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Fitch Affirms SOCAR at 'BBB-'; Outlook Stable

17 April 2013 08:44 (UTC +04:00)

The Agency informs that SOCAR’s ratings, Azerbaijan’s (’BBB-’/Stable) wholly state-owned national oil company, are aligned with the sovereign’s at the current level. SOCAR is an integrated second-tier oil company operating mature brownfields with about 250,000 barrels of oil equivalent per day (mboepd) hydrocarbon production in 2012 and a number of downstream, chemical and retail assets and pipelines. SOCAR controls Petkim, Turkey’s only chemical producer, and is currently constructing the 10m ton a year STAR refinery in Turkey. It is also a party to several production-sharing agreements (PSAs) and receives some volumes of oil, natural gas and gas condensate under PSAs. Fitch expects SOCAR’s credit metrics to worsen in 2013-2015, e.g., its funds from operations (FFO) net leverage to reach 3.2x in 2015 from 0.8x in 2011 and FFO interest coverage to decline to 5.5x in 2015 from 17x in 2011.

SOCAR’s ratings are aligned with Azerbaijan’s at the current level. SOCAR represents the state’s interests in the strategically important oil and gas industry. SOCAR maintains close relations with the government and the State Oil Fund of the Republic of Azerbaijan (SOFAZ) on principal financial and investment decisions, e.g., the construction of the USD 17 bn Oil-Gas Processing and Petrochemical Complex (OGPC) outside Baku, Azerbaijan’s capital, new gas pipelines and other projects that SOCAR expects will be largely financed by the state via SOFAZ.

While SOCAR expects SOFAZ to provide a substantial portion of funds for the OGPC and other projects, there is no definitive agreement yet beyond 2013. Moreover, Fitch estimates that SOFAZ’s assets have peaked at around USD34.1bn at end-2012 and expect these assets to decline through 2014 as SOFAZ contributions to the government budget stay high. Fitch notes that SOFAZ may not have sufficient funds for co-investment in all SOCAR’s projects, leading to SOCAR’s taking on additional debt, beyond its current estimates.

Fitch views SOCAR’s standalone profile as commensurate with the low ’BB’ rating category. This is mainly driven by the company’s diversified but limited operations - small reserves and production, mature declining brownfields and aged refineries, combined with an extensive domestic pipeline network and a growing international downstream and retail portfolio, and currently adequate credit metrics. In 2012, SOCAR reported total hydrocarbon production (excluding equity stakes) of about 250,000 barrels of oil equivalent per day (mboepd), down from 263 mboepd in 2011. While SOCAR’s upstream is weaker than that of ’BB’-rated Russian peers, this is partially compensated by SOCAR’s positions in pipelines, downstream and retail. Fitch also expects that its credit profile will be weaker than that of Russian ’BB’-rated companies. SOCAR’s production costs remain high compared with peers’.

Under its base rating case, Fitch expects SOCAR’s oil production to decline yoy and its gas production to increase moderately in 2013-2015. The oil production decline follows the depletion of existing brownfields in Azerbaijan, SOCAR’s only upstream region. At the same time, the agency forecasts that the main production gains will be achieved in natural gas from Azerbaijan’s production-sharing agreements (PSAs), in particular the Stage 2 of Shah Deniz gas PSA, in which SOCAR has a 10% stake and which expects to increase its production by 16 bcm of gas and 4 m tons of gas condensate from 2017.

Fitch expects that SOCAR will spend nearly USD 5.8 bn over 2013-2015 on capex. The company has little flexibility to postpone / phase out capex as most funds are earmarked for its upstream to arrest brownfield production decline, to meet its obligations under the PSAs and to complete investment projects that are already underway. These include the construction of the 10m ton STAR refinery in Turkey scheduled to be completed in 2017. The agency estimates that under its Brent price assumptions of USD 100 per bbl in 2013, USD92/bbl in 2014, USD85/bbl in 2015 and USD75/bbl in 2016, SOCAR’s funds from operations (FFO) net leverage will reach 3.2x in 2015, up from 0.8x in 2011.

SOCAR’s ratings could be affected by a sovereign rating action. Evidence of weakening state support would be negative for the ratings. An increase in the level of state support through e.g., government guarantees for a large portion of the company’s debt, coupled with a sovereign rating upgrade would be positive for the ratings.

An aggressive investment programme and/or acquisitions resulting in a significant and sustained deterioration of credit metrics would be negative for the ratings.

SOCAR had AZN 1.26 million of cash at 31 December 2012, which was insufficient to cover its short-term debt maturities of AZN 1.895 million on that date. A large portion of SOCAR’s cash including short-term deposits is held at the state-owned International Bank of Azerbaijan (IBA, ’BB’/Stable). Fitch notes that SOCAR’s short-term maturities at end-12 amounted to about 40% of its gross debt. In March 2013, SOCAR placed a 4.75% coupon USD1bn bond due in 2023, to refinance part of its existing debt and for its capital investment program.

78% of SOCAR’s debt at 31 December 2012 was denominated in USD including the USD 500 million bond due in 2017, and about 60% of SOCAR’s debt had floating rates.