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Rating Action:

Moody's changes the outlook on Total to negative; affirms its Aa3 and P-1 ratings

01 Apr 2020

Frankfurt am Main, April 01, 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook on Total S.A. (Total) and its guaranteed subsidiaries to negative from stable. Concurrently, Moody's has affirmed all the Aa3 long term ratings and P-1 short term ratings of Total, its guaranteed subsidiaries, as well as the ratings of revenue bonds guaranteed by Total. The full list of all affected ratings and entities is included in the end of the press release.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The oil and gas sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Total of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The negative outlook reflects increasing likelihood that Total will not be able or willing to sustain credit metrics commensurate with an Aa3 rating, such as retained cash flow (RCF)/net debt sustainably above 30%. Even before the outbreak of the coronavirus pandemics Total's ratings have been positioned relatively weakly in the Aa3 rating category. Total achieved retained cash flow (RCF)/net debt, as adjusted by Moody's, of around 29% in 2019 and we expect that the metrics will deteriorate significantly in 2020 before starting to recover in 2021 with an expectation that the metrics will move closer to the requirements to maintain the Aa3 rating.

The deterioration of Total's metrics in 2020 will be driven by a meaningful reduction of the company's earnings and cash flows across most of its businesses. Total's upstream earnings will suffer from significantly lower oil prices, which on the wake of coronavirus pandemics and with a price war in the industry plummeted in March 2020 below $30/bbl. Moody's believes that there is a risk that the oil prices will not return to the agency's fundamental medium-term price range of $50-$70/bbl (WTI) before 2022. Moody's base case is based on the assumption that the oil prices will remain low at around $40/bbl in 2020, progressively improving towards $50/bbl in the course of 2021.

In addition, despite benefitting from significantly cheaper feedstock, in 2020 Total's downstream businesses will not provide the usual offsetting effect, given the pressure on demand for a number of refined and petrochemical products driven by worsened economic conditions and current lockdowns in many countries in the world. Moody's expects the Total's downstream earnings could decline up to 20% in 2020 and then progressively recover in 2021.

The negative outlook also reflects the emerging threat to oil and gas companies' profitability and cash flow from growing efforts by many nations to mitigate the impacts of climate change through tax and regulatory policies that are intended to shift global demand towards other sources of energy or conservation.

Today's affirmation also considers that Total is taking immediate measure to protect its cash flows and its balance sheet. The company commented that in $30/bbl scenario (2020 price looking forward) it expects shortfall of around $9 billion operating cash flows in 2020 (excluding working capital, which may be released at least in the upstream business) comparted to its original budget set for $60/bbl. Totals intends to fund the difference through (1) cut of organic investments across all businesses up to around 20% ($3.3 billion savings); (2) immediate discontinuation of ongoing share buyback programme ($1.5 billion savings); and (3) an acceleration of operating expenses reduction by roughly $0.5 billion. However despite the still sizeable funding gap the company has not communicated any cuts in dividends, which may indicate its lower willingness to protect its Aa3 rating, and which is also reflected in the negative outlook.

The affirmation of Total's ratings, despite current stress in the oil and gas industry, also reflects the substantial strengthening of Total's business profile since 2015, which brings a degree of confidence that the company is reasonably well prepared for a temporary shock and should be able to deliver an improvement in its metrics once the oil prices rise and the demand for refined and petrochemical products stabilizes again. Between 2015 and 2019 Total managed to reduce its cash low break-even oil price to cover organic investments to less than $25/bbl from around $100/bbl and essentially halved its production costs to a fairly competitive $5.4/bbl.

The affirmation of the ratings also reflects that Total has an excellent liquidity buffer to weather the temporary weakness in cash flow generation. The company reported $27.4 billion of cash and cash equivalents on the balance sheet as of the end of 2019, supported by substantial undrawn committed lines worth roughly $12 billion without MAC clauses. These sources are well in excess of Total's short-term debt maturities of $14.8 billion (including leases) as of end of 2019.

Factors that would lead to an upgrade or downgrade of the ratings:

Negative rating pressure could develop if there are indications of more aggressive financial policy or weakening of the business profile in the currently challenging environment, leading to retained cash flow/net debt sustainably below 30%.

Moody's would consider upgrading the ratings if Total delivers on the forecasted production growth which should lead to further improving operating cash flow generation and sustainable free cash flow generation after dividends. Quantitatively, high cash flow coverage as measured by the retained cash flow/net debt metric at around 40% would indicate positive rating pressure.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Port Arthur Navigation District Ind Corp, TX

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

....Backed Other Short Term, Affirmed P-1

..Issuer: PORT OF PORT ARTHUR NAVIGATION DISTRICT OF JEFFERSON COUNTY, TX

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

....Backed Other Short Term, Affirmed P-1

....Backed Other Short Term, Affirmed VMIG 1

..Issuer: Port of Port Arthur Navigation District, TX

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

....Backed Other Short Term, Affirmed VMIG 1

..Issuer: Total Capital

....Backed Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Backed Other Short Term, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Aa3

....Backed Senior Unsecured Shelf, Affirmed (P)Aa3

..Issuer: Total Capital Canada Ltd.

....Backed Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Backed Other Short Term, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Aa3

....Backed Senior Unsecured Shelf, Affirmed (P)Aa3

..Issuer: Total Capital International

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Backed Other Short Term, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Aa3

....Backed Senior Unsecured Shelf, Affirmed (P)Aa3

..Issuer: Total S.A.

....Junior Subordinated Regular Bond/Debenture, Affirmed A2

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Aa3

....Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Other Short Term, Affirmed (P)P-1

....Senior Unsecured Shelf, Affirmed (P)Aa3

Outlook Actions:

..Issuer: Total Capital

....Outlook, Changed To Negative From Stable

..Issuer: Total Capital Canada Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: Total Capital International

....Outlook, Changed To Negative From Stable

..Issuer: Total S.A.

....Outlook, Changed To Negative From Stable

The principal methodology used in these ratings was Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Martin Fujerik
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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