Sanctions against Russia likely to result in losses for ONGC & BPCL: Moody’s

Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), Indian Oil Corporation (IOC), and Bharat Petroleum Corporation Ltd (BPCL) have all made investments in Russian upstream oil and gas assets.

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Moody’s Investors Service warned Thursday that the value of Indian firms’ investments in Russia’s oil and gas sectors might be harmed since import prohibitions and international sanctions could limit future cash flow generation capabilities.

Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), Indian Oil Corporation (IOC), and Bharat Petroleum Corporation Ltd (BPCL) have all made investments in Russian upstream oil and gas assets. “Import bans and international sanctions on Russia may constrain the future cash flow generating capacity of these assets and lead to impairment losses for the companies,” the rating agency stated in a report.

While global corporations such as BP and Shell have declared their pullout from Russia in the aftermath of its invasion of Ukraine, Indian firms have not announced a withdrawal from their Russian investments.

According to Moody’s, this will result in a small reduction in the value of assets immediately, especially given the present oil price situation. Indian companies have put USD 16 billion into Russian assets such as the Sakhalin-1 oil and gas project in Russia’s far east.

According to Moody’s, they may experience difficulties in collecting dividend payments, although the impact on earnings will be minimal. “If an increasing number of Russian banks are excluded from the main financial messaging SWIFT system, Indian companies might not be able to receive future dividends from their upstream investments in Russia.

Dividend income from Russian investments accounts for less than 5-6 percent of combined EBITDA for the majority of enterprises.

The United States’ restriction on importing Russian oil, as well as other international sanctions imposed on Russia, may limit these assets’ ability to provide future cash flows. Such developments will reduce the value of Indian corporations’ investments, resulting in impairment losses.

As of December 31, 2021, Russian assets represented less than 5% of IOC and BPCL’s overall asset bases. Dividends are paid to the two companies from earnings generated by these assets. ONGC’s Russian assets amounted to around 12% and 20% of its production volumes and proven reserves, respectively, in FY2021.

In the case of OIL, these proportions were roughly 31% and 24%, respectively. For ONGC, the Russian assets accounted for around 11% of its consolidated EBITDA in FY2021. The Sakhalin-1 project contributed around 8% of this total, with the remainder coming from dividends paid by CJSC Vankorneft.

“Even if ONGC loses its entire earnings contribution from the Russian assets, the impact can be accommodated into ONGC’s credit profile,” Moody’s said.

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