Azernews.Az

Standard & Poor's said Thursday that it had assigned its 'BB' long-term corporate credit rating to Socar, the 100% government-owned oil company of Azerbaijan, adding that "the outlook is positive".

The rating on Socar reflects Standard & Poor's opinion that there is an "extremely high" likelihood of timely and sufficient extraordinary support from its key owner, the government of Azerbaijan (BB+/Positive/B), the rating agency said on its website.

"In line with our methodology for rating government-related entities (GREs), we view Socar's role in Azerbaijan's economy as "critical", due to the company's central role in the country's most strategic sector, oil, and its position as the largest taxpayer and employer. Socar has a monopoly in refining and petrochemicals, and is a minority shareholder and the government's representative in Azerbaijan's largest internationally led upstream projects, Azeri-Chirag-Gunashli (ACG; 11.6461% ownership) and Shahdaniz (10%)."

Standard & Poor's said it views Socar's link to the government as "very strong".

"The government appoints the key management and determines its strategy, even though day-to-day operations are managed at the corporate level. We believe that if Socar were to default, it would have severe negative consequences for the sovereign's reputation and access to financing. For example, the government provided equity financing and loans from state-owned banks to Socar to support investments and refinancing during the difficult 2008-2009 period. The $485 million acquisition of an additional 1.6461% stake in ACG in July 2011 was financed with long-term debt provided by the State Oil Fund of Azerbaijan. Still, the government does not guarantee most of SOCAR's debt," S&P said.

The agency assessed the company's stand-alone credit quality at 'bb'. Socar has a "fair" business risk profile and a "significant" financial risk profile, it said.

"This reflects Socar's only fair quality of assets, including mature majority-owned fields; underutilized, and therefore low-profit, refineries and petrochemical plants; and only minority stakes in ACG and Shahdaniz. The government used Socar to save other underperforming state-owned entities, AzerKimiya and Azerigas."

Standard & Poor's said it also reflects potentially large investments, if projects to expand the country's oil production are approved, or if the company proceeds with other acquisitions. The company has been acquisitive, as demonstrated by its $2 billion purchase of a controlling stake in Turkish petrochemical plant Petkim. Moreover, the government is considering rebuilding and modernizing the country's whole refining and petrochemical industry. If the government doesn't provide full equity financing for such upgrades, Socar's capital expenditures will inevitably increase. But Socar enjoys considerable ongoing support from the government, and Socar's adjusted debt is manageable, leading to comfortable credit metrics.

"The positive outlook on Socar reflects the positive outlook on Azerbaijan and our expectation of possible improvement in Socar's stand-alone credit profile."

The agency said further that given its assessment of the likelihood of extraordinary support Socar might expect to receive from the government, the sovereign rating is the key factor for the rating on Socar. "If we upgrade the sovereign, we will also upgrade Socar, in line with our methodology for GREs. Likewise, if we revise the outlook on the sovereign to stable, we will also likely revise the outlook on Socar to stable."

Additional upside to the rating could result if Socar's stand-alone performance improves, for example, if large investments are financed by the government and not with corporate debt, Standard & Poor's said.

"Ratings downside pressure is quite unlikely, in our view, but could materialize if the link with the state weakens. According to our methodology for GREs, deterioration of Socar's stand-alone credit profile would pressure the rating only if the deterioration were very material, that is, to 'ccc+' or below, which we view as very unlikely."