TEXT - Fitch rates State Oil Co of Azerbaijan

Fri Mar 1, 2013 10:23am EST

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(The following statement was released by the rating agency)
    March 1 - Fitch Ratings has assigned State Oil Company of the Azerbaijan
Republic's (SOCAR) proposed USD denominated senior unsecured notes an expected
foreign currency senior unsecured rating of 'BBB-(EXP)'.

The final rating is contingent upon the receipt of final documentation 
conforming materially to information already received and details regarding the 
notes amount, coupon rate and maturity. The proceeds from the notes issuance are
expected to be used to fund the company's capex and other general corporate 
purposes. 

SOCAR plans to issue the notes at the corporate level. Although SOCAR owns 100% 
of all its main cash generating subsidiaries, the notes do not benefit from a 
direct guarantee from SOCAR's operating subsidiaries. The bond prospectus 
includes covenants limiting distributions of net income, disposals of core 
assets, consolidations, negative pledges and cross default provisions.

Although just over half of the group's debt at 30 June 2012 was at the 
subsidiaries' level, Fitch does not presently consider senior unsecured 
creditors at the group level to be structurally subordinated given the low 
amount of earnings from subsidiaries. For example, the main debtor among 
subsidiaries was SOCAR Turkey Enerji A.S., which accounted for about 31% of 
total outstanding debt at 30 June 2012 but had a negative EBIT of minus AZN56m 
in H112.

Additionally, Fitch does not foresee strong asset recovery prospects for 
subsidiary debt holders in Azerbaijan and does not anticipate asset recovery at 
subsidiaries abroad to be large enough to encumber other senior unsecured 
creditors in a liquidation scenario. Fitch has therefore assigned the notes an 
expected senior unsecured rating in line with SOCAR's IDR. Fitch may reassess 
its approach to the notes' rating if the current composition of operating profit
and debt change in a way that prioritises subsidiary debt holders over senior 
unsecured creditors at the group level. 

KEY DRIVERS

State Support-Driven IDR

SOCAR's ratings incorporate state support and are aligned with Azerbaijan's 
('BBB-'/Stable). Wholly state-owned SOCAR represents the state's interests in 
the strategically important oil and gas industry and continues to receive equity
injections from the state, eg, AZN190m in 2011 and a further AZN200m approved in
2012 but not yet transferred to SOCAR. 

'BB' Stand-Alone Profile

Fitch views SOCAR's standalone business and financial profiles as commensurate 
with the 'BB' rating category. This is mainly driven by the company's adequate 
credit metrics compared with its Russian and international peers, eg, 2011 
operating EBITDA margin of 27% and FFO adjusted leverage of 1.2x.

Limited Scale of Operations

SOCAR is relatively limited scale, with 2011 oil and gas production (excluding 
equity stakes) of 263 thousand barrels of oil equivalent per day (mboepd). Fitch
expects future production growth to be driven primarily by output expansion 
under SOCAR's major production-sharing agreements (PSAs). As SOCAR operates 
mature oil and gas fields, its production costs are high compared with those of 
its Russian peers.

Higher Gas Sales Expected

Fitch views positively the fact that in 2011 SOCAR signed second stage 
agreements regulating sales of Shah Deniz gas to Turkey and its transit to 
European markets that the company currently estimates at 2017, which should 
underpin project development.

Large Capex Programme

The ratings factor in SOCAR's intensive capex programme of AZN5.3bn over 
2012-2015, including its obligations under the PSAs. In addition, the group 
plans to build a STAR refinery in Turkey with 10m tonnes of crude oil refining 
capacity to be completed in 2017.

Leverage Likely to Increase

Fitch forecasts SOCAR's FFO adjusted leverage to remain below 2x in 2012, but to
increase above 2x by 2013. This leverage is still comfortable for the current 
rating.

RATING SENSITIVITIES

- Sovereign Rating Action and State Support

SOCAR's ratings could be affected by a sovereign rating action. Evidence of 
weakening state support would be negative for SOCAR's ratings. An increase in 
the level of state support, eg., government guarantees for a large portion of 
the company's debt, coupled with a sovereign upgrade would be positive for its 
ratings.

- Capex and Acquisitions

An aggressive investment programme and/or acquisitions resulting in a 
significant and sustained deterioration of credit metrics would be negative for 
SOCAR's ratings.

LIQUIDITY AND DEBT STRUCTURE

- Satisfactory Liquidity

SOCAR's cash position of AZN1,006m at 30 June 2012 was sufficient to cover its 
short-term debt maturities of AZN656m on that date. A large portion of SOCAR's 
cash including short-term deposits is held at the state-owned International Bank
of Azerbaijan ('BB'/Stable).

- Large Debt Maturities in 2013

Fitch notes that SOCAR will need to repay or refinance the equivalent of USD727m
in 2013. Thereafter, annual bond maturities do not exceed the equivalent of 
USD400m until 2017.

- USD-Denominated Debt

74% ofSOCAR's debt at 30 June 2012 is denominated in USD including the USD500m 
bond maturing in 2017.

 (Caryn Trokie, New York Ratings Unit)
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