Moody’s upgrades SOCAR’s baseline credit assessment

Moody's Investors Service (Moody's) has upgraded the Baseline Credit Assessment (BCA) of State Oil Company of the Azerbaijan Republic (SOCAR) to ba2 from ba3.

Concurrently, Moody's has affirmed SOCAR's corporate family rating (CFR) at Ba1. The outlook remains stable, Report informs per Moody’s website.

“Today's rating action, including the upgrade of the BCA, reflects the improvement in SOCAR's financial performance and credit metrics amid supportive oil and gas market environment; the company's strategic importance for the government of Azerbaijan; and a recent track record of more discipline in strategic and shareholder decisions, investment spending and shareholder distributions which translate into positive cash generation and good liquidity,” reads the report.

“SOCAR's business and financial profile strengthened over recent years thanks to buoyant hydrocarbon price environment, stable to growing production, and sound trading operations. Following a 56 per cent growth in 2021, revenue increased by 54 per cent to AZN119 billion [$70 billion] in 2022. Moody's-adjusted EBITDA surged to AZN14 billion [$8 billion] in 2022, a record high, from AZN7 billion in 2021 and AZN4 billion a year on average in 2017-20.

Revenue is likely to moderate to AZN80 billion-AZN90 billion a year in 2023-24 under Moody's oil price assumptions. EBITDA will be around AZN10 billion a year over the same period, lower than in 2022 but higher than in 2017-21,” Moody’s wrote.

“Although the government exerts substantial influence over SOCAR, the state has demonstrated more discipline in strategic and financial management of the company lately. This, together with robust financial performance in 2021-22, led to positive cash generation and the accumulation of a sizeable cash position. The company recorded free cash flow (FCF) of AZN2.6 billion in 2021 and AZN6.8 billion in 2022 after negative cash generation in 2019-20.

Moody's expects SOCAR to sustain its positive FCF over the next 12-18 months, although the size of that depends on the company's execution of its capital spending program, oil and gas market conditions, and the shareholder's strategic decisions.”

“The company's rating also takes into account its sizeable trading operations which reduce its consolidated margins, inflate leverage through the use of short-term debt and limit predictability of financial results because of the inherent volatility of these activities; governance considerations, including its complex organizational structure, limited transparency and disclosure, and concentrated ownership which may lead to rapid changes in its strategy and financial profile; and high operational concentration in Azerbaijan,” reads the report.