Lower Gas Prices To Dent Oil India’s Performance, Says Fitch

Oil India Ltd, Asia's oldest oil explorer, is expected to post a loss in its upstream gas business after the government enforced a lower domestic gas price from October 2016.

While there will be no significant impact on the company's credit profile, Oil India's upstream gas business will incur losses, Fitch Ratings said in a report.

The government reduced the domestic price of natural gas to $2.5 per million British thermal units (MMBTU) for the next six months starting October 2016, from $3.06/MMBTU in April to September 2016, taking international prices into consideration.

We expect that the price of $2.5 per MMBTU to be just sufficient to cover the costs of bringing the gas to the surface and that Oil India will incur cash losses due to taxes and levies. Fitch estimates a reduction in gas price by $0.5 per MMBTU will result in about a Rs 2.5 billion fall in EBITDA over the next six months for Oil India. Gas accounts for about 40 percent of the company's total oil and gas production in terms of barrels of oil equivalent.

Added Pressure?

The recent acquisition of oil fields from Russian energy giant Rosneft and added royalty payments on oil produced in India will also add pressure on Oil India's profile, according to Fitch. However, the reduction in gas prices and pressure from other expenses are not expected to add to its debt.

The oil exploration company's production is expected to increase by 5 percent over the medium term, assuming that the global gas price rises, Fitch added.

The rating agency does not expect any additional change in the company's investment and capital expenditure plans.