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Fitch affirms SOCAR's rating as stable

17 April 2014 12:23 (UTC+04:00)
Fitch affirms SOCAR's rating as stable

By Aynur Jafarova

International Rating Agency Fitch Ratings has affirmed Azerbaijan's state energy company SOCAR's Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook on the Long-term IDR is Stable.

"The ratings of SOCAR, a wholly state-owned national oil company of Azerbaijan (BBB-/Stable), are aligned with the sovereign's. SOCAR is a mid-size integrated oil company with 2013 hydrocarbon production of 255,000 barrels of oil equivalent per day and a number of assets in midstream, downstream, chemicals and retail," Fitch said.

SOCAR controls Petkim, Turkey's only chemical producer, and is constructing a 10 million ton capacity Star refinery in Turkey. It is also a party to several production-sharing agreements in Azerbaijan and receives specified volumes of oil, natural gas and gas condensate free of charge.

Under Fitch's conservative forecasts SOCAR's credit metrics will deteriorate moderately in 2013-2015, with funds from operations (FFO) net leverage increasing to 1.9x in 2016, from 1.5x in 2012 and FFO interest coverage declining to 9.6x in 2016, from nearly 16.8x in 2012, before taking into consideration any divestments.

"SOCAR's ratings are aligned with Azerbaijan's, as it represents the state's interests in the strategically important oil and gas industry. SOCAR maintains close ties with the government and the State Oil Fund of the Republic of Azerbaijan (SOFAZ) to make financial and investment decisions," Fitch noted.

A recent decree issued by the Azerbaijani President has said SOFAZ and SOCAR will set up a joint venture (JV). SOCAR's cash contribution to the JV will be limited to 49 million manats or 49 percent of JV's charter capital. SOCAR will also transfer to the JV its stakes in a number of ongoing projects, for example, a 10-percent stake in Shah Deniz PSA and gas pipeline projects.

Thereafter, SOFAZ will lend additional funds to the JV, which it will use to fund its share of investments in the above-mentioned projects.

Although there is no specific decision yet regarding the funding of SOCAR's other announced projects, for example, the oil and gas processing and petrochemical complex (OGPC) in Baku, "we expect that these projects will also be funded mostly by SOFAZ." Fitch's sovereign analysts estimate that SOFAZ's assets totaled about $40 billion at end-2013 and expect further moderate growth in sovereign assets.

SOCAR has recently agreed funding for the 10 million ton Star refinery in Turkey-over $5 billion in commitments from international banks, partially covered by Export Credit Agencies. SOCAR expects to make an additional $1 billion equity contribution for its 60 percent stake in the project, which is scheduled to be completed in 2017.

Fitch views SOCAR's standalone profile as commensurate with the mid-'BB' category, reflecting its limited reserves, declining brownfield production, aged refineries, but also an extensive domestic pipeline network, an expanding international downstream and retail portfolio, and adequate credit metrics. In 2013, SOCAR's total hydrocarbon output (excluding equity stakes) was 255,000 barrels of oil equivalent per day, flat on previous year's levels.

"Under our base rating case, we expect SOCAR's own (excluding JVs) oil production to decline gradually in 2014-2016 from the depletion of existing brownfields in Azerbaijan, SOCAR's only upstream region," Fitch said. "At the same time, we forecast higher natural gas production from Azerbaijan's PSAs, in particular the Stage 2 of the Shah Deniz PSA.

In December 2013, the Shah Deniz Stage 2 partners approved the final investment decision with a $28 billion cost estimate, including the South Caucasus Pipeline expansion. Once completed, the project aims to increase production by 16 billion cubic meters of gas and 4 million tons of gas condensate starting from late 2018.

Fitch's conservative estimates show that SOCAR will spend over 7 billion manats ($9 billion) on capex in 2013-2016. The company has little capex flexibility as most funds are earmarked for its upstream business to arrest brownfield production decline, to meet its obligations under the PSAs and to complete projects that are already underway, including the construction of the Star refinery.

"We forecast that under Fitch's oil price deck of $96 per barrel of oil (bbl) in 2014, $91/bbl in 2015 and $85/bbl in 2016, SOCAR's FFO net leverage will reach 1.9x in 2016, up from 1.5x in 2012," Fitch said.

Fitch experts believe the future developments that may result in positive rating action include an increase in state support through government guarantees for a large portion of the company's debt, coupled with a sovereign rating upgrade.

Per draft IFRS accounts, SOCAR had 1,252 billon manats of cash at December 31, 2013. Of the total cash and restricted cash at end-2013, 474 million manats was held at the state-owned International Bank of Azerbaijan (BB/Stable), a related party.

SOCAR's short-term debt at end-2013 accounted for 29 percent of its gross debt, down from 40 percent at end-2012.

Over 80 percent of SOCAR's debt at December 31, 2013 was denominated in U.S. dollars, to match dollar-linked revenues, and 60 percent of its debt had fixed interest rates.

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