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Fitch rates SOCAR at â€˜BB+â€™ with Stable outlook

15 October 2009 15:21 (UTC +04:00)

Bakuâ€“ APA-Economics. Fitch Ratings has today assigned State Oil Company of the Azerbaijan Republic (SOCAR) a Long-term Issuer Default rating (IDR) of â€˜BB+â€™ and a Short-term IDR of â€˜Bâ€™. The Outlook for the Long-term IDR is Stable.
As SOCAR is a 100% government-owned entity representing the stateâ€™s interests in the oil and gas industry, which is vital to the countryâ€™s economy (hydrocarbons account for 60% of Azerbaijanâ€™s GDP), and the largest taxpayer in the country, Fitch considers the legal, operational and strategic ties between the state and the company to be strong. The agency has therefore aligned SOCARâ€™s ratings with those of Azerbaijan (â€˜BB+â€™/Stable), based on Fitchâ€™s Parent and Subsidiary Rating Linkage methodology.
The ratings also reflect SOCARâ€™s diversified business profile with sales geared towards the regulated domestic market, which render the company less vulnerable to volatile international oil and gas prices.
In addition, the ratings take into account the companyâ€™s small scale compared with its Russian oil and gas peers. As its core fields are mature, Fitch expects SOCARâ€™s oil and gas production growth to be driven primarily by output expansion under major production sharing agreements (PSAs). Nevertheless, the group is well-placed among its peers in its reserve replacement rate and reserve life.
Furthermore, the ratings consider the companyâ€™s solid financial profile (with FY08 EBITDAR margin of 38.9% and Fitch-adjusted net leverage of 0.8x) compared with its Russian and international peers. Although the companyâ€™s gross leverage increased to 1.4x in 2008 (0.2x in 2007) following the acquisition of Petkim Petrokimya Holdings AS (Petkim; â€˜BB-â€™/Negative), a Turkish petrochemicals producer, for USD2bn, its debt maturity profile is well-balanced and liquidity position is adequate. At FYE08 it had cash of AZN512.2m, well above its short-term debt of AZN408m.
However, Fitch notes that SOCAR intends to pursue an expansion strategy with an intensive investment programme of AZN5.2bn (USD6.4bn) over 2009-2013 (excluding obligations under the PSAs). The implementation of this programme, along with the planned construction of an oil refinery at Petkimâ€™s facilities for about USD4.4bn, may require significant external financing leading to a material increase in leverage.