DBRS Confirms Total S.A. at AA and R-1 (middle) and Assigns AA to Total International, Stable Trends

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. DBRS has also assigned a new rating of AA to the Unsecured Bonds & Debentures of Total Capital International S.A. (International), with a Stable trend. The new rating is also based on the guarantee of Total. International is a wholly owned subsidiary of Total and acts as a finance company on behalf of the Total group by issuing debt securities. The confirmation and the assigned new rating reflects Total’s strong financial profile and recent actions to high-grade its Upstream portfolio and improve returns in its Downstream and Chemicals segments.

Total has a strong financial profile and good financial flexibility, with its credit ratios reflecting its underlying strong profitability, although these are not as conservative as some of its peers. DBRS expects that the Company’s net debt-to-capital ratio (17% at March 31, 2011) will remain slightly below the 20% to 25% range that was typical prior to 2008 as internal cash flow and asset sales should be sufficient to fully fund the Company’s dividends, acquisitions and planned capital expenditure program of $20 billion in 2011 ($16 billion (80%) in Upstream). Total’s sale of its common shares of Sanofi (formerly Sanofi-Aventis – 4.4% interest valued at approximately $4.7 billion at June 30, 2011) is expected to be completed in 2012.

Based on current Upstream production and pricing expectations and continuing implementation of cost-competitiveness measures in Downstream and Chemicals, earnings and cash flow could rise moderately in 2011 relative to 2010 levels.

Total’s worldwide production was flat between 2006 and 2010 despite a 3.6% increase in 2010. Over the period, declines in the North Sea operations of the United Kingdom (U.K.) and Norway were offset by growth in the Middle East and, to a lesser extent, in Africa. The negative impact of rising crude oil prices (except in 2009) on volumes related to production-sharing contracts (PSCs, which represent approximately one-third of Total’s production and reserves), combined with natural field declines, offset growth from start-ups and ramp-ups of new projects over the period.

The 2010 production increase was largely related to the ramp-up of projects started in 2009 and the start-up of the second Yemen liquefied natural gas (LNG) train in Q2 2010, combined with lower Organization of Petroleum Exporting Countries (OPEC) quota reductions, higher natural gas demand and improved security conditions in Nigeria. Production fell by 3.0% in Q1 2011 compared with Q1 2010, mainly due to the negative impact of higher prices on PSC-related volumes and civil unrest in Libya, partly offset by lower OPEC quota reductions. New field production ramp-ups offset normal field declines. Total’s net production levels are directly affected by changes in OPEC quotas due to the Company’s production within OPEC member countries and inversely affected by the price effect on PSC-related volumes.

The Company has a large portfolio of Upstream exploration and development growth prospects in diversified mature and developing regions. Total is targeting production growth of a 2% cumulative annual growth rate (CAGR) over 2010 to 2015 (excluding its recent investment in Novatek, Russia’s largest independent natural gas producer) based on an $80 per barrel Brent crude oil price and supported by 16 projects in development, ten of which are scheduled for start-up in 2011–2012, with the other six projects sanctioned in 2010. Furthermore, 12 major projects are expected to be launched in 2011–2012 for scheduled start-up between 2013 and 2018.

In the past year, Total has become much more open to transactions to high-grade its Upstream asset base as evidenced by its joint venture with Suncor Energy Inc. (Suncor) in Canada, investments in Novatek (Russia) and SunPower Corporation (SunPower (United States)), the sale of an exploration and production subsidiary in Cameroon and certain assets in Norway.

In Canada, the Total-Suncor strategic alliance encompasses the Suncor-operated Fort Hills mining project (Fort Hills), the Total-operated Joslyn mining project (Joslyn) and the Suncor-operated Voyageur upgrader project (Voyageur). Following closing on March 22, 2011, and a C$1.75 billion payment to Suncor, Total now owns 39.2% of Fort Hills, 38.25% of Joslyn and 49% of Voyageur. Total will no longer proceed with the planned construction of an upgrader in Edmonton, Alberta. The transaction provides Total with a very strong strategic partner with decades of operational and project development experience in the oil sands. Total’s 50% interests in the Surmont steam assisted gravity drainage (SAGD) and Northern Lights mining oil sands projects in Canada are not affected by the strategic alliance with Suncor.

In the Downstream segment, the Company plans to reduce the break-even point of its European refining operations by 20% in 2011 compared with 2009 and reduce its net refining capacity from 2.0 million barrels per day (b/d) at year-end 2010 to 1.8 million b/d, which will be achieved when the sale of its 48.83% interest in CEPSA closes in Q3 2011. The refinery capacity will be further reduced to 1.6 million b/d if the sale of the Lindsay refinery in the U.K. is effected by the end of 2011. Total plans to increase the combined return on average capital employed (ROACE) of the Downstream and Chemicals segments to 13% in 2015 from 9% in 2010 and to double their net cash flow in a constant price environment over the same period.

Similar to its peers, Total has experienced rapidly rising costs in its Upstream operations. Per-unit production costs (including taxes) reached $15.37 per barrel of oil equivalent (boe) in 2010 from $4.15/boe in 2004, reflecting a heated industry environment. Despite the Company’s recent cost-reduction efforts, the upward trend will likely resume in a higher crude oil price environment in 2011. Total’s three-year average reserve replacement cost ($16.00/boe in 2008–2010; $17.51/boe in 2007–2009) moderated in the latest period, following sharp increases in prior years ($9.81/boe in 2004–2006). Total is focused on stabilizing the upward pressure on reserve replacement costs given the significant rise in average Brent crude oil prices between Q3 2010 ($76.86 per barrel) and Q2 2011 ($117.36 per barrel).

Notes:
The R-1 (middle) ratings apply to the Commercial Paper issued under the Canadian program only.

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

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