OREANDA-NEWS. Fitch Ratings does not expect a recent cut in Indian natural gas prices to have a significant impact on Oil India Limited's (OIL, BBB-/ Stable) standalone credit profile of 'BBB-', although the company's upstream gas operations will incur losses.

The government of India on 30 September 2016 reduced the domestic natural gas price to USD2.50 per million British thermal units (MMBTU) for October 2016-March 2017, from USD3.06 per MMBTU for April-September 2016, as a part of its bi-annual revision in prices.

Fitch has factored in the lower gas price in its assessment of OIL's credit profile. We continue to expect OIL's net leverage (net adjusted debt/ operating EBITDAR) to remain at around 2x over the medium term despite the revision in gas prices.

We expect that the price of USD2.50 per MMBTU to be just sufficient to cover the costs of bringing the gas to the surface and that OIL will incur cash losses due to taxes and levies. Fitch estimates a reduction in gas price by USD0.5 per MMBTU will result in about a INR2.5bn fall in EBITDA over the next six months for OIL. Gas accounts for about 40% of the company's total oil and gas production in terms of barrels of oil equivalent.

We expect OIL to generate around INR34bn of total EBITDA for the financial ending March 2017 (FY17); as such, the reduction in cash generation from lower gas price will not result in any material increase in OIL's net debt and net leverage. However, acquisitions of shares in the Taas Yuriakh and Vankor fields from Russia's national oil company, Rosneft, and additional royalty payments to the state following revisions to the way royalties on Indian-produced oil are calculated have reduced the headroom available to OIL's standalone profile.

Fitch continues to assess OIL's standalone credit profile at 'BBB-'. Fitch equalises OIL's rating with that of its largest shareholder (68%), the Indian sovereign (BBB-/Stable), due to its strong operational and strategic linkages with the state and in line with Fitch's Parent and Subsidiary Linkage methodology.

Fitch expects OIL's gas production to continue to increase by around 5% annually over the medium term, assuming global gas prices in FY17 and FY18 rise based on the reference price formula for domestic gas and Fitch's price deck. The domestic natural gas price in India is determined based on the formula, which considers gas volumes in key markets and annual average gas benchmark prices, including Henry Hub, National Balancing Point, Alberta Hub and Russia.

Fitch does not also expect any changes in OIL's high capex and investment plans over the medium term, including reserve diversification and enhancement through overseas acquisitions and exploration outside its domestic acreage, which is concentrated in Assam.