BackMoody’s affirms ratings of IOCL, BPCL and HPCL; outlooks stable
Increased purchase of Russian crude oil- which is trading at a discount to Brent crude - has also benefitted the Indian refiners, says Moody’s
PremiumNEW DELHI : Moody’s Investors Service on Monday affirmed the ratings of India’s three state-owned oil refining and marketing companies -- Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL).
It added that the outlooks on the ratings for all three-oil refining and marketing companies remain stable.
“The rating affirmation reflects our views that the operating performance of the state-owned refining and marketing companies will continue to improve as lower crude oil prices will reduce marketing losses and moderate working capital requirements. It also incorporates our expectation that the government will continue to remain supportive and compensate the oil marketing companies for their past losses," said Sweta Patodia, a Moody’s Assistant Vice President and Analyst.
“The stable outlook reflects our view that the credit metrics of the state-owned refining and marketing companies will normalize and be within our rating thresholds by March 2024," added Patodia.
According to the rating agency, Brent crude oil prices have fallen 17% to average around $85 per barrel (/bbl) since October 2022, compared with an average price of $105/bbl for the six months ended 30 September 2022. The profitability of the oil marketing companies (OMCs) has thus increased as retail selling prices of gasoline and gasoil have remain unchanged during the period.
“Increased purchase of Russian crude oil- which is trading at a discount to Brent crude - has also benefitted the Indian refiners. Before the conflict, Russian crude accounted for less than 2% of the total crude oil consumption for the Indian refiners, but this has since increased to around 15%-20%," it added.
Moody’s expects this trend to continue over the next 12-18 months and benefit the Indian refiners.
At the same time, refining margins will likely remain buoyant given strong demand in Asia and Europe. Moody’s assumes regional refining margins to average around $4/barrel (bbl)-$6/bbl over the next 12-18 months.
On 1 February, the Central government allocated Rs. 300 billion ($3.7 billion) as capital support for the oil marketing sector. This followed the government’s one-off grant of Rs. 220 billion, received in January 2023, to cover the OMCs‘ losses on the sale of domestic liquefied petroleum gas.
Although the timing of the disbursement and the capital support mechanism remain unknown at this time, this development is credit positive and will further support the OMCs‘ cash flows and debt reduction.
These government support measures remain in line with Moody’s expectation. They also reinforce the rating agency’s view that the oil marketing sector continues to be strategically important to the government from an energy security standpoint and that the government will not allow these companies to incur sustained losses for an indefinite period.
“Net realized prices for transportation fuel in India have remained unchanged since April 2022 even though crude oil and international fuel prices surged. This led to the three state-owned OMCs incurring significant marketing losses for the six months ended 30 September 2022. At the same time, their borrowings increased as they had to fund the EBITDA losses with debt while high crude oil prices also lifted working capital requirements," it added.
Consequently, the credit metrics of the three companies will remain weak for the fiscal year ending March 2023 (fiscal 2023).
However, Moody’s expects the OMCs‘ earnings will continue to improve over the next 12-18 months so long as crude oil and net realized prices for gasoline and gasoil remain at or near current levels. Lower crude oil prices will also moderate working capital requirements. These factors will result in an improvement in credit metrics such that they are within the OMCs’ rating thresholds by March 2024.
“All three companies – IOCL, BPCL and HPCL - maintain a low cash balance relative to their short-term borrowings, resulting in a weak liquidity position. The companies‘ existing cash balances, along with their expected cash flow from operations, will remain insufficient to cover their capital spending, dividend payments and debt maturing over the next 12 months," it added.
However, all three entities have strong access to domestic and international funding markets owing to their status as government-owned/linked companies.
IOCL’s and BPCL’s ratings incorporate a one-notch uplift given Moody’s expectation of a high likelihood of extraordinary support from the government when needed, and the companies‘ very high level of dependence on the government.
“HPCL’s rating incorporates a one-notch uplift based on the rating agency’s expectation of extraordinary support from the Indian government through HPCL’s parent, Oil and Natural Gas Corporation Ltd. (Baa3 stable), when needed," it added.
Moody’s support assessment reflects the companies‘ vital role in India’s oil and gas sector, given their leading market positions in the country’s refining and marketing sector. It also reflects the government’s significant control over the companies’ business strategy through its ability to appoint all their board of directors and its majority ownership in the three entities.
“The ratings of IOCL, BPCL, and HPCL continue to reflect the companies‘ long operating track record as well as their exposure to the highly cyclical refining and marketing sector and the uncertain regulatory environment in India, which have weakened their credit metrics despite high refining margins," it added.
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