Standard & Poor’s Ratings Services revised its outlook on the Republic of Azerbaijan’s national oil company, State Oil Company of Azerbaijan Republic (SOCAR), to negative from stable. At the same time, the agency affirmed ‘BB+’ long-term corporate credit rating on SOCAR.
The rating actions on SOCAR follow the Azerbaijan outlook revision, and they reflect S&P view of SOCAR as a government-related entity (GRE) and the consequent high likelihood that S&P would downgrade the company if S&P downgraded the sovereign.
The rating on SOCAR reflects S&P view of the “extremely high” likelihood that its owner, the government of Azerbaijan, would provide extraordinary support to the company. S&P assesses SOCAR’s stand-alone credit profile at ‘bb’, the statement says.
In line with S&P methodology for rating GREs, S&P views SOCAR’s role in the country’s economy as “critical.” The company plays a central role in Azerbaijan’s most strategic sector, oil and gas. SOCAR is the country’s largest employer and a substantial taxpayer, and it has important social mandates and a monopoly in refining and petrochemicals. It is also a minority shareholder and the government’s representative in Azerbaijan’s largest internationally led upstream projects such as Azeri-Chirag-Guneshli (ACG).
S&P views SOCAR’s link to the Azerbaijani government as “very strong.”
The government appoints the company’s key management and determines its strategy, though day-to-day operations are managed at the corporate level. Historically, the government has provided equity financing and loans from state-owned banks to SOCAR. S&P understands that government entities will fund any future cash contributions from SOCAR to the Southern Gas Corridor Co. (SGCC), the statement says.
Still, the government does not guarantee the majority of SOCAR’s debt, including the $500 million and $1 billion Eurobonds that the company issued in early 2012 and early 2013, respectively. S&P understands that at least some of SOCAR’s new investments will be financed at the corporate level. This is a key reason why S&P does not equalize the rating on SOCAR with that on the sovereign.
On the positive side, SOCAR has a leading role in Azerbaijan’s hydrocarbon sector, with stakes in all oil-producing, refining, and petrochemical assets in the country. Both ACG and Shah-Deniz are now producing and generating cash for SOCAR, including the transfer of a Shah-Deniz stake from SOCAR to SGCC. In addition, SOCAR enjoys considerable ongoing government support through priority access to assets, case-by-case equity contributions, and financing for strategic investments, the statement says.
The government’s and SOCAR’s investment plans pose the key constraint on the rating. A new entity, SGCC, was created to finance and bear some of the investment risks associated with Shah-Deniz and other strategic projects. To export the new gas production, the government plans to construct a new pipeline, TANAP, which will cost an estimated total of $10 billion.
The key positive factors include SOCAR’s financial metrics, which S&P expects to remain line with the corporate credit rating, with average funds from operations to debt of about 30% or more under S&P Brent price assumption of $55 per barrel (/bbl) in 2015 and $65/bbl in 2016, the statement says.
The annual operating cash flow more than covers the projected capital investment of less than Azerbaijan manat (AZN) 1.5 billion in S&P base-case scenario. S&P understands that the government would provide finance support for large projects and that SOCAR plans to undertake the local refinery modernization project only if the government approves and finances it.
S&P would revise the outlook to stable if S&P took the same rating action on Azerbaijan.