Moody's upgrades outlook on SOCAR's rating to positive

Moody's Investors Service has improved the outlook on the rating of the State Oil Company of the Azerbaijan Republic (SOCAR) from stable to positive.

This change reflects Moody's increased confidence in SOCAR's financial stability and future performance prospects. In addition to revising the outlook, Moody's confirmed SOCAR's corporate rating at Ba1. The rating agency also affirmed the probability of default rating (PDR) at Ba1-PD and the basic credit assessment (BCA) at ba2. These ratings suggest a positive evaluation of SOCAR's creditworthiness and operational stability, Caliber.Az reports citing the local media.

SOCAR expects to generate approximately two billion manat in cash during 2024-2025, which is projected to cover its anticipated debt obligations amounting to 9.3 billion manats ($5.5 billion).

Additionally, SOCAR's creditworthiness underscores its pivotal role in Azerbaijan's oil and gas sector and its significance to the national economy.

The company maintained stable hydrocarbon production levels from 2021 to 2023, with a slight decline noted in the first half of 2024. It benefits from close ties with the Azerbaijani government, which holds substantial reserves and stands ready to provide financial assistance when needed. Recent improvements in strategic and financial management, overseen by the government, further enhance SOCAR's operational stability and outlook.

Moody's analysts also consider several factors in SOCAR's rating. These include significant trading operations that impact consolidated margins, heightened leverage from short-term borrowings, and the inherent volatility of these activities, which can affect financial predictability. Corporate governance issues such as a complex organizational structure, limited transparency and disclosure practices, and concentrated ownership are also noted. These factors could potentially lead to swift changes in SOCAR's strategy and financial profile. Despite a decline in financial performance in 2023 compared to the peak levels of 2022, when the average price of Brent oil fell from $101 per barrel to $83 per barrel, Moody's assesses SOCAR's sustainability as intact.

Moody's reported that SOCAR's adjusted EBITDA margin stood at 9.1 per cent in 2023, compared to 11.8 per cent in 2022, 8.7 per cent in 2021, and 6.2 per cent in 2020. Despite fluctuations, SOCAR maintained positive free cash flow for the third consecutive year, supported by stable operating cash flow, moderate capital expenditures, and modest distributions to shareholders.

Looking ahead, Moody's expects SOCAR's profitability and cash generation to remain relatively stable throughout 2024-2025. The agency's rating reflects SOCAR's strong credit indicators, despite an increase in gross leverage to 2.4x in 2023 from 1.5x in 2022, which still remained below the levels of 3.4x in 2021 and the average of 5.2x from 2018 to 2020. Moody's adjusted EBIT to interest expense ratio decreased to 2.9x in 2023 from 7.6x in 2022, aligning with an average of 2.3x from 2018 to 2021, and is anticipated to remain stable in the forecast period of 2024-2025. Furthermore, SOCAR's ratio of revolving credit facility (RCF) to net debt declined to 49 per cent in 2023 from 118 per cent the previous year, yet it exceeded the 31 per cent average from 2018 to 2021.

SOCAR established in 1992 is involved in exploring and developing oil and gas fields in Azerbaijan. Major fields include the Azeri-Chirag-Gunashli (ACG) oil field and the Shah Deniz gas field. It operates several refineries, including the Heydar Aliyev Baku Oil Refinery. The company processes crude oil into various products, including gasoline, diesel, and jet fuel. SOCAR manages a network of pipelines and terminals for transporting oil and gas. Key export routes include the Baku-Tbilisi-Ceyhan (BTC) pipeline for oil and the South Caucasus Pipeline (SCP) for gas. SOCAR has expanded its operations internationally, investing in and acquiring assets in Türkiye, Georgia, Switzerland, and other countries. Notable projects include the STAR Refinery in Türkiye and SOCAR Trading, headquartered in Switzerland. SOCAR is a major partner in the ACG oil field, one of the largest offshore oil fields in the Caspian Sea, operated by BP. SOCAR is a key player in the Shah Deniz gas field development, in partnership with BP, TPAO, Petronas, and others. The field is a significant source of natural gas for the Southern Gas Corridor, which supplies gas to Europe.