Moody’s: SOCAR’s credit metrics to improve in 2021 driven by recovery in oil & gas prices

Moody's Investors Service ("Moody's") has changed to positive from stable the outlook of State Oil Company of the Azerbaijan Republic (SOCAR), Report informs referring to the agency’s message.

Concurrently, Moody's has affirmed SOCAR's Ba2 corporate family rating (CFR), Ba2-PD probability of default rating (PDR), b1 baseline credit assessment (BCA), and Ba2 rating of SOCAR's senior unsecured notes.

“Today's rating action follows a sovereign rating action on Azerbaijan which took place on April 6, 2021, during which Moody's changed the outlook on Azerbaijan's rating to positive from stable and affirmed the long-term issuer and senior unsecured debt ratings at Ba2,” reads the message.

Today's rating action is in line with the sovereign rating action and reflects SOCAR's strong credit linkages with the state, as well as its exposure to Azerbaijan's operating and macroeconomic environment.

“The positive outlook on Azerbaijan's rating reflects Moody's assessment that governance and in particular policy effectiveness is improving, albeit from a low base, which may raise the resilience of the government's credit profile. In particular, enhancements to the monetary and macro policy framework may promote stability in the external and banking sectors in the face of shocks, while continued effective use of sizeable fiscal buffers would allow counter cyclical spending and limits the deterioration in the government's fiscal and debt metrics,” Moody’s analysts said.

The affirmation of Azerbaijan's Ba2 rating balances credit strengths from the country's sizeable net creditor position that underpins fiscal strength and lowers government liquidity and external vulnerability risks, as well as relative domestic political stability that supports the implementation of oil and gas projects, according to the ratings agency.

As a result, Moody's expects that operating and macroeconomic environment for SOCAR will gradually improve, supporting its credit profile.

“Given that SOCAR is 100 percent state owned, Moody's applies its Government-Related Issuers (GRI) methodology to determine the company's CFR. SOCAR's CFR of Ba2 factors in (1) the company's BCA of b1, which measures its standalone credit strength, excluding any extraordinary government support; (2) the Ba2 local-currency rating of the Government of Azerbaijan, with a positive outlook; (3) the very high default dependence between the state and the company; and (4) the high probability of the government providing support to the company in the event of financial distress.

SOCAR's b1 BCA factors in (1) the company's key role in the oil and gas sector of Azerbaijan and the national economy; (2) its sustainable hydrocarbon production volumes; (3) Moody's expectation that SOCAR's credit metrics will improve in 2021 driven by a recovery in oil and gas prices; (4) the company's adequate liquidity, underpinned by substantial cash balances and a comfortable debt maturity schedule; and (5) its close links with the Azerbaijan government, which has accumulated substantial reserves and should be in a position to provide financial support to the company if needed,” reads the message.

Moody's could upgrade SOCAR's rating if it were to upgrade Azerbaijan's sovereign rating, provided there is no significant deterioration in the company's specific credit factors, including its operating and financial performance, market position, credit metrics and liquidity, and no weakening in the probability of extraordinary state support in the event of financial distress.