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Stake in Kashagan Field credit negative for ONGC: Moody's


Global ratings agency Moody's says ONGC's proposed acquisition of ConocoPhillips’ 8.4 per cent participating interest in Kashagan Field in Kazakhstan is credit negative because it would increase the state-run firm's consolidated net debt by at least $5 billion.

ONGC shares traded 0.8 per cent higher at Rs 251.80 at 11.20 a.m. The stock has ended lower for the last four sessions. 70 per cent of ONGC shares are held by the government.

Oil & Natural Gas Corporation (ONGC) had earlier this week said it will pay about $5 billion from ConocoPhillips for the Kashagan stake.

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), Moody's said. The company's share of fuel subsidy was $10 billion for the fiscal year ended 31 March, and is expected to rise to $12 billion this fiscal year, Moody's added.

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.

We expect ONGC to increase its net borrowings by approximately $5 billion to fund this acquisition, Moody's said.

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 said. But the company produced nearly 450 million barrels of oil and gas for the year ended 31 March and thus, the acquisition would add less than 2% to its annual production.

The acquisition also exposes ONGC to the project’s execution risk: there have been multiple delays and cost overruns over the past decade, Moody's said.

For ConocoPhillips, the sale is credit positive, Moody's said.

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