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Ulviyya Shahin

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The forecasted cash generation of the State Oil Company of Azerbaijan (SOCAR) of around 2 billion manats ($1.176 billion) over 2024-25 should be sufficient to cover estimated debt maturities of 9.3 billion manats ($5.47 billion) over this period, according to the rating action of the Moody's international rating agency, according to which SOCAR's ratings with a positive outlook were confirmed, Azernews reports.

"In addition, SOCAR's credit quality reflects its key role in the oil and gas sector of Azerbaijan and its importance to the national economy; sustainable hydrocarbon production volumes in 2021-23, although some declines were registered in the first half of 2024; 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; and more discipline in strategic and financial management of the company, which was demonstrated by the state recently.

However, 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 the 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.

"While SOCAR's financial performance weakened in 2023, compared with a record high in 2022, as the average Brent crude oil price declined to $83 per barrel from $101 per barrel over this period, it remains sound.

The company's Moody-adjusted EBITDA margin was 9.1% in 2023, compared with 11.8% in 2023, 8.7% in 2022 and 6.2% in 2020. SOCAR also generated positive free cash flow (FCF) for the third year in a row thanks to solid operating cash flow, moderate capital spending, and modest shareholder distributions," Moody's added.

"We expect the company's profitability and cash generation to remain relatively stable in 2024-25. The rating action also reflects SOCAR's strong credit metrics. Its gross leverage increased to 2.4x in 2023 from 1.5x in 2022 but was well below the 3.4x in 2021 and 5.2x average in 2018-20, and is likely to remain around the current level over the next two years. Moody's-adjusted EBIT/Interest expense was 2.9x in 2023, compared with 7.6x in 2022 and 2.3x average in 2018-21, and will remain stable in 2024-25. Finally, RCF/Net debt declined to 49% in 2023 from 118% a year earlier but was above the 31% average in 2018-21," reads the report.

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