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Rating Action:

Moody's changes the outlook on Total to stable; affirms its Aa3 rating

28 Nov 2019

Frankfurt am Main, November 28, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook on Total S.A. (Total) and its guaranteed subsidiaries to stable from positive. 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 affected ratings is in the end of the press release.

"We've stabilised the outlook as Total's credit metrics have not improved to levels that would be commensurate with an upgrade. It is also unlikely that the company's metrics will reach the guidance for an upgrade in the next 12 to18 months, notwithstanding an ongoing improvement in its operating cash flows," says Martin Fujerik, Moody's lead analyst on Total.

RATINGS RATIONALE

For the period of last 12 months to September 2019 Total achieved Moody's adjusted retained cash flow (RCF)/net debt of around 26%, which positions the company relatively weakly in the Aa3 rating category. While the rating agency expects that the ratio will improve back above 30% over the next 12-18 months, it is unlikely to increase sustainably above 40%, which is the guidance for an upgrade.

Moody's expects that the improvement in metrics will be primarily supported by an increase in cash flow generation. The company guides that it will be able to boost its operating cash flows by around $1 billion p.a. between 2019 and 2025 assuming a $60 Brent price per barrel (bbl), which Moody's believes is broadly achievable. The growth in cash flows in the coming two years will come primarily from the company's upstream business, where Total is currently experiencing a healthy increase in daily production (as high as 9% in 2019). Moody's expects that the production will continue to grow in the next 12-18 months at around mid-single digit in % terms, supported by previous acquisitions as well as a ramp-up of a number of upstream projects, in particular in liquified natural gas (LNG). After the finalisation of the acquisition of Anadarko's African asset for a total consideration of roughly $9 billion announced in May 2019, around half of which (Mozambique LNG project) was already closed in September 2019, Moody's does not expect further major acquisitions in the next 12-18 months.

At the same time the company committed to keeping its organic capital investment roughly flat (at around $15 billion to $16 billion p.a. or $16 billion to $18 billion including net acquisitions), which will support the continuation of positive free cash flow (FCF) generation (i.e. operating cash flows minus gross capital spending minus dividends, Moody's definition). Assuming a Brent price of $60/bbl Moody's expects that Total will generate FCF between $3 billion to $4 billion p.a. in the coming two years, which supports its Aa3 rating.

The return to positive FCF generation has been enabled by a significant reduction of break-even oil prices from $100/bbl in 2014 to below targeted $30/bbl as of today. The company achieved this reduction by (1) cutting its organic capital investments by roughly $8 billion p.a. since the peak in 2014; (2) cutting its operating expenditure by $4.2 billion through 2018 compared to 2014; including a significant repositioning of its upstream portfolio towards lower-costs assets that has leadled to a meaningful reduction of production costs to $5.7/bbl in 2018 from $9.9/bbl in 2014; and (3) continuously focusing on the efficiency of its downstream activities that managed to deliver fairly stable cash flows despite material restructuring and asset sales. Moody's expects that Total will continue lowering its production costs and deliver further costs savings, which will further support cash flows.

Environmental considerations incorporated into the agency's credit analysis for Total are primarily related to potential carbon dioxide regulations, but also include natural and man-made hazards. Social risks are primarily related to demographic and societal trends and responsible production. These risks could influence regional moves towards less carbon-intensive sources of energy, which could reduce demand for oil, gas and refined products. The entire sector is exposed to rising litigation risk, which is an event risk related to climate change and related disclosures. Future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk for the company. These risks also add to corporate governance considerations with respect to financial strategy and risk management. A strong business profile with a clear carbon transition strategy, healthy financial position and low financial leverage are important characteristics for managing these environmental and social risks.

Total has incorporated carbon footprint reduction in its strategy, which the agency views positively. It committed to reducing the absolute level of scope 1 and scope 2 emissions in its operated oil and gas facilities from 42 million tonnes p.a. CO2 equivalents in 2018 to below 40 million tonnes p.a. in 2025, despite ambitious growth plans across all the business segment, and aims to reduce the carbon intensity of energy products used by its customers by 15% between 2015 and 2030. Among other measures, the strategy also contains an annual budget of $1.5 billion to $2 billion into lower-carbon electricity (gas and renewables).

On the back of improved cash flows and with a gearing ratio being around or below the company's 20% ceiling over the past four years, the company has introduced a number of shareholder-friendly measures since 2018. In 2018 Total announced a $5 billion share buyback programme for 2018-2020, which will be completed next year, and effectively returned to cash dividend after offering a scrip option since 2015, which was discontinued in 2019. In addition to that, in its strategy update in September 2019 Total announced an acceleration of dividend growth, targeting 5-6% p.a. from 2019 (previously 10% increase between 2018 and 2020), which will limit the improvement in RCF/net debt sustainably above 40%. Furthermore, the announced debt-funded acquisition of Anadarko's African assets initially puts additional pressure on the metrics until the assets start to deliver cash flows; notwithstanding a sound strategic rationale behind the transaction. Total expects the acquisition to be free cashflow positive from 2020 even at a Brent price of less than $50/bbl.

WHAT COULD CHANGE THE RATINGS UP/DOWN

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.

Negative rating pressure could develop as a result of changes to the company's financial policy resulting in a more aggressive balance sheet leveraging, including as a result of acquisitions, with retained cash flow/net debt sustainably declining to below 30%.

LIST OF AFFECTED RATINGS

..Issuer: Total Capital

Affirmations:

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

....Backed Senior Unsecured MTN 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

Outlook Action:

....Outlook, Changed To Stable From Positive

..Issuer: Total Capital Canada Ltd.

Affirmations:

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

....Backed Senior Unsecured MTN 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

Outlook Action:

....Outlook, Changed To Stable From Positive

..Issuer: Total Capital International

Affirmations:

....Backed Senior Unsecured MTN 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

Outlook Action:

....Outlook, Changed To Stable From Positive

..Issuer: Total S.A.

Affirmations:

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

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

....Commercial Paper, Affirmed P-1

....Senior Unsecured MTN Program, Affirmed (P)Aa3

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

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

Outlook Action:

....Outlook, Changed To Stable From Positive

..Issuer: Port Arthur Navigation District Ind Corp, TX (guaranteed by Total S.A.)

Affirmations:

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

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

..Issuer: Port of Port Arthur Nav Dist of Jefferson Cnty, TX (guaranteed by Total S.A.)

Affirmations:

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

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

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

..Issuer: Port of Port Arthur Navigation District, TX (guaranteed by Total S.A.)

Affirmations:

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

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

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Integrated Oil and Gas Methodology published in September 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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

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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