New gas price mechanism to boost profits of ONGC, RIL: S&P

Global rating agency Standard & Poor's (S&P) said the government's decision to increase domestic gas prices is likely to benefit two major gas producers Oil and Natural Gas Corp (ONGC) and Reliance Industries Ltd (RIL).

"We also believe that the price increase will support the companies' high capital expenditure plans...we also believe that the price increase will support the companies' high capital expenditure plans. However, the new pricing guideline does not affect our ratings on ONGC (BBB-) and RIL (BBB+)," S&P said in a statement.

The new gas pricing mechanism to improve the cash flows and profitability of both ONGC and RIL to varying degrees, it said.

"We anticipate that the increase in gas prices will significantly improve ONGC's operating profit by about 20 per cent, compared with 5-7

per cent for RIL," it said.

The impact on RIL's profitability is not likely to be as significant given the company's low gas production of about 13 million metric standard cubic meters per day, it said.

Under the government's new gas pricing mechanism, gas prices are likely to almost double from the current $4.2 per million british thermal units. The mechanism is applicable for five-year beginning April 1, 2014.

The government's announcement reduces uncertainty over future gas prices, in our opinion, it said.

But the uncertainty will continue for RIL, given a legal dispute over the government's ability to increase the gas prices for some of the company's gas blocks where production has significantly declined, it added.

Higher gas prices would make it viable for the companies to invest in some deep water gas blocks increasing gas production over the long term, it added.