DBRS Confirms Total S.A. and Subsidiaries at AA and R-1 (middle)

DBRS has today confirmed the Unsecured Bonds & Debentures and Commercial Paper ratings for Total S.A. (Total or the Company), Total Capital SA (Total Capital) and Total Capital Canada Ltd. (Total Canada) at AA and R-1 (middle), respectively, all with Stable trends. The Total Capital and Total Canada ratings are based on the guarantee of Total.

Total has a strong financial profile and good financial flexibility, with its credit ratios reflecting its underlying profitability, although not as conservative as some of its peers. DBRS expects that the Company’s net debt-to-capital ratio (16% at March 31, 2009) may move up to the 20% to 25% range that was typical prior to 2008, as internal cash flow may be insufficient to fully fund the Company’s planned capex program of $18 billion in 2009 ($14 billion (78%) Upstream), similar to the 2008 level. However, Total’s ongoing sale of its investment in common shares of Sanofi-Aventis (9.6% interest valued at approximately $7.5 billion at June 30, 2009) will continue to provide a significant source of liquidity.

Based on the current production and pricing, 2009 earnings and cash flow could drop significantly relative to 2008 levels. Earnings and cash flow should benefit from expected production growth over the medium term, although the volatility of energy prices remains a key risk.

Rapidly rising crude oil prices coincided with a worldwide production decline of 10% between 2004 and 2008 (approximately 2.5% per year), mainly due to the negative impact of higher prices on volumes related to production sharing contracts (PSCs) and unscheduled shutdowns in the North Sea (Europe) in 2008. These factors, combined with natural field declines, more than offset growth from start-ups and ramp-ups of new major projects over the period. Production fell by 2.3% in 2008, partly due to the negative impact of higher prices on PSC-related volumes (Brent averaged $97.3 per barrel in 2008, up from $72.4 per barrel in 2007). However, the impact of lower crude oil prices (Brent averaged $44.5 per barrel in Q1 2009 and $59.1 per barrel in Q2 2009) on PSC-related volumes could augment the positive impact of bringing new projects on-stream over the medium term, potentially resulting in rising net production for Total, although this is subject to changes in OPEC quotas due to its heavy exposure to African and Middle East countries that are OPEC members.

The Company has a large portfolio of Upstream exploration and development growth prospects in diversified mature and developing regions. Total is targeting production growth largely from major projects in Africa, the Middle East and Asia. The price effect on PSCs inversely affects Total’s net production levels as PSCs represent approximately one-third of Total’s production and reserves. These targets include expected growth of 50% in LNG sales in 2010 compared with 2008 levels and tripling of long-term LNG purchases. LNG activities are expected to account for 16% of Total’s production in 2010 (13% in 2008) and be balanced among the Atlantic Basin, the Middle East and Asia-Pacific regions.

Total has also identified a large number of projects for development between 2010 and 2016, including several natural gas and LNG projects, heavy oil projects and development of projects deep offshore West Africa and in the Caspian Sea. Included in this time frame are the Company’s 74% interest in the Joslyn oil sands project and its 50% interest in Surmont Phase 2 in western Canada. The final investment decision (FID) with respect to the Joslyn mining project, which would be developed in two phases of 100,000 barrels per day (b/d) of bitumen production from the surface mining project, is expected in late 2010, subject to regulatory approvals. Total continues to study the possibility of building a delayed coker upgrader, in two phases, with ultimate capacity of approximately 230,000 b/d in Edmonton, Alberta. The FID to construct the upgrader will be made after basic engineering studies are completed, but not until the Joslyn mining FID in late 2010 at the earliest.

Similar to its peers, Total has experienced rapidly rising costs in its Upstream operations. Between 2004 and 2008, the Company’s per-unit production costs and taxes rose by 121% to $9.19 per barrel of oil equivalent (boe) and its three-year average reserve replacement costs rose by 161% to $14.89 per boe, reflecting rising energy and service costs, rising production tax rates and the price effect on production volumes and reserves under PSCs. Despite the rising trends, Total’s production costs and reserve replacement performance compare relatively favourably to those of its peers. Total is focused on cost reduction initiatives throughout the organization in order to reverse the upward pressure on costs given the significant decline in average Brent crude oil prices between Q2 2008 ($121.2 per barrel) and Q1 2009 ($44.5 per barrel), although increasing in Q2 2009 ($59.1 per barrel).

Total must manage a variety of political and business risks, including uncertainty regarding the stability of regulatory, legal, currency and taxation systems. For example, during the ramp-up of crude oil prices over the past few years, the national governments of a number of oil-producing nations (e.g., Bolivia, Russia and Venezuela) increased taxation and/or royalty rates, or unilaterally changed the terms of PSCs. New contracts typically result in less favourable terms. In Venezuela (4% of 2008 production), Total, among others, finalized an agreement during 2007 to grant the government majority control of the massive Orinoco heavy oil projects. In addition, Venezuela implemented a new 50% tax on crude oil priced above $70 per barrel. In Nigeria (10% of production), political unrest has resulted in production stoppages at several projects over the years, resulting in a 6% drop in Nigerian production net to Total in 2008. Total’s exposure to these risks is higher than some of its peers given the Company’s higher share of production (50% to 60%) coming from less developed countries.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil & Gas Companies, which can be found on our website under Methodologies.

This is a Corporate rating.