Fitch affirms Azerbaijan's SOCAR at 'BB+'

  10 April 2021    Read: 832
Fitch affirms Azerbaijan

Fitch Ratings has affirmed State Oil Company of the Azerbaijan Republic's (SOCAR) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook on the Long-term IDR is Negative. The Recovery Rating is 'RR4'. 

“SOCAR is fully owned by the state and its rating is equalised with that of Azerbaijan (BB+/Negative) under Fitch's Government-Related Entities (GRE) Rating criteria. This is underpinned by state support provided to the company in the form of financial guarantees, cash contributions and equity injections, as well as SOCAR's social functions and its importance as a state vehicle for the development of oil and gas projects.

We continue to assess SOCAR's Standalone Credit Profile (SCP) at 'b+', with high leverage being the main constraint,” said Fitch.

SOCAR's 1H20 performance was better than expected in Fitch’s previous rating case, with broadly flat EBITDA yoy, as weaker performance in the upstream segment was partially offset by stronger trading operations.

“We estimate 2020 EBITDA to have only moderately fallen yoy and should rebound in 2021, on stronger international oil prices and increased regulated fuel prices since January 2021. We expect funds from operations (FFO) net leverage to remain below 4.5x over 2021-2023, materially below our 6x downgrade sensitivity, and in line with the 'b+' SCP.

The 'b+' SCP of SOCAR takes into account its high leverage, but also its fairly high production (267,000 barrels of oil equivalent (boe) per day) and robust oil proved reserve life of 12 years. SOCAR's unit profitability measured as consolidated FFO to total upstream production was healthy at USD20/boe in 2019, lower than that of integrated oil majors (e.g. Royal Dutch Shell plc, AA-/Stable, USD32/boe), which have stronger downstream divisions, and closer to that of Russian oil producers (e.g. PJSC Lukoil, BBB+/Stable, USD 20/boe). The upstream segment is SOCAR's key profit driver.

The rating of SOCAR is equalised with that of the state given their strong ties under Fitch's GRE Rating Criteria. We assess status, ownership and control and support track record factors as well as socio-political and financial implications of GRE's default as 'Strong' resulting in a score of 30,” said the agency.

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