Fitch Ratings has affirmed State Oil Company of the Azerbaijan Republic’s (SOCAR) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at ‘BB+’. The Outlook remains Positive. The Recovery Rating is ‘RR4’.

We have revised our assessment of SOCAR’s Standalone Credit Profile (SCP) to ‘bb-‘ from ‘b+’ in light of its stronger financial profile.

SOCAR is fully owned by the state and its rating is equalised with that of Azerbaijan (BB+/Positive) under Fitch’s Government-Related Entities (GRE) Rating Criteria. This is underpinned by state support provided to the company in the form of financial guarantees, cash contributions and equity injections, as well as SOCAR’s social functions and its importance as a state vehicle for the development of oil and gas projects.

Key Rating Drivers
Stable Oil and Gas Production: SOCAR’s oil and gas output remained broadly stable in 2022 at 284 thousand barrels of oil equivalent per day. This comes on top of Azerbaijan’s 6% decrease in oil output and 7% higher gas production. Azerbaijan’s oil production has historically decreased and we do not expect this to materially change. We assume SOCAR’s production will grow by 0.5% annually in 2023-2025 on the back of higher natural gas output.

Close Links with the State: SOCAR’s rating is equalised with that of the state given their strong ties under Fitch’s GRE Rating Criteria. We assess status, ownership and control and support track record factors as well as socio-political and financial implications of GRE’s default as ‘Strong’, resulting in a score of 30. As the IDR reflects the combination of the strength of state linkage and SOCAR’s SCP, a sovereign upgrade would lead to continued equalisation of SOCAR’s rating with the sovereign’s and the company’s upgrade.

Most oil and gas projects in Azerbaijan operate under production-sharing agreements, in which SOCAR has a minority stake and where it also represents the state and is involved in marketing the latter’s share of crude oil and gas (profit oil). In addition, SOCAR has stakes in some other major energy projects promoted by the state, such as the Southern Gas Corridor (SGC).

Supportive Business Profile: SOCAR’s leverage has historically been relatively high compared with its peer group, but declined from 2022. This reflects higher cash-flow generation due to higher oil and gas prices. We expect that SOCAR will maintain a strong financial profile over forecast period until 2026 under Fitch’s oil and gas price deck. This underpins our upward revision of SOCAR’s SCP. The ‘bb-‘ SCP also takes into account the scale of operations and is constrained by corporate governance considerations with significant limitations on the disclosure of information.

Absheron Adds to Gas Output: SOCAR and TotalEnergies SE (AA-/Stable) started production in Absheron gas and condensate field in July 2023. SOCAR expects production from Absheron will amount to 1.8 million barrels of oil and 707 million cubic metres of natural gas in 2023. We understand that the start of Absheron field is the largest Azeri oil and gas development since Shah Deniz II. We believe the start of Absehron improves SOCAR’s business profile.

Asset Transfers Completed: SOCAR completed sales of its 14.35% participation interest in Shah Deniz PSA to SGC Upstream LLC and its 14.35% equity interest in South Caucasus Pipeline and SCP Hold Co to SGC Midstream LLC at end-March 2023. The purchasers are wholly owned by Southern Gas Corridor (SGC), which in turn is 49% owned by SOCAR. We believe that completion of the transaction is neutral for SOCAR’s business profile given SOCAR co-owns SGC.
At the same time, it is positive for SOCAR’s financial profile because it removes the risk that SOCAR would be obliged to return advances of AZN4.3 billion (end-2022 balance) received for the sale of these entities. We have historically treated the advances as debt.

Derivation Summary
We equalise SOCAR’s rating with that of Azerbaijan to reflect the strong ties between the two. SOCAR’s three most relevant peers rated on a top-down or constrained basis are JSC National Company KazMunayGas (BBB/Stable, equalised with Kazakhstan) in Kazakhstan, Petroleo Brasileiro S.A. (BB/Stable, constrained) in Brazil and OQ S.A.O.C. (BB+/Stable, constrained) in Oman.
Source: Fitch Ratings