BAKU

(Read the full text of the report on fitchratings.com)

Fitch Ratings has revised the outlook on Azerbaijan’s state oil company SOCAR long-term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR and senior unsecured rating at ‘BB+’. The Recovery Rating is ‘RR4’.

The rating actions followed the revision of the outlook on the sovereign rating of Azerbaijan to BB+/Stable.  SOCAR is fully owned by the state and its rating is equalised with that of Azerbaijan.

“This is underpinned by state support provided to the company in the form of financial guarantees, cash contributions and equity injections, as well as SOCAR’s social functions and its importance as a state vehicle for the development of oil and gas projects,” the agency said in a statement.

Fitch assessed SOCAR’s Standalone Credit Profile (SCP) at ‘b+’, with high leverage being the main constraint.

The agency said that SOCAR’s performance in the first half of 2020 was better than expected that in the previous rating case, with broadly flat EBITDA year-on-year, as a weaker performance in the upstream segment was partially offset by stronger trading operations.

“We estimate 2020 EBITDA will have only moderately fallen year-on-year and should rebound in 2021, on stronger international oil prices and increased regulated fuel prices since January 2021,” Fitch said.

“We expect funds from operations (FFO) net leverage to remain below 4.5 times over 2021-2023, materially below our 6 times downgrade sensitivity, and in line with the ‘b+’ SCP,” it added.

Taxes paid by SOCAR accounted for almost 10 percent of government revenue in 2019. The state guarantees 9 percent of SOCAR’s debt and provides equity injections to cover cash deficits, when needed.

The state exercises significant control over SOCAR’s profitability and balance sheet through regulation of domestic fuel prices, cash injections, government distributions and other measures.

“To a large extent, SOCAR’s high leverage is a function of the company’s close links with the state but we believe that the government has incentives to keep SOCAR adequately funded,” the rating agency said.

It said it had expected SOCAR’s Capex to moderate given the Southern Gas Corridor and the STAR refinery in Turkey, SOCAR’s two large projects developed together with partners and not consolidated on the company’s balance sheet, have been brought on stream and should not require material additional capital injections.

“However, we have limited visibility over possible cash outflows related to its other projects, such as its upstream projects and modernisation of the Heydar Aliyev refinery,” Fitch said. “Given this limited transparency, we put more emphasis on SOCAR’s historical performance when assessing its credit profile.”

Key assumptions:

– Brent crude price: at $58/bbl in 2021 followed by $53/bbl until 2023

– Increased domestic fuel prices since January 2021: up 11 percent for RON 92 gasoline and 33 percent for diesel

– Broadly stable upstream production in 2021-2023

– USD/AZN exchange rate: 1.7 over 2019-2022

– Aggregate Capex of 9 billion manats over 2021-2023

– Continued support from the state.