Fitch Ratings has affirmed Oil India Limited's (OIL) Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and the rating on its outstanding senior unsecured debt at 'BBB-'.

Fitch has also affirmed OIL's subsidiary Oil India International Pte. Ltd.'s (OIIPL) Long-Term Foreign-Currency IDR and the rating on its US dollar senior unsecured notes at 'BBB-'. The Outlook on the IDRs is Stable.

We maintain OIL's Standalone Credit Profile (SCP) at 'bb+', reflecting its cost-competitive upstream operations and downstream integration with a high-complexity refinery, balanced by its geographical concentration compared with higher-rated peers. It also reflects our view that OIL's credit metrics will remain adequate for its SCP over the next few years, as higher upstream profits offset its high capex intensity. This is in light of our increased oil and gas price assumptions and production growth estimates, and rising refining profits after its capacity expansion.

OIL's IDR benefits from a one-notch uplift from its SCP based on our 'Very Likely' assessment of support from the government of India (BBB-/Stable), under our Government-Related Entities (GRE) Rating Criteria. We equalise OIIPL's IDR with that of its parent, OIL, due to our assessment of OIL's strong incentives to support OIIPL under our Parent and Subsidiary Linkage Rating Criteria.

Key Rating Drivers

'Strong' Responsibility to Support: Fitch assesses the government's decision-making and oversight over OIL as 'Strong'. The state directly owns 57% of the company and appoints its chairman, managing director, board representatives and independent directors, enabling the government to exert control over OIL. We also view the precedents of support from the sovereign as 'Strong'. OIL has not needed tangible financial support from the government due to its adequate financial profile, but has received indirect support in sourcing upstream acquisitions and viability gap funding for certain investments.

'Strong' Incentives to Support: We assess OIL's role in the preservation of the government's policy role as 'Strong'. Energy security remains a key government priority, and OIL is the largest oil and gas producer and refiner in India's north-eastern region. It supports energy availability and economic development in the region, and contributes 10% to India's overall oil and gas production.

We also assess OIL's contagion risk as 'Strong'. OIL is a key GRE in India that borrows in both onshore and offshore capital markets, and is one of 13 state-owned enterprises (SOEs) designated as a 'Maharatna' by the government, which is a status that imparts greater autonomy in financial decision-making. A default by OIL could hurt the funding access and borrowing costs of other GREs or 'Maharatnas'.

Strong Upstream Earnings: We have revised up our estimates for OIL's upstream EBITDA starting from the financial year ending March 2025 (FY25). This is driven by an increase in Fitch's mid- to long-term oil price assumptions due to higher uncertainty over demand related to energy-transition risks, higher gas price estimates under India's new market-linked gas pricing regime, and higher production growth estimates.

Refining Margins to Moderate: We expect refining margins at OIL's subsidiary, Numaligarh Refinery Limited (NRL), to moderate to mid-cycle levels from FY25, from higher than usual levels in FY23-FY24 (estimated). This will be driven by increasing product inventories in Asia amid weak Chinese refining demand and curtailed Asian petroleum product exports, and lower benefit from price differences between crude varieties. However, spreads will remain supported by India's growing transport demand. Geopolitical concerns affecting petroleum product trade routes could also have an impact on margins.

High Capex Intensity: We expect OIL's capex intensity to rise to 36% on average over FY24-FY26, against an average of 19% over FY20-FY23. We believe around two-thirds of the nearly INR450 billion capex over FY24-FY26 will be spent on expanding NRL's refinery capacity by 6 million tonnes per annum (mtpa), and building a new polypropylene petrochemical plant at the site. We expect the expanded refinery to be commissioned in early FY27 (OIL's expectation: 2HFY26) and believe it remains subject to execution risks during implementation and stabilisation risks once commissioned.

Leverage to Rise, Remain Adequate: Fitch expects the high capex intensity to drive an increase in OIL's EBITDA net leverage to over 2x during FY25-FY28, from less than 2x over FY22-FY24 (estimate). Capex and leverage will peak in FY26, but the earnings contribution from the expanded refinery after its commissioning in FY27 should lead to gradual deleveraging.

Robust Operating Profile: OIL's proved (1P) reserves of 899 million barrels of oil equivalent (boe) as of FY23, and oil and gas production of around 155 thousand boe (kboe) per day are less than those of 'BBB-' rated peers. Its upstream operating profile benefits from lifting costs of USD13-14/barrel (bbl) and finding and development costs of USD7-8/bbl, below many similar or higher-rated global peers. However, OIL benefits from downstream integration via NRL relative to the pure upstream operations of most 'BBB-' peers, and NRL's refining asset quality exceeds that of many regional refining peers.

OIIPL's Rating Equalised with OIL: We equalise OIIPL's rating with that of its parent, OIL, due to our assessment of OIL's 'High' legal and strategic and 'Medium' operational incentives to support OIIPL. OIL guarantees all of OIIPL's debt, oversees its operation and appoints its management, and OIIPL contributed 27% of OIL's FY23 production. OIIPL's Russian oilfields carry high strategic importance for India. Three other Indian GREs hold stakes in the Vankorneft field, and Indian GREs produce the largest share from the Russian fields, among the GREs' producing international assets.

Derivation Summary

OIL's ratings will remain equalised with those of the sovereign under Fitch's GRE criteria even if its SCP weakens by a notch, provided our assessment that the government's support is highly probable under the criteria remains unchanged.

OIL's GRE assessment can be compared with that of Thailand-based PTT Public Company Limited (BBB+/Stable). We assess the government's decision-making and oversight, precedents of support, and contagion risk as 'Strong' for both entities.

However, we assess PTT's role in preservation of the government's policy as 'Very Strong', given that it is the sole natural gas supplier to Thailand's electricity generation sector and has a key function in the country's energy security. In comparison, we assess OIL's preservation of the government's policy role as 'Strong'. It is the largest oil and gas producer and refiner in India's north-eastern region, but there are other SOEs that play a greater role in the country's overall energy needs.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Oil price assumptions in line with Fitch's price deck, with Brent at USD77.5/bbl in FY25, USD68.8/bbl in FY26 and USD63.8/bbl in FY27.

Gas prices of USD6.5/mmbtu in FY25, USD6.75/mmbtu in FY26 and USD6.38/mmbtu in FY27, forecast as 10% of Fitch's crude oil price estimates, subject to a ceiling of USD6.5/mmbtu in FY25 and USD6.75/mmbtu in FY26.

Oil production growth of mid-single digits in FY25 and FY26, and 2% thereafter. Gas production growth of 15%-17% in FY25 and FY26, and 5% thereafter.

Upstream capex of INR48 billion-55 billion per annum during FY25-FY27.

NRL's capex of INR106 billion in FY25 and INR112 billion in FY26; the new refinery to be gradually commissioned from FY27.

Gross refining margins (excluding excise duty benefits) at NRL of USD10/bbl from FY25.

Dividend-payout ratio of around 45%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the sovereign rating, provided the likelihood of support from the state remains strong.

An upward revision of the SCP may result from EBITDA net leverage decreasing sustainably below 2x, or a significant improvement in OIL's business profile, including a larger production and reserve profile with greater geographical diversification.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the sovereign rating.

A downward revision of the SCP may result from EBITDA net leverage increasing sustainably above 3x.

For the sovereign rating of India, the following sensitivities were outlined by Fitch in its rating action commentary of 16 January 2024:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Public Finances: Rising general government debt/GDP ratio, for instance, from insufficient fiscal consolidation or an economic shock.

Macro: A structurally weaker real GDP growth outlook that further weighs on the debt trajectory or prevents a closer alignment of per capita GDP with the peer median.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Public Finances: Implementation of a credible medium-term fiscal strategy, for instance, from further revenue-enhancing reforms, which lowers the general government debt and interest/revenue ratio towards the levels of 'BBB' category peers.

Macro: Higher medium-term investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation.

Liquidity and Debt Structure

Strong Liquidity: OIL's liquidity is strong with INR64 billion of readily available cash and INR20 billion of unutilised short-term credit lines as of 31 December 2023. OIL had INR83 billion of debt maturing in the subsequent 12 months at the time, of which INR42 billion of its long-term debt maturities has since been refinanced. We expect OIL to roll over its working capital debt, as its operating profile remains robust. Debt maturities are well spread out, with 61% of debt maturing in or after FY27 as of December 2023.

We expect OIL to report negative free cash flow in the next few years. However, it has secured financing for a large part of its capex needs and should be able to secure adequate funding when needed, given its ready access to domestic and international capital and banking markets, strong linkages with the sovereign, and importance in maintaining India's energy security.

Issuer Profile

OIL is India's second-largest state-owned oil and gas upstream company, with daily domestic production of about 113.2kboe and a share of production from overseas assets of about 41.5kboe as of FY23. OIL diversified into the downstream business by increasing its stake in NRL, which has a refining capacity of 3mtpa.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

OIL's ratings benefit from a one-notch uplift from its SCP for support from the Indian sovereign and are equalised with those of the sovereign. A change in Fitch's rating on the sovereign would automatically result in a change in the company's rating. OIIPL's ratings are equated to OIL's and any change in OIL's rating will automatically result in a change in OIIPL's ratings.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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