Approximately USD30.8 billion of rated debt securities affected
London, 23 August 2012 -- Moody's Investors Service today changed to negative from stable the outlook
on the Aa1/P-1 senior unsecured debt ratings of Total S.A.
("Total") and its guaranteed subsidiaries.
RATINGS RATIONALE
Today's rating action reflects Moody's concern that the significant
increase in investments made by Total in the past two years to give fresh
impetus to its upstream growth strategy, has constrained the recovery
in its credit metrics relative to pre-2009 historical levels despite
the buoyant oil price environment, and reduced headroom at the Aa1
rating level.
In support of its strategic efforts to further strengthen and diversify
its hydrocarbon resource base, Total has significantly stepped up
investments in its upstream business since mid-2010, including
the launch of major organic projects and a series of acquisitions involving
in several cases the formation of new partnerships with independent exploration
and production companies. In the last twelve months (LTM) to June
2012, Total's upstream investments amounted to USD26 billion
compared to USD15 billion in the LMT to June 2010.
Despite the high oil price realizations achieved by the group in the past
eighteen months, this increase in capital spending has led to some
erosion in its upstream efficiency measures such as finding and development
costs (F&D) and return on capital employed (ROCE). In particular,
this has reflected Total's growing participation in capital intensive,
long cycle projects such as liquefied natural gas (LNG) and unconventional
plays (e.g. shale gas, heavy oil) resulting in a higher
allocation of capital towards unproved, not yet producing assets.
On a more positive note, Moody's acknowledges that the active
portfolio management undertaken by Total has helped free up capital and
mitigate the impact of heightened upstream investment activity on its
financial profile. Since the end of 2009, the group has raised
aggregate cash proceeds of USD18 billion from the disposal of various
non strategic oil and gas properties and downstream businesses such as
its 48.8% stake in CEPSA, Mapa Spontex, and
the gradual sell-down of its Sanofi shares. This has allowed
Total to remain broadly cash flow neutral in the two and a half years
to June 2012.
However, despite the positive effect of a strong oil price environment
on operating cash flow generation, Total has failed to rebuild any
meaningful headroom within its financial metrics relative to Moody's
guidance for the current Aa1 rating. In 2011, the group reported
retained cash flow (RCF)/net debt of 58%. This leaves the
same ratio at 52% on a three-year average basis compared
to the minimum level of 55% set for the Aa1 rating.
Looking ahead, Moody's expects Total's operating cash
flow to benefit from the start-up of several upstream projects
which, according to management's guidance, should not
only help raise production to around 2.7 million barrels of oil
equivalent per day (boepd) by 2015 but also yield higher margin barrels.
That said, in the near to medium-term, Total will be
required to sustain high levels of capital expenditure in order to bring
to market the resources it has added to its portfolio in recent years,
while inflationary pressures may further impact capital and operating
costs across the industry. In addition, contributions from
the group's downstream business to its cash flow are likely to remain
constrained given the challenging operating environment facing the European
refining and petrochemicals sectors. Therefore, the negative
outlook reflects Moody's belief that Total's ability to achieve
cash flow neutrality and reposition its credit metrics more solidly relative
to the Aa1 rating category within the next 18 months, will largely
depend on the continuation of a strong oil price environment and the timely
execution of further asset disposals.
A stabilisation of the outlook would be predicated on Total's ability
to enhance its operating cash flow generating capacity by completing its
major upstream projects on time and within budget, while successfully
executing the portfolio initiatives required to maintain cash flow neutrality.
In turn, this should lead to some strengthening in the group's
financial metrics, with RCF/net debt more comfortably positioned
in the high 50s and total debt to proved reserves below USD4.5
per barrel.
Conversely, negative rating pressure could develop should Total
fail to maintain cash flow neutrality and reposition its financial metrics
more solidly within the Aa1 rating as a result of (i) significant delays
and cost overruns affecting its major upstream projects, (ii) a
severe and extended correction in the oil price and/or (iii) its failure
to complete asset disposals.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Integrated
Oil & Gas Industry published in November 2009. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
Headquartered in Paris, France, TOTAL S.A. is
one of the largest integrated oil & gas companies in the world,
with total proved hydrocarbon reserves of 11.4 billion barrels
of oil equivalent and operations in more than 130 countries. In
2011, it reported revenues from sales of EUR167 billion and hydrocarbon
production of around 2.35 million barrels of oil equivalent per
day.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
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support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
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Moody's changes outlook on Total's Aa1/P-1 ratings to negative
