Moody's cuts RIL credit rating to negative

Sequel to firm's announcement of cut in K-G gas reserves after long decline in output; agency says it expects decline in cash flows.

A week after Reliance Industries cut estimates for proven gas reserves in its Krishna-Godavari block by 6.7 per cent to 3.67 trillion cubic feet, credit ratings agency Moody's has downgraded RIL as 'credit negative'.

The revisions in gas reserves came after two years of declining production from the K-G basin on the east coast.

"The revisions are credit negative for the company, as it confirms the technical difficulties that it faces in its exploration and production business from declining production and consequently lower cash flows," Moody's said on Monday in its weekly credit outlook.

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After the rating, the company's stock was trading at 681.15, down 2.3 per cent, on the Bombay Stock Exchange.

"The 12.8-billion cubic metre reduction in proven reserves will reduce total cash flows of the company from the project by approximately $1.7 billion, based on an existing gas price of $4.2 per million British thermal units.

The even greater decline of 38.8 billion cubic metres in proven developed reserves will require the company to make further investments, "although at this stage we cannot estimate the amount of those additional investments," stated the ratings agency in the credit outlook.

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The revision has not yet prompted a write-down of the value of the exploration assets, which stood at $5.4 billion as of March, because Reliance Industries records the assets at cost less accumulated depletion, and the estimated fair market value of the remaining proven reserves exceeds the current book value.

"The revision of reserves has resulted in the company's reserve life declining significantly, especially for proven developed reserves, based on last year's rate of production.

However, we expect the rate of production to decline further, which would help lengthen reserve life. We also expect RIL to get technical support from BP Plc, which in February 2011 acquired a 30 per cent stake in the block and RIL's other upstream assets in India for $7.2 billion.

However, given the extent of the decline, we do not expect the company to reach the target level of production in the next 12-18 months,", the agency added.

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Last week, the government disallowed RIL a $1.2-billion cost recovery from its investment in the KG-D6 field.

The company has taken the government to the Supreme Court over its failure to appoint an arbitrator on the cost-recovery issue.

The ministry has held RIL responsible for violation of its committed work programme in the production sharing contract (PSC). In its letter, it alleged the company failed to fulfil "obligations" under the PSC and "deliberately and willfully caused breaches, which have led to immense loss and prejudice to the government and the people of India".

"We expect arbitration to be a long process but not to have any meaningful impact on the company's cash flows for the next 12-18 months.

However, regulatory pressure on the company will continue to increase as long as the production levels continue to decline," Moody's weekly credit outlook said.