At the same time, Moody's has affirmed OIL's Baa2 issuer rating. The outlook for the ratings is stable.
The provisional status of the senior unsecured notes will be removed upon completion of the issuance and review of final terms and conditions.
The proceeds will be used to refinance the bridge financing facility for OIL's acquisition of 4% participating interest in Rovuma Area 1 offshore block in Mozambique.
Ratings Rationale
OIL's Baa2 rating is equivalent to its baseline credit assessment (BCA),which is also baa2. The Government of India (Baa3 stable) owns 67.64% of the company.
"The rating is supported by OIL's position as the third largest exploration and production (E&P) company in India accounting for about 8% of the country's total production, its long track record of more than 50 years, its competitive cost position from its onshore production resulting in high profitability and solid operating cash flow generation, and its strong credit metrics with robust liquidity," says Vikas Halan, a Moody's Vice President and Senior Analyst.
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OIL has historically maintained a conservative financial profile and has substantially more cash than financial debt. The company also has extremely strong credit metrics with adjusted debt to EBITDA of 0.2x and adjusted debt to capitalization of 6.6%.
"OIL's adjusted debt to proved developed reserves for the financial year ending 31 March 2013 (FYE03/2013) was $0.6/barrel of oil equivalent (boe) which is low compared to other investment-grade international E&P companies," adds Halan, who is also lead analyst for OIL.
The rating, however, is constrained by the company's relatively small scale of production, declining reserve base from its matured and geographically concentrated producing fields in North Eastern India and its exposure to the fuel subsidy in India that reduces its cash flow and margins substantially.
In 2014, OIL made a $1 billion debt-funded acquisition of a 4% participating interest in the Mozambique Rovuma basin was its largest overseas investment made till date.
"While OIL's capex will increase over the next few years as the company implements its domestic exploration and development programs, and acquires and develops its overseas assets, we expect these expansion activities to be funded by a mixture of operating cash flow and debt such that OIL's credit metrics will remain well within the tolerance level of its ratings," adds Halan.
The rating outlook is stable reflecting a) a stable outlook on the sovereign rating of India, b) our expectation that the subsidy burden on OIL will reduce over time and c) our expectation that the company's growth plan will continue to be executed within the tolerance level of its current ratings.
Negative pressure on the ratings will develop if 1) the sovereign rating for India is downgraded; or 2) any major adverse changes are made to the fuel subsidy mechanism; or 3) OIL increases its pace of acquisition such that it results in higher business risk and deterioration of its credit metrics.
Moody's would consider adjusted debt to proved developed reserves above $5 per barrel, adjusted debt to average daily production above $15,000 per barrel and retained cash flow to adjusted debt below 60%, as indicative of negative pressure on the ratings.
Upward pressure on the rating in the near to medium term is unlikely given the current scale of OIL's production and reserves. Upward pressure will also be constrained by the strong linkage with the Government of India. A sovereign upgrade will not automatically result in a higher rating for OIL.
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