New gas policy a positive for ONGG, RIL: S&P

The rating agency says uncertainity for Mukesh Ambani company continues

Rating agency Standard & Poor's today said that the new gas price mechanism in India is a positive for Oil and Natural Gas Corporation (ONGC) and Reliance Industries Ltd (RIL).

India is set to usher into new gas pricing regime, based on a formulae suggested by Rangarajan committee, from April 2014. According to the government, the prices of domestic natural gas may almost double from the current $4.2 per million metric British thermal unit (mmBtu) to around $7-8 per mBtu by then.

Standard & Poor's Ratings Services expects the new gas pricing mechanism to improve the cash flows and profitability of both ONGC and RIL to varying degrees.

“We also believe that the price increase will support the companies' high capital expenditure plans,” it said in a statement today. However, the new pricing guideline does not affect the ratings on ONGC (BBB-/Negative/--) and RIL (BBB+/Negative/--).  The negative outlooks on the ratings reflect the negative outlook on the sovereign credit rating on India (unsolicited rating BBB-/Negative/A-3).

It stated that the gas price hike would significantly improve ONGC's EBITDA by about 20%, compared with 5-7% for RIL. The impact on RIL's profitability is not likely to be as significant given the company's low gas production of about 13 million metric standard cubic meters per day (mmscmd).

“Our financial forecasts for RIL already considered the benefit of a potential price increase. We expect the price revision to help ONGC maintain its ratio of funds from operations to debt at more than 60% over the next two to three years. Our view is based on the understanding that state-owned ONGC will not be required to bear any additional subsidy burden from the fertilizer or power sectors, which are likely to be adversely affected by the price increase,” the statement said.

It stated that the government's announcement reduces uncertainty over future gas prices. “But the uncertainty will continue for RIL, given a legal dispute over the government's ability to increase the gas prices for some of the company's gas blocks where production has significantly declined,” it added.

Higher gas prices would make it viable for the companies to invest in some deep water gas blocks, in our opinion, increasing gas production over the long term. The new pricing mechanism is applicable for five years beginning April 1, 2014.