimate that ONGC's domestic production volumes will rise by 8-10 per cent for fiscal 2024 (year ending March 31). The increase is attributable to the start of oil production from its block in the Krishna Godavari basin later this year," S&P said. At the same time, production at the Sakhalin-1 project of ONGC Videsh Ltd (OVL) should also recover to fiscal 2022 levels, after a period of disruptions because of geopolitical issues.

Oil and Natural Gas Corporation produced 42.8 million tonnes of oil equivalent (mmtoe) in fiscal 2023 compared with 43.4 mmtoe in fiscal 2022. OVL produced a total of 10.2 mmtoe in fiscal 2023, down from 12.3 mmtoe in fiscal 2022. "Growth in production volumes will outstrip the impact of moderating oil prices on ONGC's earnings, in our view. We estimate the company's EBITDA at Rs 1-1.1 lakh crore over fiscals 2024 and 2025, compared with about Rs 98,700 crore in fiscal 2023," it said.

S&P Global Ratings forecasts that the Brent crude oil price will be USD 90 per barrel for the rest of 2023 and USD 85 per barrel for 2024 and 2025. "In our view, the average realization on domestic gas production will be USD 6.5 per metric million British thermal unit (mmbtu) in fiscal 2024, compared with USD 7.5 per mmbtu in fiscal 2023. The realization rate is in line with India's new gas price formula, calculated at 10 per cent of the average price of the crude basket in the preceding month, but capped at USD 6.5 per mmbtu," it said.

S&P said ONGC is expected to continue to direct 55-60 per cent of its operating cash flows for capital investments over the next 12-24 months. In fiscal 2024, the company will spend about Rs 32,000 crore at the standalone level and about Rs 14,000 crore at its subsidiary, Hindustan Petroleum Corp Ltd.

"We estimate ONGC will invest about Rs 47,500 crore in total over the year. Investments on exploration and production in existing onshore and offshore fields are critical for ONGC because production volumes have declined consistently since fiscal 2020," it said. Under its projections, ONGC has a sufficient cushion to undertake additional investments and maintain healthy shareholder distributions. The company is likely to step up its investments in renewables and diversify its petrochemicals business starting fiscal 2025. It plans to spend about Rs 1 lakh crore to achieve its 10-gigawatt green energy goal by 2030.

Currently, the company has a renewable energy capacity of 340 megawatts, and it has committed to net-zero for scope 1 and 2 emissions by 2038. The company paid out about Rs 17,600 crore in dividends in fiscal 2023, higher than Rs 12,900 crore in fiscal 2022. "Given the healthy earnings outlook, we expect the company to maintain its stated financial policy of returning 40-50 per cent of net income to shareholders over the next 12-24 months."

"We estimate the company's ratio of funds from operations to debt to be above 60 per cent in fiscal 2024 compared with about 55 per cent in fiscal 2023," S&P said. "However, given sizable investments to achieve its sustainability goals, deleveraging could slow down from now on. This is likely to restrict upside to the company's 'bbb+' standalone credit profile assessment."
S&P rating on ONGC remains constrained by the sovereign credit rating on India (BBB-, with stable outlook).

 

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