The Outlook on the Long-term IDR is Stable.
SOCAR’s ratings incorporate state support as it is wholly state-owned, represents the state’s interests in the strategically important oil and gas industry, and continues to receive equity injections from the state (AZN190m in 2011), in accordance with Fitch’s parent and subsidiary rating linkage methodology. In Fitch’s view, although SOCAR continues to benefit from relatively strong links with the Azerbaijan state (’BBB-’/Positive), full and timely financial support, which would allow full rating alignment with the sovereign, is not certain without robust legal ties (e.g. explicit guarantees). Government guaranteed debt accounted for only 5% of the group’s total debt at end-2011. Fitch views SOCAR’s standalone rating to be commensurate with the ’BB’ rating category.
SOCAR’s ratings reflect the company’s solid credit metrics compared with its Russian and international peers. This is demonstrated by its 2011 EBITDA margin of 33.8% and FFO adjusted leverage of 1.2x. Fitch also anticipates the company will continue to generate solid cash flow from operations in 2012, albeit at a lower level. However, Fitch forecasts that the company’s free cash flow will turn negative in 2012 and afterwards mainly due to the intensive capex programme, resulting in an increase in FFO adjusted leverage to above 2x by 2013.
The ratings also consider SOCAR’s intensive capex programme of AZN5.3bn (including the company’s obligations under the production sharing agreements; PSAs) over 2012-2015. SOCAR plans to build a refinery at Petkim Petrokimya Holdings A.S.’s (’B+’/Stable) site, with throughput capacity of approximately 10m tonnes. SOCAR plans to start construction works at end-2012 or 2013 and to complete it by 2015. Additionally, SOCAR plans to build a new complex outside Baku in 2013-2016 in order to replace two old refineries in the city centre. This will include a gas refining plant with capacity of 16bcm, an oil refining plant with capacity of 10m tonnes, and a petrochemical plant, which is expected to use products from new oil and gas refineries. The company estimates construction costs at USD15bn-USD20bn and expects this project to be financed primarily by the state.
The ratings also incorporate the company’s relatively small scale of operations compared with its Russian peers, with 2011 oil and gas production (excluding equity stakes) of 262,604 barrels of oil equivalent per day. Fitch expects future production growth to be driven primarily by output expansion under SOCAR’s major PSAs. As the company operates mature oil and gas fields, its production costs are relatively high compared with its Russian counterparts.
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