Record operating profit will help ONGC cut borrowings: Moody's

The highest ever operating profit posted by the state-run Oil and Natural Gas Corporation (ONGC) in the first quarter will help the company reduce borrowings, US rating agency Moody's said on Monday.Last week, ONGC reported a 58.32 per cent jump in earnings before interest, tax, depreciation and amortization (EBITDA) for the April-June quarter at Rs 13,893 crore, as compared to the Rs 8,775 crore profit before tax in the same period last year.It also declared a 58.15 per cent jump in net profit for the quarter at Rs 6,143.88 crore on the back of higher crude prices and improved performance."The increase in EBITDA was largely driven by higher crude oil prices, as well as the depreciation of the Indian rupee," Moody's Investors Service said in a report.Moody's noted that the government has decided against asking ONGC to share the cost of any fuel subsidies and said the decision is credit positive because it provides ONGC with cash flow to reduce its borrowings."If it had done so, such a request could have partly negated the impact of the increase in oil prices," the American agency said.ONGC increased its borrowings by about Rs 25,000 crore in January 2018, when it acquired a 51.11 per cent stake in state-run refiner Hindustan Petroleum Corporation for Rs 36,915 crore."If oil prices stay above $70 per barrel for the remainder of the year and the government refrains from asking ONGC to share the costs of any fuel subsidies, we expect ONGC to generate a consolidated free cash flow of more than Rs 20,000 crore after likely capital spending of Rs 30,000 crore and dividend payments of Rs 9,500 crore."The company could reduce part of its acquisition debt by using this free cash flow," Moody's said.High levels of free cash flow will improve ONGC's financial flexibility, especially at a time when the company is unlikely to reduce its borrowings by selling its 13.77 per cent stake in state-run Indian Oil Corporation (IOC), given that the share prices of IOC have fallen by about 25 per cent since September 1, 2017, it added.ONGC's 13.77 per cent stake in IOC is currently valued at Rs 22,500 crore.However, the report also said the government could ask ONGC to share fuel subsidies in the next few quarters, or alternatively look for higher dividends."Any such move by the government would constrain ONGC's free cash flow and debt reduction, which will be credit negative," it said.Assuming an average oil price for the remainder of the year between $45 and $65 per barrel, Moody's expects ONGC "to maintain retained cash flow/net debt above 30 per cent".Debt reduction from free cash flow generation due to high oil prices, and the absence of subsidy sharing, will provide the company with a buffer to absorb future declines in oil prices, it said.With ONGC only reporting standalone financial results, its consolidated EBITDA, which includes the results of overseas arm ONGC Videsh Ltd, will also benefit from the increase in oil prices, the report added.

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