S&P announces expectations for SOCAR investments in 2023-2024

International ratings agency S&P Global Ratings anticipates ambitious investments from Azerbaijan’s State Oil Company (SOCAR) in 2023-2024 totalling 4-5 billion manats (up to $2.941 billion), with positive Free Operating Cash Flow (FOCF) of 1-2 billion manats (up to $1.176 billion).

“In our base-case scenario, we anticipate S&P Global Ratings-adjusted FFO to debt of 30%-40% in 2023-2024 (41% in the rolling 12 months ended June 30, 2022) on the back of supportive O&G prices, according to Report.

Given our assumed Brent price of $85 per barrel (/bbl)-90/bbl over 2023 and 2024, we think SOCAR will continue demonstrating solid results with FFO to debt of 30%-40%, versus 28% in 2021, and debt to EBITDA of 2.0x-2.5x, versus 2.8x. This led us to revise up the SACP to 'b' from 'b-'.”

The company has been active in many international and domestic projects in various industries, including investments into domestic O&G operations, petrochemicals (Petkim and potentially Mercury in Türkiye, and SOCAR Polymer in Azerbaijan), a shipyard in Baku, SOCAR commodities trading operations, and others. The company's operations are concentrated in Azerbaijan (80%) and Türkiye (20%).

“We continue to view SOCAR as one of the government's main assets in the country's key O&G sector. We continue to see a very high likelihood of SOCAR receiving extraordinary support if needed. This view reflects SOCAR's position as the government's key asset in the O&G sector, which is central to the country's economy.

The company is 100% government controlled, with no privatization plans in sight. The government is heavily involved in determining SOCAR's strategy and has a track record of providing sizable equity and debt funding for capex. We understand that the government has established a special committee to monitor the financial condition of its large government-related entities (GREs), including SOCAR. Still, we don't equalize SOCAR's credit quality with our sovereign rating on Azerbaijan (BB+/Stable/B) because we believe SOCAR's day-to-day management is quite autonomous.

Moreover, the company's structure is complex and difficult to monitor, including international or trading operations, given the absence of centralized treasury management or consolidated financial plans. In addition, SOCAR's debt is only partly guaranteed by the government (about 5% at year-end 2022), while that of SGC, another prominent GRE in the hydrocarbon sector, is guaranteed,” S&P noted.