Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank loan facilities of Oil India Ltd (OIL). 

 

The ratings reflect the strong business risk profile of OIL, being the second largest fully integrated national oil and gas company in India with a strong foothold in the north-eastern region. While the company initially started off as an exploration and production (E&P) company, over the years it has gradually diversified its presence across the entire hydrocarbon value chain. Along with its presence in the domestic markets, OIL diversified in the international markets with exploratory rights in seven countries.

 

Furthermore, its overall credit risk profile is supported by the strategic importance the company holds to the Government of India.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of OIL and its subsidiaries/associates. These subsidiaries/associates are strategically important to OIL in diversifying its presence across the entire hydrocarbon value chain, thereby reducing its exposure to the inherent E&P-related business risks.

 

The ratings also factor in the support OIL receives from the government, by virtue of the latter holding a majority shareholding.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance of OIL to the government of India: OIL is strategically important to the government, as the latter has and will continue to hold a majority stake (56.66% as of December 2023) in the former. The oil and gas sector remains a critical sector to the government as it is one of the largest contributors to the exchequer. OIL contributed to around 10% of India’s crude oil production during fiscal 2023 and is the second-largest national oil company in the E&P business of crude oil and natural gas, transportation of crude oil, and production of liquefied petroleum gas. As the largest player in the north-east region, it plays a crucial role in the implementation of the government’s policies in the oil and gas sector, with added presence across various business segments. OIL will remain strategically important to the government and the latter is expected to continue providing the required managerial and financial support to it. To further highlight the importance of OIL, the company was awarded the Maharatna status in August 2023.

 

• Presence across the hydrocarbon value chain: While OIL initially started off as an E&P company, it has gradually diversified its presence across the entire hydrocarbon value chain. OIL directly or indirectly has presence in refining, petrochemicals, oil and gas transportation, city gas distribution, renewable energy and green energy initiatives through various subsidiaries, associates and joint ventures. Furthermore, the company expanded its reach in the international markets, wherein it currently has participating interest in oil/gas blocks in seven countries.

 

• Comfortable operating performance: Continued capital expenditure (capex) undertaken for E&P operations ensured stability in the volumes of oil and gas extracted by OIL, despite a natural decline with aging of wells observed in the industry. Also, the rise seen in both crude as well as natural gas prices has improved profitability from the E&P segment in fiscal 2023 and the first half of fiscal 2024. Over the medium term, profitability from crude oil E&P operations are expected to continue to remain healthy, with the expectation that crude prices could be range-bound at USD 75-80 per barrel (bbl), compared to OIL’s producing cost of USD 32-34/bbl. Similar healthy profitability is expected from the natural gas E&P operations, with recovery seen in gas prices.

 

OIL has also strategically invested in Numaligarh Refinery Ltd (NRL; ‘CRISIL AAA/Stable/CRISIL A1+’), with the aim of diversifying its presence in the oil refining segment. NRL’s operating performance has remained healthy, supported by high gross refining margin. This is contributed by the 50% excise duty exemption the company is entitled to by virtue of government incentives since its inception. NRL’s refinery is also amongst the most efficient refineries in India having a high distillate yield and energy efficiency along with Nelson Complexity Index of 9.20.

 

OIL also operates in varied business segments such as oil and gas transportation, petrochemicals, city gas distribution, renewable energy and green energy initiatives, which contribute to less than 10% of its revenue.

 

• Healthy financial risk profile: The debt protection metrics were strong, with interest coverage and net cash accrual to total debt ratios of 18.75 times and 0.53 time, respectively, as on March 31, 2023, as against 13.72 times and 0.46 time, respectively, during the previous fiscal. Future budgeted capex requirement (excluding NRL's expansion) are expected to be majorly funded through cash accrual.

 

The subsidiary, NRL, is in the process of expanding its refining capacity by 6 million metric tonne per annum, with expected capital outlay of Rs 28,026 crore. The company has also budgeted an additional investment of Rs 6,555 crore for setting up a petrochemical plant of 360 KTPA (kilo-tonne per annum), to manufacture poly propylene which would be integrated to this expanded facility. While the execution is at its initial stage, the overall financial risk profile is still expected to remain comfortable, supported by healthy operating performance and financial flexibility. OIL has committed a total of Rs 2204 crore of equity funding towards the expanded capacity, out of which around Rs 1102 crore has already been invested while the rest will be invested over the next 2-3 years.

 

Weakness:

• Susceptibility to inherent risks in the E&P business: OIL operates in a competitive, capital-intensive, volatile and cyclical industry. The E&P activity calls for continuous and large investments, wherein the gestation period could be longer. For the international investments undertaken, profitability is also susceptible to significant geo-political risks, as some of the overseas blocks are in countries that have political instability.

Liquidity: Superior

Liquidity is strong, with consolidated cash and equivalent balance maintained at Rs 5,752 crore as of September 2023. Around Rs 6,000 crore (excluding NRL’s expansion) of budgeted annual capex is to be met through cash accrual. It also has access to sanctioned fund-based limit of Rs 435 crore, with minimal utilisation.

 

Environmental, social and governance (ESG) profile:

CRISIL Ratings believes OIL’s ESG profile supports its credit risk profile. The oil and gas sector has moderate environmental and social impact, primarily driven by its raw material sourcing strategies, energy and emission intensity, waste intensive process, and its direct impact on the health of the environment.

 

Key ESG highlights:

• The company aims to become net zero in operational emissions by 2040.
• OIL is conducting pilot studies and feasibility assessments for carbon capture utilisation (CCU), and storage (CCUS) and Carbonated Water Injection (CWI) technology.
• To further enhance its Health, Safety and Environment (HSE) practices, OIL launched Project KAVACH (Key to Awareness, Value Creation, and Change) encompassing ten strategic goals with the aim of transforming the existing HSE management system into HSE+.
• Its governance structure is characterised by 30% of the board comprising independent directors. The company has made adequate financial disclosures.

 

There is growing importance of ESG among investors and lenders. OIL’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence allowing ease of access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings expects the company’s business and financial risk profiles will remain comfortable, as the required support from the central government would continue.

Rating Sensitivity factors

Downward factors:

• Change in the support philosophy of the government or reduction in its stake to below 51%
• Larger-than-expected, debt-funded capex, weakening the debt protection metrics

About the Company

Incorporated in 1889, OIL is a fully integrated E&P company and the second largest national oil and gas entity in India. It is a state-owned enterprise of the government, which holds about 57% equity stake, under the administrative control of the Ministry of Petroleum and Natural Gas. The company through its various subsidiaries, joint ventures and associates has diversified its presence across the entire value chain in the hydrocarbon sector.

 

For the first half of fiscal 2024, profit after tax (PAT) was Rs 2,040 crore on revenue of Rs 15,778 crore against Rs 5,346 crore and Rs 22,109 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (consolidated)

As on/ for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	36203	26180
Profit after tax (PAT)	Rs crore	9850	6715
PAT margin	%	27.21	25.65
Adjusted debt / adjusted networth	Times	0.45	0.50
Interest coverage	Times	18.75	13.72

CRISIL Adjusted numbers

Any other information: Not applicable