S&P expects SOCAR’s liquidity to remain manageable

S&P Global Ratings international rating agency has revised its outlook on Azerbaijan’s State Oil Company SOCAR to stable from negative while affirming ‘BB-’ issuer credit rating (ICR) on SOCAR, Report informs referring to S&P.

The outlook revision follows a similar rating action to the sovereign, highlighting the importance of SOCAR to the state and the latter’s strong fiscal and external stocks.

"We continue to view SOCAR as one of the government’s main assets in the country’s key oil and gas sector. The government fully owns the company, is heavily involved in its strategy and decision-making, and has a record of providing sizeable equity and debt funding for SOCAR’s CAPEX. Still, we continue to differentiate between the ratings on the sovereign and those on the company. Only about 10% of SOCAR’s debt is guaranteed by the government," S&P noted.

"The company’s day-to-day management is autonomous, and its structure is complex and difficult to monitor (including international or trading operations, given the absence of centralized treasury management or consolidated financial plans). We are also monitoring if the recent establishment of Azerbaijan Investment Holding in August 2020 to manage government-related entities will have any implications for SOCAR because the list of assets to be transferred to the holding company and the holding company’s role have yet to be clarified," the report said.

The authors of the report noted that the S&P assessment of higher volatility in the oil and gas exploration and production industry affects their view of SOCAR’s business risk.

"We think the global energy transition, rising focus on ESG, and stricter policies in many countries increase product substitution and growth trend risks for the oil and gas exploration and production industry. We expect oil and gas price volatility will continue. SOCAR generates majority part of the business from its oil and gas exploration, production, and refining operations, which leaves it exposed to the structural global changes for fossil fuels," reads the report.

The agency’s view on SOCAR’s credit quality is unchanged at ‘b-.’

S&P expects that SOCAR will maintain manageable liquidity and comfortable interest coverage metrics. ‘Although SOCAR’s investment plans are difficult to predict, in our base-case scenario, we expect SOCAR’s FOCF to be materially negative in 2020-2022 and estimate that funds from operations (FFO) to debt will be below 12 percent unless compensated by additional government funding. We expect only limited upside from the recent commissioning of the TAP gas pipeline to Europe because SOCAR is only a minority shareholder in this value chain, the ramp-up is likely to be gradual, and most export profits will accrue to the government and not the company,’ the rating agency noted.

The stable outlook reflects the rating agency’s expectation that SOCAR’s liquidity will remain manageable, and the government’s willingness to provide extraordinary and ongoing support remains solid.

"In our view, this would require an absence of major delays, cost overruns, and operating issues at the company’s CAPEX projects and core operations, and no major changes in SOCAR’s very strong links with the government. In our base-case scenario, we expect that the company’s liquidity will remain manageable, its domestic operations and exports will continue uninterrupted, and S&P Global Ratings-adjusted FFO to debt will be 9%-12% in 2020-2022," S&P added.