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Rating Action:

Moody's downgrades Total SA's rating to Aa3; stable outlook

08 Apr 2016

London, 08 April 2016 -- Moody's Investors Service (Moody's) has today downgraded the senior unsecured ratings of France's largest company, Total S.A. (Total), to Aa3/(P)Aa3 from Aa1/(P)Aa1 and its junior subordinate ratings to A2 from Aa3 to reflect continuing pressure on the firm's operating cash flow and credit metrics as a result of sustained oil price weakness. At the same time, Moody's affirmed Total's P-1/(P)P-1 short-term ratings. The outlook on all ratings is stable. Today's action concludes the review for downgrade initiated by Moody's on 22 January 2016.

"The downgrade of Total's ratings mainly reflects our expectation that oil prices will remain lower for longer in 2016-17 and will continue to pressure Total's operating cash flows and credit metrics. All of which is at a time when the company manages a sizable debt position," says Elena Nadtotchi, Vice President -- Senior Credit Officer and Moody's lead analyst for Total.

Total is reducing its operating and investment costs, and is targeting divestments to help fund negative free cash flow in the next two years. Moody's expects that Total will look to reinstate cash dividends, currently paid 60% in scrip, as the oil price improves over the medium term, and that will likely delay improvements in the firm's credit metrics.

Moody's oil price assumptions are $33 per barrel of oil (bbl) in 2016, $38/bbl in 2017 and $43/bbl in 2018.

RATINGS RATIONALE

-- DOWNGRADE OF RATING TO Aa3 --

Today's downgrade of Total's senior unsecured ratings from Aa1 to Aa3 stable primarily reflects the ongoing low price environment for oil and natural gas and the impact it will have on the company's cash flow generation and the expected pace of recovery in its credit profile, following a multi-year period of high capital investment and negative free cash flow generation.

When taking into account its oil price assumptions, Moody's expects that Total will generate moderate negative free cash flow (before asset sales) in the next three years. As such, Total is unlikely to be able to reduce its substantial debt in the near term, despite executing on its plan to deliver around $10 billion in divestment proceeds in 2015-17. As a result, its financial metrics will remain relatively weak, with retained cash flow/net debt of around 30% (compared to 31.5% reported in 2015) and net debt/EBITDA sustained above 2x in 2016/2017. To support its balance sheet, Total issued hybrid instruments in 2015 and maintains a high cash balance (equivalent to 35% of its adjusted debt), but will maintain a relatively elevated net debt/net capitalisation position in 2016/2017 close to 40% (37% in 2015, as calculated by Moody's).

Total's Aa3 rating balances Moody's assessment of Total's resilient integrated business model with the expectation of a period of weaker financial metrics in 2016-18, as a result of its relatively large debt. Total is currently implementing its strategy for coping with a prolonged oil price downturn. This plan focuses on (1) the delivery of largely de-risked growth projects that target a 5% production increase in 2015-17; and (2) the accelerated reduction in operating and capital costs over 2016-17, both of which will allow the company to reduce the negative effect of lower oil prices on its cash flows.

The company is implementing a number of operating measures to maximise its funds from operations amid lower oil prices, as it concludes its investment cycle in 2016-17. These measures include (1) $1 billion in additional operating cost cuts aimed at reducing costs by $3 billion (or around 12% of 2015 adjusted EBITDA); (2) a further reduction in capital expenditures to $19 billion in 2016 (from $23 billion in 2015) and a lower level of investment at $17 billion-$19 billion from 2017 onward; (3) a reduction in the exploration budget to around $1.5 billion annually; as well as (4) the introduction of a scrip dividend in 2015.

Notwithstanding its oil price assumptions, Moody's estimates that these measures will arrest the precipitous decline in Total's funds from operations in 2016-17, following their almost 22% decrease over 2015 as oil price fell. Moody's expects that Total's downstream operations and marketing will continue to perform strongly and support operating cash flow generation in the low oil price environment.

LIQUIDITY POSITION

Total maintains a strong liquidity profile underpinned by substantial undrawn committed lines of about $10.7 billion, as well as cash balances of $29 billion, as reported at end-2015. These comfortably exceed debt maturities falling due within one year of approximately $7.7 billion and the projected negative free cash flow. Proceeds from the agreed asset disposals (of at least $4 billion in 2016) will further strengthen the liquidity position of the group.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Total's Aa3 rating reflects the expectation of gradual improvement in funds from operation, supported by some recovery in oil prices over 2017-18, growth in production and accelerated cost cutting in 2016-17.

The stable outlook is also supported by the expectation that Total will execute on the targeted $10 billion in divestments in 2016-17 and limit additional borrowing to support its operations and payments to the shareholders.

WHAT COULD CHANGE THE RATING UP/DOWN

The upgrade of the ratings will be driven by the improvement in operating cash flow leading to sustainable free cash flow generation after dividends, and leading to deleveraging via the reduction of debt or improvement in metrics with retained cash flow/net debt maintained around the mid-40s in percentage terms.

Negative rating pressure could develop as a result of a change in 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%.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Total S.A. (Total) is one of the largest integrated oil & gas companies by proved reserves, and the largest corporation in France. At the end of 2015, the group maintained total proved reserves of 10.9 billion barrels of oil equivalent (boe) that represent around 13.4 years of production. In 2015, Total reported USD 143 billion in revenues, USD224 billion in assets. The company is listed in France and currently has capitalisation of around USD105 billion.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: TOTAL S.A.

....Junior Subordinated Regular Bond/Debenture, Downgraded to A2 from Aa3, review for downgrade

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Aa3 from Aa1, review for downgrade

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

....Senior Unsecured Shelf, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

.Backed Senior Unsecured Revenue Bonds supported by Total S.A., Downgraded to Aa3 from Aa1, review for downgrade

..Issuer: Total Capital

....Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Aa3 from Aa1, review for downgrade

....Backed Senior Unsecured Shelf, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

..Issuer: Total Capital Canada Ltd.

.... Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Aa3 from Aa1, review for downgrade

..Issuer: Total Capital International

.... Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa3 from (P)Aa1, review for downgrade

.... Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Aa3 from Aa1, review for downgrade

Affirmations:

..Issuer: TOTAL S.A.

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

.Backed Senior Unsecured Revenue Bonds supported by Total S.A., Affirmed P-1

.Backed Senior Unsecured Revenue Bonds supported by Total S.A., Affirmed VMIG 1

..Issuer: Total Capital

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

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

..Issuer: Total Capital Canada Ltd.

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

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

..Issuer: Total Capital International

.... Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

Outlook Actions:

..Issuer: TOTAL S.A.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Total Capital

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Total Capital Canada Ltd.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Total Capital International

....Outlook, Changed To Stable From Rating Under Review

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Elena Nadtotchi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Total SA's rating to Aa3; stable outlook
No Related Data.
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