Lower gas output at RIL's KG-D6 won't have much impact: Moody's

New Delhi: Rating agency Moody’s today said the decline in the production of natural gas at RIL’s KG-D6 block will lower the company’s cash flows but impact on its overall financial health will only be modest.

Besides, Moody’s Investor Service said that BP Plc’s decision to invest$ 7.2 billion in Reliance Industries’ (RIL) oil and gas properties will help it overcome operational challenges in the fields.

“RIL has already reduced its exposure to the Indian oil & gas exploration & production (E&P) sector by monetizing a large part of its investments upfront through the sale of its 30 per cent stake to BP Plc (A2/Stable) for $ 7.2 billion.

“Having BP as its partner will also provide it with the technical expertise it may need to overcome operational challenges,” Moody’s Vice President and Senior Analyst Vikas Halan said in the report.

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Gas production at KG-D6 has fallen below 45 million standard cubic meters a day (mmscmd) against 55 mmscmd in 2010, raising fears if the company will be able to keep its output target of 80 mmscmd for 2012-13 or not.

The decline is due to more-than-expected reservoir complexities and uncertainty remains on time needed to restore the production to target levels.

Moody’s Investors Service said that the decline “will result in lower cash flows, but the impact on the company’s overall financial health is likely to be modest.”

However, it will have no impact on RIL’s ratings, Moody’s said.

On February 23, Moody’s changed the outlook on RIL’s Baa2 local currency issuer rating to positive from stable in recognition of the long-term trend of improvement in its credit profile. Meanwhile, the foreign currency issuer and the bond ratings continue to have a stable outlook in line with the country ceiling.

“From an overall perspective, RIL’s long-term story is compelling. Its local and foreign currency ratings were last upgraded in February 2006 and have since remained at Baa2. During this period, the company doubled its refining capacity and started production of gas at its KG-D6 block,” Halan said.

At the same time, revenue has more than tripled while EBITDA has grown by 167 per cent. Moreover, its credit metrics, which had weakened in FY09, have returned to a very healthy level, Moody’s said, adding the company had cash and cash equivalent of over USD10 billion as of June 2011.

“Given the financial flexibility, an increase in business risk - from large acquisitions or investments in non-core sectors - can be accommodated to some extent in its current ratings. We expect these activities to remain modest in the near term,” Halan added.

Some of the RIL’s non-core investments include a 95 per cent stake in Infotel Broadband Services Pvt Ltd for $ 1 billion and a 14.12 per cent stake in EIH Ltd for $ 229 million, the report said.

Positive rating drivers for RIL include the geographical diversification of its core operations in the absence of any material deterioration in its financial profile, it added.

PTI