ONGC's $11.5 billion Andhra investment may put cash flows under pressure: Moody's

Oil & Natural Gas Corporation Ltd's (ONGC) $11.5 billion investment in Andhra Pradesh may put its cash flow under pressure, Moody's said on Monday. 

ONGC's huge capital outlay can be credit negative and might lead to an upfront increase in leverage. Along with it, the  development of oil and gas assets has a long gestation period before contributing meaningfully to earnings and cash flows, Moody's said. 

On January 27, the company signed a Memorandum of Understanding (MoU) with Andhra Pradesh Government for investing $5.07 billion in developing oil and gas finds off the state's coast by 2019-20. 

ONGC had said that it will invest $5.07 billion in bringing to production 10 oil and gas discoveries in the Bay of Bengal block KG-DWN-98/2 (KG-D5), which sits next to Reliance Industries flagging KG-D6 fields. 

According to Moody's, off the total investment, around $1.5 billion will be spent on onshore blocks with the balance $10 billion spent on offshore assets in the Krishna-Godavari (KG) basin. The company expects to commence investment in fiscal 2018 and finish by fiscal 2021.

Sweta Patodia, Associate Analyst, Moody's, in a report titled 'ONGC’s Planned $11.5 Billion Investment in Andhra Pradesh Is Credit Negative', said, "Assuming the proposed investment is equally spread over fiscal 2018 and 2019, we expect ONGC’s retained cash flow (RCF)/debt to decline to 40% by March 2018 and 33% by March 2019. We do not expect any incremental cash flows during this period."

Moreover, Patodia mentioned that ONGC will have no room to take on more debt despite RCF/debt remaining marginally above. Which means, any increase in shareholder  payments or weak operating performance would exert downward pressure on its ratings.

Oil Prices to hurt more

As per the report, the company's decision came in when the gas prices are falling.

On October 1, 2016, the prices of  domestically produced natural gas were revised down to $2.5 per million British thermal unit (mmbtu) from $3.06/mmbtu (on gross calorific value basis). The revised prices remain effective until 31 March 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, the report said. 

"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," Patodia added.