ONGC’s downstream gains buffer blow from cheaper oil

State-owned Oil and Natural Gas Corporation's (ONGC) earnings are likely to remain resilient in the current fiscal as income from its refining and marketing operations will rise enough to offset a decline in upstream profitability following a recent fall in oil prices, S&P Global Ratings said Monday.

ONGC, it said, is likely to generate enough free cash flow to consolidate its balance sheet and support the rating, but headroom for the 'bbb+' stand-alone credit profile (SACP) remains thin, given recent acquisitions.

"We project ONGC's adjusted EBITDA will be broadly stable at Rs 1-1.05 lakh crore in fiscal 2026, assuming Brent oil prices of USD 65 per barrel (bbl) in 2025 and USD 70 per bbl from 2026 onward," it said in a note.

The company's funds from operations (FFO)-to-debt ratio will likely improve to more than 40 per cent over the next 12-24 months, in line with our expectation for a 'bbb+' SACP.

"We expect the India-based integrated oil and gas company's earnings to remain resilient in fiscal 2026 (ending March 31, 2026). Earnings at the company's refining and marketing operations will rise enough to offset a decline in upstream profitability following a recent fall in oil prices," it said.

Expanded refining and marketing margins at ONGC's subsidiary Hindustan Petroleum Corp Ltd (HPCL) will support the profitability of the group's downstream operations. This assumes prices at the pump remain largely unchanged amid cheaper feedstock prices.

"We expect the higher marketing margins to more than cover continued losses on liquefied petroleum gas (LPG) sales. Moreover, losses on LPG sales will narrow in fiscal 2026 after the government hiked prices on LPG by Rs 50 (about 10 per cent) per cylinder in April," the rating agency said.

Rising prices on ONGC’s gas sales will temper the impact of lower oil prices in fiscal 2026, it added.

"We expect domestic gas prices to increase after India's government raised its cap on gas prices by USD 0.25 per metric million British thermal units (mmbtu) from April 2025. Moreover, gas from new wells will be sold at a higher price." It anticipated about 10 per cent of ONGC's annual gas production will come from new wells, and their pricing will be revised upward to 12 per cent of the preceding month's India crude basket instead of 10 per cent. This translates to about USD 7.8 per mmBtu under our latest oil price assumptions.

"We project discretionary cash flows of Rs 10,000-12,000 crore in fiscal 2026. A moderation is likely in capital spending to Rs 50,000-52,000 crore and in shareholder returns to Rs 6,000-8,000 crore amid softer upstream profitability. These amounts were Rs 55,700 crore and Rs 17,000 crore, respectively, in fiscal 2025," S&P said.

ONGC's fiscal 2025 results were slightly below expectations. "We estimate the company's FFO-to-debt ratio was slightly below 40 per cent, compared with our expectation of 42-44 per cent".

The weaker performance was largely due to an uptick in operating costs and higher debt following recent acquisitions.

HPCL is eligible for government compensation when its revenue from selling LPG in the domestic market is lower than the effective cost of marketing it. This compensation would further support its credit ratios when received. However, some delay in compensation is likely because the under-recovery will only be recognised as revenue in the group's income statement after the government gives its approval, the note added.