ONGC's $5 bn investment plan not to impact its ratings: S&P

The proposed investment can be accommodated within overall capex expectation for state run oil firm

Credit rating of state-owned Oil and Natural Gas Corp's (ONGC) will remain unaffected by its decision to invest $5 billion in KG basin oil and gas field, Standard & Poor's said on Wednesday.

"The plan also does not have any impact on ONGC's stand-alone credit profile (SACP) because the proposed investment can be accommodated within our overall capital expenditure (capex) expectation for ONGC of Rs 37,500-40,000 crore ($5.5 billion-$6.0 billion) for financial year 2017 (year ending March 31) and financial year 2018," S&P said.

ONGC's $5.07 billion investment in block KG-DWN-98/2 or KG-D5 to produce oil and gas by 2019-2020 is in line with S&P's capex projections.

"We expect ONGC to materially ramp up spending on the KG basin starting in financial year 2018. In our view, the capex remains in line with our overall projections as the company will be completing some of its existing projects like Daman and Vashista," it said.

The benefit of new production from KG basin will only accrue starting financial year 2020.

"The company's announcement is also in line with our earlier expectation that the government's acceptance of a higher gas price for deep water blocks would result in additional investment in the oil and gas sector in India," S&P said in a statement.

S&P said its corporate credit rating on ONGC continues to be constrained by the sovereign credit rating on India (BBB-/Stable/A-3).

S&P has rated ONGC as 'BBB-' with stable outlook.

A 'BBB' rating exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation, according to S&P's rating definitions.

"The rating on ONCG still has significant headroom as it will only come under pressure if we lower the SACP by five notches to 'bb' from 'a-'. This headroom reflects the very strong link of ONGC with the Indian government," it said.

S&P said ONGC's SACP has very little headroom.

"We currently expect ONGC's ratio of funds from operations (FFO) to debt to be about 35 per cent for the next two years after factoring the acquisition of 15 per cent stake in Vankor oil field in Russia for about $1.3 billion. We could lower the SACP if we expect the FFO-to-debt ratio to remain below 35 per cent on a sustained basis," it said.