S&P assigns ‘BBB-‘ rating to ONGC on Sovereign risk

Standard & Poor’s Ratings has given a negative outlook on India’s biggest oil and gas producer, ONGC.

Though Oil and Natural Gas Corp. Ltd would have qualified for a higher rating than ‘BBB-‘ based on financials alone, its close links to the Indian government creates a risk factor, S&P said.

“The sovereign credit rating on India constrains the rating on ONGC because of the potential for extraordinary negative government intervention in case of severe sovereign fiscal or external stress,” said Standard & Poor’s credit analyst Andrew Wong.

Though ONGC’s business risk profile can be considered “strong” and its financial risk profile as “modest”, the possibility of Indian government intervention dampens its prospects. Its strong market position in the domestic exploration and production (E&P) sector, its stable production, and conservative financial management ensure good profitability and low leverage, it said.

However, “ONGC is exposed to negative intervention by the Indian government. Our SACP already factors in the company’s ongoing contribution to the funding of the government’s oil subsidies. The share is determined in an ad-hoc manner without a formal regulatory, contractual, or legislative mechanism,” S&P added.

The rating was given in the context of ONGC’s foreign acquisitions arm, ONGC Videsh Ltd, trying to raise funds by issuing senior unsecured notes from the debt market.

ONGC accounts for nearly 70% of India’s oil and gas production, or 1.2 million barrels of oil equivalent per day.

However, ONGC faces geographic-concentration risk, with India accounting for about 80% of the company’s oil and about 90% of gas production. Within India, offshore fields in the Mumbai basin account for about two-thirds of the company’s Indian oil and gas production. In addition, ONGC’s international business is exposed to countries such as Sudan and Syria, which have higher operating risks than India, S&P said.

It also noted that its customers are mainly government-owned oil companies, which increases “counterparty credit risk”.