“SOCAR`s ratings are aligned with sovereign Azerbaijan`s (BBB-/Stable), as it represents the state`s interests in the strategically important oil and gas industry,” said the message. “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 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 2014, SOCAR`s total hydrocarbon output was 297,000 barrels of oil equivalent per day (mboepd), flat on previous year`s levels. While SOCAR`s upstream is weaker and its lifting costs are higher than that of `BB` rated Russian peers, this is partially compensated by profits from its midstream and downstream operations.
Under Fitch’s base rating case, it is expected that SOCAR`s own (excluding JVs) oil production to decline gradually to 2016 from the depletion of existing brownfields in Azerbaijan, SOCAR`s only upstream region.
“At the same time, we forecast higher natural gas production from Azerbaijan`s PSAs, in particular the Stage 2 of the Shah Deniz PSA,” said the message. “Once completed, the project aims to increase production by 16 billion cubic meters of gas and 4 million metric tons of gas condensate starting from late 2018.”
The agency conservatively estimates that SOCAR will spend around $2.2 billion on capex in 2015-2016.
“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,” the message said. “We forecast that under Fitch`s oil price deck of $55 per barrel of oil (bbl) in 2015 and $65/bbl in 2016, SOCAR`s FFO net leverage could exceed 2x.”
The analysts of the agency said that an increase in state support through eg, government guarantees for a large portion of the company`s debt, or additional lending by SOFAZ, coupled with a sovereign rating upgrade.
Future developments that may result in negative rating action include weakening state support, an aggressive investment program and/or acquisitions resulting in a significant and sustained deterioration of standalone credit metrics.
SOCAR includes production associations Azneft (the enterprises producing oil and gas onshore and offshore), Azerkimya (the chemical industry enterprises) and Azerigaz.
The company also has a number of processing enterprises, service enterprises, and institutions involved in geophysical and drilling operations.
SOCAR is the sole producer of oil products in Azerbaijan. It has two oil refineries on its balance sheet, and also owns filling stations in Azerbaijan, Georgia, Ukraine, Romania and Switzerland.
SOCAR is a co-owner of the largest Turkish petrochemical complex, Petkim, and other assets in Turkey. The company is also currently working as part of the supply of Azerbaijan’s gas to Europe.
In this regard, work is underway within the second phase of development of the Shah Deniz gas and condensate field, to expand the South Caucasus Pipeline, and projects are being developed to construct the Trans Anatolian Natural Gas Pipeline (TANAP) and the Trans Adriatic Pipeline (TAP).
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