ONGC’s Deen Dayal acquisition

#S&P Global Ratings said #Oil and Natural Gas Corp. Ltd. (ONGC: BBB-/Stable/–) has the financial headroom to absorb the acquisition of 80 per cent participating interest in #Deen Dayal West gas field from #Gujarat State Petroleum Corp. Ltd. (GSPC).

The US$1.2 billion acquisition includes the transfer of operatorship of the field to ONGC and US$200 million of another six discoveries depending on their development progress. The acquisition, which was announced on Dec. 23, 2016, is likely to be completed by March 2017, said S&P on Jan 9, 2017.

“Improving oil prices should enable ONGC to maintain adequate–albeit reduced–buffer in its financial ratios, following the acquisition,” said S&P Global Ratings credit analyst #Vishal Kulkarni. “Therefore, we expect the company to be able to maintain its stand-alone creditworthiness over the next 12-24 months.”

ONGC’s appetite for acquiring hydrocarbon reserves and enhancing production has been increasing over the past two years, and the trend is expected to continue.

At the same time, the company will continue to pursue meaningful capital expenditure and dividend distributions using its operating cash flows, limiting the potential for debt reduction from internal accruals.

The GSPC acquisition follows ONGC’s acquisition of a stake in a producing field of CJSC Vankorneft for about US$2.0 billion.

The acquisitions came at a time when hydrocarbon prices were low. And they have depressed ONGC’s financial metrics, with the ratio of funds from operations to debt now close to about 40 per cent-45 per cent, from about 80 per cent as of March 31, 2016.

Nevertheless, ONGC is expected to sustain its financial position in line with its ‘a-‘ stand-alone credit profile (SACP).

The ratios could have deteriorated below S&P’s downgrade threshold for the SACP but for the improvement in oil prices since late 2016.

In December 2016, S&P Global Ratings revised its oil price deck to US$50 a barrel for 2017, from US$45 a barrel.

“Continued appetite for acquisitions of US$1 billion or more a year or oil prices falling below US$45 a barrel could strain ONGC’s SACP,” said Kulkarni.

“We expect the GSPC acquisition to enhance ONGC’s gas reserves by 1.1 trillion cubic feet and help increase gas production by 8 per cent-9 per cent when commercial production starts. The gas production from this field has started on a trial basis and will likely reach commercial stable production level 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.

GSPC has completed the basic gas production infrastructure for the field.

Still, ONGC is expected to incur residual capital spending of about US$1 billion for the field.

“Our rating on ONGC is constrained by the sovereign credit rating on India (BBB-/Stable/A-3), given our view that ONGC could face extraordinary negative government intervention. Under our criteria for government-related entities, we see a very high likelihood of extraordinary government support to the company,” S&P said. fii-news.com