ONGC's Rs 78,000-cr Andhra investment credit negative: Moody's

Oil and Natural Gas Corporation's (ONGC) planned Rs 78,000-crore investment for development of oil and gas discoveries in Andhra Pradesh will be credit negative and lead to an upfront increase in leverage, Moody's Investors Service today said.

Of the total investment, around Rs 10,000 crore will be spent on onshore blocks, with the balance Rs 68,000 crore on offshore assets in the Krishna-Godavari (KG) basin during 2018-21.

"The huge capital outlay will be credit negative for ONGC and lead to an upfront increase in leverage," Moody's said in a statement here.

"At the same time, the development of oil and gas assets has a long gestation period before contributing meaningfully to earnings and cash flows. During the initial development period, ONGC's borrowings will remain elevated for its Baa1 rating category."
 

Baa indicates moderate credit risk.

Assuming that the proposed investment is equally spread over fiscals 2018 and 2019, it expected ONGC's retained cash flow (RCF) to debt ratio to decline to 40 per cent by March 2018 and 33 per cent by March 2019.

"We do not expect any incremental cash flows during this period. Although RCF/debt would remain marginally above our quantitative downward rating guidance of 30 per cent for its rating, ONGC will have no room to take on more debt," Moody's said.

"Any increase in shareholder payments or weak operating performance would exert downward pressure on its ratings. Nonetheless, the company's sizeable cash balances of Rs 25,800 crore as of March 31, 2016, support its baseline credit assessment, which reflects its fundamental Baa1 credit strength."

ONGC's investment comes at a time when gas prices in India are falling because of government caps on selling prices.

Prices of domestically produced natural gas were revised down to USD 2.5 per million British thermal unit on October 1, 2016, from USD 3.06 per mmBtu (on gross calorific value basis).

The revised prices remain effective until March 31, 2017.

For natural gas produced from deep water and ultra-deep water areas, prices are capped at USD 5.3 per mmBtu, which is among the lowest in Asia.

"Even if ONGC's entire incremental production from the Andhra Pradesh investment was eligible for the higher gas price, that price would still be materially lower than prices in Asia," Moody's added.