Moody's lowers OIL's baseline credit rating to baa3 from baa2

Moody's Investors Service has lowered the state-owned Oil India Limited's baseline credit assessment (BCA) to baa3 from baa2 following the acquisition of an oil and gas block in Russia in 2016 and share buyback in June this year.

"The lowering of the BCA to baa3 from baa2 is driven by our expectation that the company's credit metrics, which have weakened on the back of acquisition and shareholder payments, are unlikely to recover to a level more appropriate for a baa2 BCA," Vikas Halan, Moody's Vice President and Senior Credit Officer said in a report.

OIL acquired stakes in oil and gas fields in Russia for USD1 billion in 2016 and also executed share buybacks of Rs 1527 crore in June 2017. These exercises resulted in an increase in its net borrowings to over Rs 8000 crore as of September 2017, compared to a net cash position in March 2016, Moody's said.

Even though an improvement in oil prices will result in higher cash flows, OIL will continue to generate negative free cash flows as its dividend payments and capital expenditures will remain high.

The company may also need to make further buybacks under the guidelines issued by the government of India for the state-owned companies, it added.

Consequently, Moody's expects OIL's borrowings to remain high over the next 2-3 years, unless the company decides to monetise some of its non-core investments, such as its stake in Indian Oil Corporation Ltd.

"The affirmation of OIL's baa2 issuer rating reflects our expectation of the high likelihood of extraordinary support that results in a one-notch uplift from its baa3 BCA," Halan added.

OIL accounts for about 8 per cent of India's total crude oil (excluding condensate) and natural gas production, along with 8 per cent of its proved crude oil reserves in fiscal 2017.

OIL also benefits from the competitive cost structure of its onshore operations, resulting in high profitability and solid operating cash flow generation. The company also has a robust liquidity profile with cash and cash equivalents, (including investments in liquid mutual funds) of Rs 4,400 crore as of 30 September 2017 against no short-term debt.

"The outlook on the ratings is stable, reflecting the stable outlook of India's sovereign rating. An upgrade of OIL's ratings to baa1 will require an upgrade of India's sovereign rating to baa1," the rating agency said.

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