India’s Oil Majors To Lift Borrowing To Cover Dividends, Capex

India’s three major state-held oil refining and marketing firms—Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL)—will increase borrowings to keep their large dividend payments and high capital spend, Moody’s Investors Service said on Tuesday.

“These companies’ large dividend payments and high capital spending levels will keep their credit metrics weak, particularly in relation to retained cash flow on debt,” Vikas Halan, a Moody’s Vice President and Senior Credit Officer, said.

India’s major oil refiners increased dividend payments in fiscal year 2017 compared to fiscal year 2016. This, coupled with the high capital expenditure and acquisition of upstream assets, has “weakened their credit metrics in fiscal 2017 to below the rating tolerance levels for their standalone credit profiles,” Moody’s said.

In fiscal 2018, the cash flows from operations would not be enough to cover capital spending and dividend payments, so the companies will fund the shortfall with borrowings, the rating agency said. However, Moody’s expects the credit metrics of the companies will improve in fiscal year 2018 due to higher sales, better margins, and reduced dividend payments.

“Even then, that level of dividends is more than double the total paid in fiscal 2016,” Moody’s Halan commented on the expected reduced dividend pays in fiscal year 2018.

In terms of capex, all three companies are expected to keep their high spending levels over the next few years, with the 2018 combined spend up by some 15 percent annually, excluding acquisitions.

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At the beginning of 2017, when it affirmed the three companies’ ratings, Moody’s said that the companies would continue to expand their capacities in line with the growth in demand for petroleum products in India.

“The continued need to expand capacity and investment in upstream assets could result in increased borrowings and weaker credit metrics, especially if refining or marketing margins decline,” Moody’s said on January 5.

India’s government plans to sell by the end of this year its 51.1 percent stake in the third-largest local refiner HPCL to the country’s biggest explorer, state-held Oil and Natural Gas Corporation (ONGC), in a deal valued at around US$4.5 billion.

By Tsvetana Paraskova for Oilprice.com

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