Rating agency Moody’s has said ONGC’s acquisition of ConocoPhillips’ 8.4 per cent stake in Kazakhstan’s Kashagan oilfield will be ‘credit negative’ as the state-owned firm’s debt will rise by $5 billion.

“The acquisition would be funded with debt and would increase ONGC’s consolidated net debt by at least $5 billion, a credit negative,” it said in a note today.

Oil and Natural Gas Corp (ONGC) has been struggling to generate positive free cash flows given its already high capital expenditure programme (about $7.5 billion in the current year) and projected rise in its fuel subsidy outgo to Rs 60,000 crore from Rs 50,000 crore last year, it said.

“For the 12 months ended March 31, ONGC generated free cash flow of $145 million and had $3.2 billion of debt and nearly $5 billion of cash.

“We expect ONGC to increase its net borrowings by approximately $5 billion to fund this acquisition,” it said.

ONGC Videsh Ltd, the overseas arm of the state explorer, had earlier this week said it will pay about $5 billion from ConocoPhillips for the Kashagan stake.

The deal, which is subject to relevant regulatory approvals, priority rights and consortium preemption rights, is to close in the first half of 2013.

The acquisition would mark ONGC’s entry into the oil-proven North Caspian Sea of Kazakhstan. According to the company, the acquisition would likely add an average annual production of about 7.3 million barrels for more than 25 years, with a peak of about 11.7 million barrels.

ONGC produced nearly 450 million barrels of oil and gas for the year ended March 31, and the acquisition would add less than 2 per cent to its annual production.

“The acquisition also bears significant strategic importance to India in terms of contributing to the country’s energy security. India imports nearly 80 per cent of its crude annually, and this acquisition is a step toward reducing its reliance on imports,” Moody’s said.

The Kashagan Field, located in the shallow waters (about five to eight meters) of the Kazakh North Caspian Sea, is one of the world’s largest development projects. “The acquisition exposes ONGC to the project’s execution risk: there have been multiple delays and cost overruns over the past decade,” it said.

Moody’s said ONGC’s expectation of the first production from the field next year “somewhat mitigates the execution risk.”

“Nonetheless, subsequent phases of the project could face similar delays or cost overruns,” it said.

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, it said.

(This article was published on November 29, 2012)
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