Azerbaijan, Baku, Dec. 28 / Trend /
Standard & Poor's Ratings Services said today that it had raised its rating on State Oil Company of Azerbaijan Republic (SOCAR) to 'BB+' from 'BB'. The outlook is stable, the agency said today.
We upgraded SOCAR because we upgraded the Republic of Azerbaijan (BBB-/Stable/A-3).
The rating action is in line with Standard & Poor's methodology for rating government-related entities (GREs). We continue to view the likelihood that Azerbaijan would provide timely and sufficient extraordinary government support to SOCAR as "extremely high". SOCAR is 100% government-owned and vertically integrated. We view SOCAR's role in the country's economy as "critical", owing to the company's central role in the country's most strategic sector, hydrocarbons, and its position as the country's largest employer. SOCAR has a monopoly position in refining and petrochemicals, and is a minority shareholder and the government's representative in Azerbaijan's largest internationally led upstream projects, Azeri-Chirag-Guneshli (ACG; 11.6461% ownership) and Shah-Deniz (10%), the message said.
The agency views SOCAR's link to the Azerbaijani government as "very strong". The government appoints the company's key management and determines its strategy, although day-to-day operations are managed at the corporate level. We believe that if SOCAR were to default, it would have severe negative consequences for the sovereign's reputation and access to financing. The government provided equity financing and loans from state-owned banks to SOCAR to support investments and refinancing during the 2008-2009 crisis, the message said.
The $485 million acquisition of an additional 1.6461% stake in ACG in July 2011 was financed with long-term debt provided by the State Oil Fund of Azerbaijan (SOFAZ; not rated). Still, the majority of SOCAR's debt is not guaranteed by the government.
We assess the company's stand-alone credit quality at 'bb', its business risk profile as "fair", and its financial risk profile as "significant". This reflects an only fair quality of assets, including mature majority-owned fields; underutilized and, therefore, low-profit refineries and petrochemical plants; and only minority stakes in ACG and Shah-Deniz. The government has previously used SOCAR to save other underperforming state-owned entities, AzeriKimiya and Azerigas, the message said.
Our assessment also reflects potential for large investments, such as projects to expand the country's oil production, or further acquisitions. The company has been prone to acquisitions, as demonstrated by its $2 billion purchase of a controlling stake in Turkey-based petrochemical plant Petkim. In addition, Azerbaijan is considering rebuilding and modernizing the country's entire refining and petrochemical industry.
If the government does not provide full equity financing for such upgrades, SOCAR's capital expenditures will materially increase. However, SOCAR enjoys considerable ongoing support from the government, and its adjusted debt is manageable, in our view, which leads to comfortable credit metrics, the message said.
The stable outlook reflects the stable outlook on Azerbaijan.
The rating on the sovereign is the key factor for the rating on SOCAR, given our view of an "extremely high" likelihood of extraordinary government support. In line with our methodology for GREs, an upgrade or a downgrade of the sovereign would trigger a commensurate upgrade or a downgrade on SOCAR.
However, additional ratings upside could result if SOCAR's stand-alone performance improved, for example, if large investments were financed by the government rather than corporate debt.
Downside pressure on the rating is quite unlikely, in our view, but could materialize if SOCAR's link with the state were to weaken. In line with our methodology for GREs, a deterioration of SOCAR's stand-alone credit quality would pressure the rating only if it were very material, that is to 'b+' or below, which we view as unlikely.