S&P downgrades Azerbaijan's SOCAR to 'BB'; outlook stable

The agency also lowered its rating on SOCAR's senior unsecured debt to 'BB' from 'BB+'.

The rating action on SOCAR follows the downgrade of the company's only shareholder, the Republic of Azerbaijan, on Jan. 29, 2016. 

S&P said: "The rating on SOCAR now incorporates a one-notch uplift--versus a two-notch uplift previously--from the rating on the sovereign, reflecting our view of the government's reduced capacity to support its government-related entities

(GREs). That said, we continue to believe there is an extremely high likelihood that SOCAR would receive such support due to its critical role for and very important link with the government.

"Our assessment of SOCAR's stand-alone credit profile (SACP) remains unchanged at 'bb-'. We forecast a moderate increase only in SOCAR's debt metrics due to the lower oil prices. This is because SOCAR has materially cut its capital expenditures, which should enable the company to generate positive free operating cash flow, even in the current environment. We also anticipate continuing ongoing support from the government, including our expectation that the government will finance part of SOCAR's capital expenditures in 2016. We capture this in our assessments of SOCAR's business and financial risk profiles as well as its liquidity.

"In our revised base-case scenario for SOCAR we assume:

-- A Brent crude oil price of $40 per barrel in 2016, $45 in 2017, and $50 from 2018 onward.

-- About 1% decline in oil production in 2016, then stabilizing at about 9.6 million tons, including production sharing agreements and the share in Azeri-Chirag-Guneshli (ACG).

-- Stable gas production, as declining own production should be offset by an increase at Shah Deniz.

-- An exchange rate of Azerbaijani new manat (AZN) 1.6 to US$1.

-- Continued government support to finance SOCAR's participation in major projects, such as TANAP (the Trans-Anatolian gas pipeline), ACG, and Shah Deniz, with equity injections.

-- Capital expenditures of AZN1.5 billion-AZN1.6 billion in 2016-2017.

-- Distribution to the government of about AZN0.4 billion."