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April 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed State Oil Company of the Azerbaijan Republic’s (SOCAR) Long-term Issuer Default Rating (IDR) at ‘BBB-', Short-term IDR at ‘F3’ and senior unsecured rating at ‘BBB-'. The Outlook on the Long-term IDR is Stable.
The ratings of SOCAR, a wholly state-owned national oil company of Azerbaijan (BBB-/Stable), are aligned with the sovereign‘s. SOCAR is a mid-size integrated oil company with 2013 hydrocarbon production of 255 thousand barrels of oil equivalent per day (mboepd) and a number of assets in midstream, downstream, chemicals and retail.
SOCAR controls Petkim, Turkey’s only chemical producer, and is constructing a 10 million ton capacity STAR refinery in Turkey. It is also a party to several production-sharing agreements (PSAs) in Azerbaijan and receives specified volumes of oil, natural gas and gas condensate free of charge.
Under Fitch’s conservative forecasts SOCAR’s credit metrics will deteriorate moderately in 2013-2015, with funds from operations (FFO) net leverage increasing to 1.9x in 2016, from 1.5x in 2012 and FFO interest coverage declining to 9.6x in 2016, from nearly 16.8x in 2012, before taking into consideration any divestments.
Ratings Aligned with Sovereign’s
SOCAR’s ratings are aligned with Azerbaijan‘s, as it represents the state’s interests in the strategically important oil and gas industry. SOCAR maintains close ties with the government and the State Oil Fund of the Republic of Azerbaijan (SOFAZ) to make financial and investment decisions.
Funding of SOCAR’s Projects
According to a recent decree by the President of Azerbaijan, SOFAZ and SOCAR will set up a joint venture (JV). SOCAR’s cash contribution to the JV will be limited to AZN49m or 49% of JV’s charter capital. SOCAR will also transfer to the JV its stakes in a number of ongoing projects, eg, a 10% stake in Shah Deniz PSA and gas pipeline projects. Thereafter, SOFAZ will lend additional funds to the JV, which it will use to fund its share of investments in the above-mentioned projects. Although there is no specific decision yet regarding the funding of SOCAR’s other announced projects, eg, the oil-gas processing and petrochemical complex (OGPC) in Baku, we expect that these projects will also be funded mostly by SOFAZ. Fitch’s sovereign analysts estimate that SOFAZ’s assets totalled about USD40bn at end-2013 and expect further moderate growth in sovereign assets.
SOCAR has recently agreed funding for the 10 million ton STAR refinery in Turkey
- over USD5bn in commitments from international banks, partially covered by Export Credit Agencies. SOCAR expects to make an additional USD1bn equity contribution for its 60% stake in the project, which is scheduled to be completed in 2017. ‘BB’ Standalone Profile
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 2013, SOCAR’s total hydrocarbon output (excluding equity stakes) was 255 thousand 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.
Gas Replaces Oil
Under our base rating case, we expect SOCAR’s own (excluding JVs) oil production to decline gradually in 2014-2016 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. In December 2013, the Shah Deniz Stage 2 partners approved the final investment decision with a USD28bn cost estimate, including the South Caucasus Pipeline expansion. Once completed, the project aims to increase production by 16 billion cubic meters of gas and 4 million tons of gas condensate starting from late 2018.
Large Capex, Higher Leverage
We conservatively estimate that SOCAR will spend over AZN7bn (USD9bn) on capex in 2013-2016. 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. We forecast that under Fitch’s oil price deck of USD96 per barrel of oil (bbl) in 2014, USD91/bbl in 2015 and USD85/bbl in 2016, SOCAR’s FFO net leverage will reach 1.9x in 2016, up from 1.5x in 2012.
Positive: Future developments that may result in positive rating action include:
-An increase in state support through eg, government guarantees for a large portion of the company’s debt, coupled with a sovereign rating upgrade Negative: Future developments that may result in negative rating action include:
-Weakening state support
-An aggressive investment programme and/or acquisitions resulting in a significant and sustained deterioration of stand-alone credit metrics
Per draft IFRS accounts, SOCAR had AZN1,252bn of cash at 31 December 2013, which was insufficient to cover its short-term debt of AZN1,459m on that date. Of the total cash and restricted cash at end-2013, AZN474m was held at the state-owned International Bank of Azerbaijan (BB/Stable), a related party. SOCAR’s short-term debt at end-2013 accounted for 29% of its gross debt, down from 40% at end-2012, following the placement in 2013 of a USD1bn 4.75% coupon 10-year bond.
Over 80% of SOCAR’s debt at 31 December 2013 was denominated in USD, to match USD-linked revenues, and 60% of its debt had fixed interest rates.