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 (18% at March 31, 2010) will 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 dividends and planned capex program of $18 billion in 2010 ($14 billion (78%), Upstream), which is similar to the 2009 amount. However, Total’s ongoing sale of its investment in common shares of Sanofi-Aventis (5.7% interest valued at about $4.6 billion at June 30, 2010) continues to provide a significant, although declining, source of liquidity.

Based on current Upstream production and pricing expectations, and continuing challenges in the Downstream and Chemicals markets, 2010 earnings and cash flow could rise moderately relative to 2009 levels. Earnings and cash flow could benefit from expected production growth over the medium term, although the volatility of energy prices remains a key risk.

Total’s worldwide production declined by 9% between 2005 and 2009 (approximately 2.4% per year), including a 2.7% drop in 2009. The 2005 to 2008 decline was mainly due to the negative impact of rising crude oil prices on volumes related to production sharing contracts (PSCs), natural field declines, especially in the North Sea operations of the United Kingdom and Norway, and the 2008 modification of contractual terms related to, and the sale of, a 16.7% interest in the Sincor assets (re-classified as an equity investment named PetroCedeño) and production in Venezuela.

The 2009 production decline was largely related to Organization of Petroleum Exporting Countries (OPEC) quota reductions and security related disruptions in Nigeria. These factors, combined with natural field declines, more than offset growth from start-ups and ramp-ups of new major projects and the positive impact of lower prices on PSC-related volumes. Production rose by 4.7% in Q1 2010 compared with Q1 2009, mainly due to ramp-ups on new fields and supported by lower OPEC quota reductions and lower levels of security related disruptions in Nigeria, partly offset by the negative impact of higher prices on PSC-related volumes. Total’s net production levels are directly affected by changes in OPEC quotas due to the Company’s exposure to several African and Middle Eastern OPEC members and inversely affected by the price effect on PSC-related volumes (which represent approximately one-third of Total’s production and reserves).

The Company has a large portfolio of Upstream exploration and development growth prospects in diversified mature and developing regions that is expected to result in production growth in excess of 2% per year from 2010 to 2014. Total is targeting production growth largely from major projects in Africa, the Middle East and Asia. These targets include expected growth of 60% in liquefied natural gas (LNG) sales and purchases in 2010 compared with 2009 levels. LNG activities are expected to account for 15% 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 2012 and 2018, including several natural gas and LNG projects, heavy oil projects and projects deep offshore West Africa and in the Caspian Sea. Included in this time frame are the Company’s 75% operating interest in the Joslyn oil sands mining project and its 50% non-operating interest in the Surmont steam assisted gravity drainage (SAGD) bitumen production in western Canada. The final investment decision (FID) with respect to the Joslyn 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 the medium term for start-up in 2017, 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. The FID to construct the upgrader will be made after the Joslyn mining FID, with upgrader start-up to coincide with mining operation start-up. The Surmont Phase 2 expansion (to increase production capacity from 20,000 b/d to 110,000 b/d (55,000 b/d net to Total)) is under construction and production start-up is expected in 2015. Total also has a 50% operating interest in the Northern Lights oil sands mining project and recently agreed to acquire a 20% non-operating interest in the Fort Hills oil sands mining project from UTS Energy Corporation (UTS), subject to regulatory and UTS shareholder approvals.

Similar to its peers, Total has experienced rapidly rising costs in its Upstream operations. Between 2005 and 2008, its per unit production costs and taxes rose by 66% to $9.19 per barrel of oil equivalent (boe) and its three-year average reserve replacement costs more than doubled to $14.89/boe, reflecting a heated industry environment and the price effect on PSC-related production and reserves. While per unit production costs and taxes declined by 15% to $7.78/boe in 2009, reflecting the impact of the economic downturn and Total’s cost reduction efforts, per unit reserve replacement costs rose by 18% to $17.51/boe in 2009. (Note that DBRS converts all natural gas reserves and production at a ratio of 6,000 cubic feet of natural gas to one boe.)

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. In Nigeria (10% of 2009 production), political unrest has resulted in production stoppages at several projects over the years. Total’s exposure to these risks is higher than some of its peers given its higher share of production (50% to 60%) coming from less developed countries. However, DBRS notes that, given the high levels of debt and deficits in some developed countries, the above-noted risk is rising in the latter countries as well.

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

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

This is a Corporate (Energy) rating.