“Fitch" beynəlxalq reytinq agentliyi Hökumətlə Əlaqəli Qurumların (GRE) Reytinq Meyarlarına uyğun olaraq Dövlət Neft Şirkətinin (SOCAR) reytinqini Azərbaycanın suveren reytinqinə (BB+/Stabil) bərabərləşdirilib.

Bu barədə agentliyin açıqlamasında bildirilir.

Məlumatda həmçinin deyilir ki, reytinq SOCAR-a verilən maliyyə zəmanətləri, pul köçürmələri və kapital qoyuluşları formasında dövlət dəstəyi, o cümlədən şirkətin sosial funksiyaları və neft-qaz layihələrinin inkişafı üçün dövlət vasitəsi kimi əhəmiyyəti ilə əsaslandırılır.

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Fitch Revises Outlook on Azerbaijan's SOCAR to Stable; Affirms at 'BB+'

Fitch Ratings has revised the Outlook on State Oil Company of the Azerbaijan Republic's (SOCAR) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR and senior unsecured rating at 'BB+'. The Recovery Rating is 'RR4'.

The rating actions follow the revision of the Outlook on the sovereign rating of Azerbaijan (BB+/Stable). SOCAR is fully owned by the state and its rating is equalised with that of Azerbaijan under Fitch's Government-Related Entities (GRE) Rating Criteria. This is underpinned by state support provided to the company in the form of financial guarantees, cash contributions and equity injections, as well as SOCAR's social functions and its importance as a state vehicle for the development of oil and gas projects.

We assess SOCAR's Standalone Credit Profile (SCP) at 'b+', with high leverage being the main constraint.

KEY RATING DRIVERS

Leverage High but Under Control: SOCAR's 1H20 performance was better than expected in our previous rating case, with broadly flat EBITDA yoy, as weaker performance in the upstream segment was partially offset by stronger trading operations. We estimate 2020 EBITDA will have only moderately fallen yoy and should rebound in 2021, on stronger international oil prices and increased regulated fuel prices since January 2021. We expect funds from operations (FFO) net leverage to remain below 4.5x over 2021-2023, materially below our 6x downgrade sensitivity, and in line with the 'b+' SCP.

Supportive Business Profile: SOCAR's 'b+' SCP takes into account its high leverage, but also its fairly high production (267,000 barrels of oil equivalent (boe) per day) and robust oil proved reserve life of 12 years. SOCAR's unit profitability measured as consolidated FFO to total upstream production was healthy at USD20/boe in 2019, lower than that of integrated oil majors (e.g. Royal Dutch Shell plc, AA-/Stable, USD32/boe), which have stronger downstream divisions, and closer to that of Russian oil producers (e.g. PJSC Lukoil, BBB+/Stable, USD20/boe). The upstream segment is SOCAR's key profit driver.

Close Links with the State: SOCAR's rating is equalised with that of the state given their strong ties under Fitch's GRE Rating Criteria. We assess status, ownership and control and support track record factors as well as socio-political and financial implications of GRE's default as 'Strong' resulting in a score of 30.

As the IDR reflects the combination of the strength of state linkage and SOCAR's SCP, a deterioration of the SCP on a sustained basis may result in the IDR being notched down from the sovereign. Most oil and gas projects in Azerbaijan operate under production-sharing agreements, in which SOCAR has a minority stake and where it also represents the state and is involved in marketing the latter's share of crude oil and gas (profit oil). In addition, SOCAR has stakes in some other major energy projects promoted by the state, such as the Southern Gas Corridor (SGC).

Significant Tax Contributor: Taxes paid by SOCAR accounted for almost 10% of government revenue in 2019. The state guarantees 9% of SOCAR's debt and provides equity injections to cover cash deficits, when needed.

Social Functions: Our assessment of links between the state and SOCAR is also supported by the latter's social role. One of its key functions is production and sale of fuel at regulated prices to the domestic market, which are enough to cover the company's operating cash costs but are lower than international prices. Also, SOCAR employs more than 50,000 staff in Azerbaijan. It does not pay dividends but it may be required by the state to make cash contributions to the state budget, government agencies or to directly fund some social projects.

Performance Controlled by State: The state exercises significant control over SOCAR's profitability and balance sheet through regulation of domestic fuel prices, cash injections, government distributions and other measures. To a large extent, SOCAR's high leverage is a function of the company's close links with the state but we believe that the government has incentives to keep SOCAR adequately funded.

Moderating Capital Intensity: We expect SOCAR's capex to moderate given the SGC and the STAR refinery in Turkey, SOCAR's two large projects developed together with partners and not consolidated on the company's balance sheet, have been brought on stream and should not require material additional capital injections. However, we have limited visibility over possible cash outflows related to its other projects, such as its upstream projects and modernisation of the Heydar Aliyev refinery. Given this limited transparency we put more emphasis on SOCAR's historical performance when assessing its credit profile.

DERIVATION SUMMARY

We equalise SOCAR's rating with that of Azerbaijan to reflect the strong ties between the two. High leverage and limited visibility of its capex programme are the main constraints on SOCAR's 'b+' SCP. High leverage is typical for some national oil companies. SOCAR's three most relevant peers rated on a top-down or constrained rating basis are Petroleos Mexicanos (BB-/Stable, top-down minus 3) in Mexico, JSC National Company KazMunayGas (BBB-/Stable, top-down minus 1) in Kazakhstan, and Petroleo Brasileiro S.A. (BB-/Negative, constrained) in Brazil.

KEY ASSUMPTIONS

- Brent crude price: at USD58/bbl in 2021 followed by USD53/bbl until 2023

- Increased domestic fuel prices since January 2021: up 11% for RON 92 gasoline and 33% for diesel

- Broadly stable upstream production in 2021-2023

- USD/AZN exchange rate: 1.7 over 2019-2022

- Aggregate capex of AZN9 billion over 2021-2023

- Continued support from the state

RATING SENSITIVITIES

SOCAR:

Developments That May, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

- An upgrade of Azerbaijan would not necessarily be replicated for SOCAR, unless its SCP improves.

- An upward revision of the SCP could be triggered by SOCAR's FFO net leverage falling consistently below 4x, improved standalone liquidity and better transparency.

Developments That May, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

- A downgrade of Azerbaijan.

- A negative revision of SOCAR's SCP, which could stem from FFO net leverage exceeding 6x over an extended period.

- Weakening state support.

Azerbaijan:

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

- Macro: Improvements in the transparency and predictability of Azerbaijan's policy framework, including exchange rate policy, that strengthens the country's ability to manage external shocks and reduces macro volatility.

- External Finances: Marked strengthening of the external balance sheet, for example due to sustained higher-than-forecast oil prices.

- Public Finances: Greater confidence in a sustained strengthening of the public balance sheet, for example based on a credible medium-term fiscal strategy and higher and more diversified GDP growth.

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

- External Finances: Prolonged lower oil prices sufficient to have a material negative impact on external buffers.

- Macro: Developments in the economic policy framework that undermine macroeconomic stability, such as contributing to a rapid erosion of the sovereign's external balance sheet or disorderly devaluation of the manat exchange rate, with adverse effects on the economy, banking sector and public finances.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Tight Standalone Liquidity: As of 31 December 2020, SOCAR's liquidity sources were around AZN8 billion, including cash balances and undrawn committed credit lines. This compares with AZN8 billion of short-term debt, including put option liabilities related to a Goldman Sachs transaction, which SOCAR is planning to refinance. Although SOCAR's standalone liquidity is tight, we expect the state to provide support should the need arise.

SUMMARY OF FINANCIAL ADJUSTMENTS

We treat liabilities resulting from the transactions involving disposal of certain assets to SGC and Goldman Sachs International (GSI) for a total AZN7 billion as debt-like obligations at end-2019. This mainly includes the sale of a 10% interest in the Shah Deniz PSA and in South Caucasus Pipeline Company to SGC, and a sale of a 13% stake in SOCAR Turkey Enerji A.S. to GSI.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

SOCAR's rating is equalised with that of Azerbaijan.

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