Oil companies likely to use improved cash flows to expand asset base: S&P

Oil. Photo: Reuters
Indian oil and gas companies are likely to use their improved cash flows from market-linked fuel prices to expand their asset base and enhance operational quality, S&P Global Ratings said on Tuesday.

They are expected to step up investments in upgrading refineries to meet cleaner fuel standards, improve yields and create flexible refinery configurations in product pipeline and gas infrastructure capacities, it said.

"The combination of reform-driven improvements in financial health, lower crude oil prices, and forecasts of mid-single-digit demand growth for petroleum products puts Indian oil companies in a sweet spot to invest in growth," S&P Global Ratings credit analyst Vishal Kulkarni said.

"We expect the fuel-price reforms in India since late 2014 to continue and enhance business and financial prospects for the oil and gas companies. Making fuel prices market linked has improved oil marketing companies' profitability, bolstered cash flows, and lowered their debt."

Oil marketing companies also need additional investments to maintain their dominant market share amid rising competition from private sector companies.

The planned combined capital expenditure (capex) by the three oil marketing companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum, over the next five years is Rs 3.2 lakh crore — a huge jump from the Rs 1.6 lakh crore they invested over the past five years.

"While we don't expect the OMCs to reset their capex to higher levels immediately, their leverage could worsen if they were to elevate their capex plus acquisitions to $10 billion (about Rs 65,000 crore) a year without commensurate contribution to EBITDA," S&P said.

S&P Global Ratings believes the credit profiles of the companies could invariably attain investment-grade levels on their own or after considering government support and intervention due to their relationship with the government and the role they play.

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