Credit-rating agency Moody's has said Oil & Natural Gas Corporation's decision to acquire 8.4% participating interest in the US-based ConocoPhillips Kashagan field in Kazakhstan is credit-negative for the firm. The rating agency said the the deal routed through subsidiary OVL and funded through debt would increase ONGC's consolidated debt burden by at least $5 billion.
Conversely, the sale would be credit-positive for ConocoPhillips as it would plug the firm's cash-flow gaps and help fund its large capital programme, Moody's said. The deal would also enhancing the firm's liquidity and allow it to maintain its solid leverage profile.
Moody's, which a day earlier reaffirmed stable outlook for India, said: ONGC has been struggling to generate positive free cash flows given its already high capital expenditure program (approximately $7.5 billion for the year ended March 2012).
It added: Additionally, ONGCs share of Indias high fuel subsidy was $10 billion for the fiscal year ended 31 March, and we expect it to rise to $12 billion this fiscal year. For the 12 months ended 31 March, ONGC generated free cash flow of $145 million and had $3.2 billion of debt and nearly $5 billion of cash.
It said: We expect ONGC to increase its net borrowings by approximately $5 billion to fund this acquisition. The companies expect the acquisition, subject to relevant regulatory approvals, priority rights and consortium preemption rights, to close in the first half of 2013.
The oil and gas major has formulated a Perspective Plan 2030, whereby it plans to invest nearly $200 billion over the next 17 years to increase its oil and gas production both in domestic and overseas market. Much of this expansion is to be funded through debt.
In addition to the $5 billion acquisition cost, ONGC will also need to make its share of investments in the subsequent phases of the project, with those costs based on future discoveries and sums that could be as high or higher than this $5 billion investment, Moody's said.