Rationale

 The issuer rating assigned to Essar Oil & Gas Exploration and Production Limited (EOGEPL/the company) factors in the presence of the company’s long-term gas sale and purchase agreement (GSPA) with GAIL India Ltd [rated [ICRA]AAA(Stable)/[ICRA]A1+] at a competitive pricing for a period of 15 years (starting FY2018) till August 2033 along with the pipeline connectivity with the national grid through the Urja Ganga pipeline which mitigates the evacuation risks. After the connectivity with the Urja Ganga pipeline, the company’s gas production rose to 0.86 mmscmd in FY2024 from 0.54 mmscmd in FY2021 and is expected to rise further with the addition of new wells. The outlook for gas consumption in India remains positive with rising demand from sectors like city gas distribution, fertiliser power, refining etc. and the high import dependence, which mitigates the demand risk for the gas produced by EOGEPL. At present, EOGEPL’s gas remains competitively priced vis-à-vis imported regasified liquified natural gas (R-LNG), thus easing the offtake risk. The overall coverage and capitalisation metrics have improved materially over the course of FY2023 and FY2024 because of increased production and healthy realisations. The coverage and capitalisation indicators are expected to improve with rising production and repayment of debt obligations. The rating is further supported by the successful implementation of the resolution plan by the lenders of EOGEPL along with the creation of a debt service reserve account (DSRA) for one quarter’s repayment obligations. The rating also takes comfort from the presence of a trust and retention account (TRA) mechanism, wherein debt servicing gets priority over capital expenditure. The rating is constrained by the exposure of the cash flow to the volatility in crude oil prices, which drive the realisations for the gas sold by the company. The company is exposed to geological, technological and execution risks inherent in exploration and production (E&P) activities. The cash flow will also remain susceptible to the gas production volumes which can be uncertain for E&P blocks. The company has large capex plans (of ~Rs. 700 crore over the course of FY2025 to FY2027) to drill new wells and increase production from the existing wells. Accordingly, the ability to ramp up production as planned will remain a key monitorable. Besides, the company derives almost all its cash flow from a single field which exposes it to asset concentration risks. The Stable outlook on the rating of EOGEPL reflects expectations of a healthy ramp-up in gas production, supported by a favourable gas demand and pricing scenario, leading to an improvement in its cash accruals in the near to medium term.