Azernews.Az

Fitch Ratings has affirmed State Oil Company of the Azerbaijan Republic's (SOCAR) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and senior unsecured rating at 'BBB-'. The Outlook on the Long-term IDR is Stable, the agency said.

SOCAR's ratings, Azerbaijan's ('BBB-'/Stable) wholly state-owned national oil company, are aligned with the sovereign's at the current level, the statement said.

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 $17bn 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 $34.1bn 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.

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 percent stake and which expects to increase its production by 16 bcm of gas and 4m tons of gas condensate from 2017, the statement said.

Fitch expects that SOCAR will spend nearly $5.8bn 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," the statement said. "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 $100 per bbl in 2013, $92/bbl in 2014, $85/bbl in 2015 and $75/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. 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 SOCAR ratings, the statement said.

SOCAR had 1.263m manat of cash at 31 December 2012, which was insufficient to cover its short-term debt maturities of 1.895m manat 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 percent of its gross debt. In March 2013, SOCAR placed a 4.75 percent coupon $1bn bond due in 2023, to refinance part of its existing debt and for its capital investment program.

78 percent of SOCAR's debt at 31 December 2012 was denominated in USD including the USD500m bond due in 2017, and about 60 percent of SOCAR's debt had floating rates.