BAKU, Azerbaijan, Oct.29
By Leman Zeynalova – Trend:
If the Nagorno-Karabakh conflict continues, S&P rating agency cannot rule out the risk of asset damage, weaker local demand, payment arrears, or additional mandates on GREs, such as Azerbaijan’s state oil company SOCAR, to support domestic customers who face pressure from the pandemic and the Nagorno-Karabakh conflict, Trend reports citing S&P rating agency.
“Currently, we apply a 25 percent haircut to SOCAR’s cash to reflect relatively weak quality of the local banking system. If its cash becomes not fully available, we may switch to a 100 percent haircut, which would further weaken SOCAR’s metrics. We have therefore revised our assessment of SOCAR’s stand-alone credit profile downward to 'b-'.
“Regardless of how the situation in Nagorno-Karabakh develops, we expect SOCAR’s FOCF in 2020-2022 to be materially negative, only partly covered with equity injections from the government. Under our base case, we expect FFO to debt of 9%-12% in 2020-2022, if capex cuts or equity contributions do not fully offset lower oil and gas prices and OPEC+-related production cuts. Still, interest coverage is robust, and working capital fluctuations, which are difficult to predict, could support metrics somewhat above 12 percent.
“At this stage, in our base case, we do not include any direct damage to the safety of SOCAR’s employees, domestic operations, exports, production assets, or liquidity, because this is difficult to predict. We understand that SOCAR’s main oil and gas assets are located relatively far from the conflict zone, and that only the export pipelines run about 30-40 kilometers from Nagorno-Karabakh. Azerbaijani authorities reported an attempted missile attack in the area close to export pipelines Baku-Tbilisi-Ceyhan and Southern Gas Corridor (SGC), which was prevented by Azerbaijan’s military forces. We note that international oil majors are the shareholders and operators of Azerbaijan’s largest oil and gas projects, Azeri-Chirag-Guneshli (ACG) and Shah Deniz, where SOCAR only has equity stakes (25 percent and 10%, respectively, plus a 49 percent stake in Southern Gas Corridor CJSC, which holds 6.67 percent in Shah Deniz). As of now, SOCAR’s domestic operations, exports, and capex continue uninterrupted, and any additional security costs are on the government. SOCAR’s management doesn’t expect any changes to the planned commissioning of the Trans-Adriatic Pipeline (TAP) in November 2020, which would enable exports of up to 10 billion cubic meters (bcm) of gas from Azerbaijan’s Shah Deniz project via the SGC to Southern Europe. Also, we understand that despite the hostilities in Nagorno-Karabakh, SOCAR continues to have access to debt financing from domestic and international banks, and its cash held with domestic banks remains available,” reads the report.
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