Moody’s Investors Service (Moody’s) has confirmed the Ba1 corporate family rating (CFR), Ba1 senior unsecured notes rating and Ba1-PD probability of default rating (PDR) of State Oil Company of the Azerbaijan Republic (SOCAR). The outlook on the ratings is negative.
Moody’s website says that the decision to confirm SOCAR’s ratings factors in the company’s high level of vertical integration into refining and trading operations, allowing it to maintain adequate credit metrics for its rating category in a “lower-for-longer” oil price environment.
The agency also considers that SOCAR’s rating also benefits from continued strong support from the Government of Azerbaijan as the country’s largest employer and tax contributor.
“Given that SOCAR is 100% state-owned, Moody’s considers it to be a government-related issuer (GRI) and therefore applies its GRI methodology to determine the company’s rating,” the Agency said.
The final Ba1 rating for SOCAR comprises the following inputs:
– a baseline credit assessment (BCA) of ba3, which measures the company’s underlying fundamental credit strength;
– the Ba1 local-currency rating of the Azerbaijan government, with negative outlook;
– very high dependence between the state and the company;
– Moody’s assumptions of a high level of support from the state in case of need.
“SOCAR’s Ba1 rating takes into account: the key role that the company plays in the oil and gas sector of Azerbaijan and the national economy; the rating agency’s estimates of SOCAR’s stable oil and gas production in 2016-17; robust liquidity profile underpinned by substantial cash balances and comfortable debt maturity schedule; and its close linkages with the Azerbaijan’s government, which has accumulated substantial reserves,” it was informed.
The rating also reflects the rating agency’s conservative view on potential challenges in maintaining stable production over longer-term if upstream capex is sustainably kept at a low level; the company’s ability to efficiently replenish its oil reserves; and the low oil price environment and regulated prices for domestically produced oil products in Azerbaijan, which will continue to negatively impact the company’s profitability and cash flow metrics.
The rating agency reminds that in 2015 SOCAR reported revenue of approximately $31.5 billion (including trading operations) and EBITDA of $3.1 billion.
“The negative outlook on the ratings is in line with the negative outlook for the sovereign rating and reflects the fact that a potential further downgrade of Azerbaijan’s sovereign rating may lead to downgrade of the company’s rating,” Moody’s said.
The agency does not consider it possible raising of company’s ratings in the near future.
A lower BCA might result if SOCAR’s financial profile deteriorates beyond Moody’s current expectations, such that retained cash flow/net adjusted debt falls consistently below 20% and EBIT/interest expense remains below 5.0x on a sustained basis.
“Other factors that might lead to a rating downgrade include evidence of reduced state support; state measures that would seriously impair SOCAR’s credit quality (e.g., materially unfavorable regulatory changes, increased tax rates or significant equity withdrawals); or deterioration of the government’s financial standing and its ability to provide support,” Moody’s said.
