Despite GSPC buyout, ONGC financials strong enough, says S&P

Given the continuing upward trend in global crude oil prices should help the national explorer ONGC to maintain its credit profile despite the recent leveraged buyout of Gujarat State Petroleum's oil blocks for USD 1.2 billion, says a report.
"Improving oil prices should enable ONGC to maintain adequate, albeit reduced, buffer in its financial ratios, following the acquisition of 80 per cent state in GSPC's Deen Dayal West gas field," Vishal Kulkarni, an analyst at S&P said in report today.
"Since we expect the GSPC acquisition to enhance ONGC's gas reserves by 1.1 trillion cubic feet and help increase gas production by 8-9 per cent when commercial production starts, we expect the company to be able to maintain its stand-alone creditworthiness over the next 12-24 months," the report added.

The report further said the state-run company still has enough financial headroom to absorb the acquisition of cost USD1.2 billion. The December 23, 2016 acquisition includes the transfer of operatorship of the field to ONGC and USD200 million of another six discoveries depending on their development progress.
The gas production from this Deen Dayal West field has started on a trial basis and will likely reach commercial stable production by 2019.
The field is a high-pressure, high-temperature field and is eligible for the premium domestic gas pricing for gas from difficult fields. Despite this, the company would have to incur residual capital spending of about USD1 billion for the field, he said.

It can be noted that ONGC has been displaying a rising appetite for acquisitions to enhance production over the past two years, and the report expects this trend to continue.

The GSPC acquisition follows ONGC's acquisition of a stake in a producing field of CJSC Vankorneft for about USD2 billion. The acquisitions came at a time when hydrocarbon prices are low. And these buyouts have depressed ONGC's financial metrics, with the ratio of funds from operations to debt now close to about 40-45 per cent from about 80 per cent as of March 2016.
"Nevertheless, we expect ONGC to sustain its financial position in line with its 'A-' stand-alone credit profile. The ratios could have deteriorated below our downgrade threshold but for the improvement in oil prices since late 2016," the report noted.

"Continued appetite for acquisitions of USD1 billion or more a year or oil prices falling below USD45 a barrel could strain ONGC's standalone ratings," he said.