What will SOCAR"s aggressive investment policy lead to?

Fitch expects that SOCAR will spend nearly USD5.8bn over 2013-2015 on capex.

The company has little flexibility to postpone / phase out capex as most funds are earmarked for its upstream to arrest brownfield production decline, to meet its obligations under the PSAs and to complete investment projects that are already underway. These include the construction of the 10m ton STAR refinery in Turkey scheduled to be completed in 2017.

Fitch experts believe that an aggressive investment programme and/or acquisitions resulting in a significant and sustained deterioration of credit metrics would be negative for the ratings.

SOCAR's ratings could be affected by a sovereign rating action. Evidence of weakening state support would be negative for the ratings. An increase in the level of state support through e.g., government guarantees for a large portion of the company's debt, coupled with a sovereign rating upgrade would be positive for the ratings.

Satisfactory Liquidity, Large Maturities SOCAR had AZN1,263m of cash at 31 December 2012, which was insufficient to cover its short-term debt maturities of AZN1,895m on that date. A large portion of SOCAR's cash including short-term deposits is held at the state-owned International Bank of Azerbaijan (IBA, 'BB'/Stable).

Fitch notes that SOCAR's short-term maturities at end-12 amounted to about 40% of its gross debt. In March 2013, SOCAR placed a 4.75% coupon USD1bn bond due in 2023, to refinance part of its existing debt and for its capital investment program.

78% of SOCAR's debt at 31 December 2012 was denominated in USD including the USD500m bond due in 2017, and about 60% of SOCAR's debt had floating rates.-0--