Fitch Affirms SOCAR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the State Oil Company of the Azerbaijan Republic’s (SOCAR) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' and Short-term foreign currency IDR at 'F3'. The Outlook for the Long-term IDR is Stable, the agency reported on Thursday.

Fitch continues to align SOCAR's ratings with the sovereign's (the company is 100%-state owned), as the agency considers the legal, strategic and operational ties between SOCAR and its parent as strong, according to Fitch's Parent and Subsidiary Rating Linkage methodology.

SOCAR represents the state's interests in the oil and gas industry, which is vital to Azerbaijan's economy (oil and gas accounted for 95% of the country's exports in 2010). The Ministry of Finance also provides a guarantee for SOCAR's AZN750m loan due in 2016 (26% of gross debt at end-2009). Fitch views SOCAR's standalone rating to be commensurate with the 'BB' rating category.

SOCAR's ratings reflect the company's solid credit metrics compared with its Russian and international peers. This is demonstrated by its H110 EBITDA margin of 42.1 percent and gross adjusted leverage of 1.4x.

Fitch expects SOCAR to report favourable financial results in 2010. Fitch also anticipates the company will generate solid cash flow from operations in 2011 supported by the more favourable oil and gas industry environment. Fitch forecasts that the company's free cash flow will turn positive in 2011 but is likely to revert to being negative afterwards.

The ratings also consider SOCAR's intensive capex programme of AZN6.5bn (including the company's obligations under the production sharing agreements; PSAs) over 2011-2015. In addition, the company plans to build a refinery at Petkim Petrokimya Holdings A.S.'s (Petkim; 'BB-'/Negative) site, with throughput capacity of approximately 10 million tons.


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