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SOCAR gets first-time Ba1 level from Moodyâ€™s rating

17 February 2010 15:11 (UTC +04:00)

Baku â€“ APA-Economics. Moody’s Investors Service (Moody’s) has on February 17 assigned Ba1 corporate family (CFR) and Probability of Default (PDR) ratings to the State Oil Company of the Azerbaijan Republic ("SOCAR"), Financial reported.

The State Oil Company of the Azerbaijan Republic is the national energy company of Azerbaijan, 100% owned by the government of Azerbaijan. SOCAR is a vertically integrated oil and gas producer, including upstream, midstream and downstream operations. SOCAR is the backbone of Azerbaijan’s national economy. It has a monopoly position in the supply of oil and gas products to the domestic market and is an official representative of the State in all oil and gas projects in the territory of Azerbaijan.

The company operates through 18 subsidiaries/business units and nearly 50 joint ventures, operating companies and associates. It also participates in all international consortia developing new oil and gas projects in Azerbaijan. The largest of these are the BP-operated Azeri Chirag Gunesli (ACG) oil project and the Shah Deniz gas project, and their respective transportation routes, Baku-Tbilisi-Ceyhan oil pipeline (BTC) and South Caucasus gas pipeline (SCP). It holds a 51% share in Petkim, Turkey’s sole petrochemical producer.

Given that SOCAR is 100% owned by the State, Moody’s has determined the company’s CFR by applying the Joint Default Analysis, our methodology for government-related issuers (GRIs). Our Ba1 rating of SOCAR reflects the following combination of factors:

âˆ™ A Baseline Credit Assessment (BCA) -- which measures the company’s fundamental credit strength excluding any government support -- of 13 (expressed on a scale of 1 to 21, in which a BCA of 13 corresponds to a Ba3 rating)

âˆ™ The Ba1 local currency rating of the Azerbaijan government
âˆ™ Very High dependence
âˆ™ High support

The high government support assumption reflects Moody’s estimation of the likelihood that the government of Azerbaijan would be willing and able to provide direct and/or indirect financial support to SOCAR , if necessary, and would thus attempt to prevent a default on its financial obligations. Very High dependence is based on the fact that the economy and the budget of Azerbaijan are highly dependent on oil and oil-related revenues, thereby making both, the Republic and the company reliant on similar sources of revenue and susceptible to similar risk factors.

SOCAR’s BCA of 13 incorporates the medium scale of the company’s reserves and production base, and very strong financial metrics. It also reflects the fact that SOCAR is a fully integrated oil and gas company that enjoys either a share in, or a full control over, the country’s oil and gas pipelines for the domestic and export markets. At the same time, Moody’s rating of SOCAR is constrained by a very high concentration of upstream assets, which are heavily depleted. With almost no exploration activity performed for a number of years, the company’s ability to replace reserves in a cost-efficient manner remains untested, highlighting uncertainty over the its long-term growth potential and development. Moreover, SOCAR ’s high susceptibility to negative government interference presents an additional challenge for its credit quality.

To maintain the stable outlook Moody’s expects SOCAR to continue to maintain solid financial ratios and credit metrics, with a retained cash flow-to-net debt ratio exceeding 30% and debt/total capitalisation below 30% on an adjusted basis, as well as healthy liquidity profile.