For the April-June quarter of the current fiscal, ONGC reported 47.2 per cent increase in EBITDA or operating profit to Rs 14,240 crore.

"The increase in EBITDA was largely driven by higher crude oil prices, as well as the depreciation of the Indian rupee," Moody's said.

In a report, the global rating firm said the government has decided against asking ONGC to share in the cost of any fuel subsidies.

"If it had done so, such a request could have partly negated the impact of the increase in oil prices."

The government's decision, it said, is credit positive because it provides ONGC with cash flow to reduce its borrowings. ONGC increased its borrowings by about Rs 25,000 crore in January 2018, when it acquired a 51.11 per cent stake in Hindustan Petroleum Corp Ltd for Rs 36,915 crore.

"If oil prices stay above USD 70 per barrel for the remainder of the year and the government refrains from asking ONGC to share the costs of any fuel subsidies, we expect ONGC to generate a consolidated free cash flow of more than Rs 20,000 crore after likely capital spending of Rs 30,000 crore and dividend payments of Rs 9,500 crore. The company could reduce part of its acquisition debt by using this free cash flow," it said.

The high levels of free cash flow will improve ONGC's financial flexibility, especially at a time when the company is unlikely to reduce its borrowings by selling its 13.77 per cent stake in Indian Oil Corp (IOC), given that the share prices of IOC have fallen by about 25 per cent since September 1, 2017.

ONGC's 13.77 per cent stake in IOCL is currently valued at Rs 22,500 crore. Moody's said the government could, however, ask ONGC to share fuel subsidies in the next few quarters or alternatively, look for higher dividends.

"Any such move by the government would constrain ONGC's free cash flow and debt reduction, which will be credit negative," it said. The rating agency in its base case assumed an average oil price for the remainder of the year of between USD 45 and USD 65 per barrel and expects ONGC to maintain retained cash flow/net debt above 30 per cent.

Debt reduction from free cash flow generation because of high oil prices and the absence of subsidy sharing will provide the company with a buffer to absorb declines in oil prices, it said.

While ONGC has only reported standalone financial results, its consolidated EBITDA — which includes the results of ONGC Videsh Ltd, ONGC's international exploration and production business — will also benefit from the increase in oil prices.

However, the refining businesses of the company (HPCL and Mangalore Refining and Petrochemical Ltd) will likely report weaker earnings for Q1 2019 versus Q4 2018 because regional refining margins were lower by about USD 1 per barrel, Moody's added.