Key Rating Drivers & Detailed Description

Strengths

Strategic importance of OIL to, and support received from, GoI

OIL is strategically important to GoI, as the latter has and will continue to hold a majority stake (56.66% as on September 30, 2021) 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 11% of India’s crude oil production during fiscal 2021 and is the second-largest national oil company in the business of E&P 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 GoI policies in the oil and gas sector, with added presence across the various business segments. OIL will remain strategically important to GoI and the latter is expected to continue providing the required managerial and financial support to OIL.

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 eight countries.

Comfortable operating performance

Continued capital expenditure (capex) undertaken for the 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. Over the medium term, profitability from the crude oil E&P operations is expected to remain healthy, with an expectation that crude price could range between $60-65/bbl. vis-à-vis OIL’s crude oil producing cost of $30-35/bbl. (including government levies). A similar improvement in profitability is expected from the natural gas E&P operations, with steady recovery seen in gas prices.

OIL has also strategically invested in Numaligarh Refinery Ltd (NRL; ‘CRISIL AAA/Stable/CRISIL A1+’), with an aim of diversifying its presence in the oil refining segment. NRL’s operating performance has remained healthy, supported by the 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 a 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 contributes to less than 10% of its revenue.

Healthy financial risk profile

Debt protection metrics were strong, with interest coverage and net cash accrual to total debt ratios of 12.80 times and 0.19 time, respectively, as on March 31, 2021 as against 10.18 times and 0.32 times, respectively, during the previous fiscal. Future budgeted capex requirements (excluding NRL's expansion) are expected to be majorly funded through cash accruals.

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. While the execution is at its initial stage, its overall financial risk profile is still expected to remain comfortable; supported by healthy operating performance and financial flexibility. OIL equity investment towards this expanded capacity is expected to be around Rs 2,920 crore, to be invested over the next 4-5 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.

Key Financial financials (Consolidated)

Annexure - Details of Instrument(s)

Annexure - List of Entities Consolidated

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