S&P improves outlook on SOCAR
- 29 January 2021
According 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. 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” reads the agency’s report.
Based on S&P’s view, SOCAR's credit quality is unchanged at 'b-', due to high leverage, negative free operating cash flow (FOCF), and lack of predictability in the company's trajectory. This balances higher industry volatility and lower risks stemming from the ceasefire agreement, as well as our expectation 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% 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 agency report notes.