Fitch Ratings has revised the Outlook on State Oil Company of the Azerbaijan Republic's (SOCAR) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR and senior unsecured rating at 'BB+'. The Recovery Rating is 'RR4', AzVision.az reports citing Fitch.
The rating actions follow the revision of the Outlook on the sovereign rating of Azerbaijan (BB+/Stable). SOCAR is fully owned by the state and its rating is equalised with that of Azerbaijan 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 assess SOCAR's Standalone Credit Profile (SCP) at 'b+', with high leverage being the main constraint.
SOCAR's 1H20 performance was better than expected in our 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 will 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,” said the rating agency.
SOCAR's 'b+' SCP 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, USD20/boe). The upstream segment is SOCAR's key profit driver.