ONGC's Rs 78,000 crore investment seen as credit negative: Moody's

Moody's said investments will lead to upfront increase in leverage and involve long gestation period

Ratings agency Moody's sees Oil and Natural Gas Corporation (ONGC) planned Rs 78,000 crore investment in Andhra Pradesh as credit negative in the backdrop of falling gas prices, long gestation period of such investments and expected increase in leverage. 

On January 27, Petroleum Minister Dharmendra Pradhan said ONGC, amongst other oil public sector utilities, will invest Rs 78,000 crore in Andhra Pradesh in the development of oil and gas discoveries.

"Of the total investment, around Rs 10,000 crore ($1.5 billion) will be spent on on-shore blocks with the balance Rs 68,000 crore ($10 billion) spent on off-shore assets in the Krishna-Godavari (K-G) basin. The company expects to commence investment in financial year 2017-18 and finish by financial year 2020-21," the Moody’s report noted. 

The decision to invest further in on-shore and off-shore assets comes at a time when gas prices in India are falling due to government's intervention. Moody's sees this as a detrimental to ONGC's future investments in these blocks. 

"Prices of domestically produced natural gas were revised down on October 1, 2016 to $2.5 per million British thermal unit (mmbtu) from $3.06/mmbtu (on gross calorific value basis). The revised prices remain effective until March 31, 2017. For natural gas produced from deep water and ultradeep water areas, prices are capped at $5.3/mmbtu, which is among the lowest in Asia. Even if ONGC's entire incremental production from the Andhra Pradesh investment were eligible for the higher gas price, that price would still be materially lower than prices in Asia," Moody's said in its note. 

In addition to falling gas prices, Moody's said these investments will be credit negative for ONGC and lead to an upfront increase in leverage and typically involve long gestation period. 

"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," it said. 

Moody's expects ONGC's retained cash flow (RCF)/debt to decline to 40 per cent by March 2018 and 33 per cent by March 2019 if the proposed investment is equally spread over FY18 and FY19. "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. Any increase in shareholder payments or weak operating performance would exert downward pressure on its ratings," the report further said.

The company's cash balance, however, could help support its credit assessment. "The company's sizeable cash balances of Rs 25,800 crore or $3.8 billion as of March 31, 2016 supports its baseline credit assessment, which reflects its fundamental Baa1 credit strength," Moody's report added.