DBRS Confirms Total S.A. and Subsidiaries Commercial Paper Ratings at R-1 (middle), Stable

DBRS Limited (DBRS) has today confirmed the Commercial Paper ratings of Total S.A. (Total or the Company) and its subsidiaries at R-1 (middle). All trends are Stable. Total’s ratings reflect the Company’s exceptional ability to resist the current industry downturn, in large part because of its strong business risk profile, significant liquidity and continued focus on both operating and capital efficiency. With its diverse asset base, the Company has the flexibility to deploy capital investments (capex) in areas that provide superior long-term netback potential. Furthermore, the Company’s downstream operations act as a natural hedge in periods of low commodity prices. The rating confirmation incorporates DBRS’s expectation that key credit metrics will deteriorate materially in 2015, predominately driven by weak commodity prices; however, a negative rating action could be triggered if key financial metrics deteriorate beyond the rating range on a sustained basis.

One key challenge for Total and its peers is adapting to what could be an extended period of low oil prices that could continue to significantly depress internally generated cash flow. In this challenging period of uncertainty about the timing of commodity price recovery, it is imperative for an oil and gas (O&G) company to (1) preserve liquidity, (2) focus on both operating and capital efficiency and (3) maintain capex and dividend flexibility to adjust spending according to changing commodity prices, which could greatly affect cash flow. Applying the aforementioned three factors, DBRS believes that Total could withstand the challenging environment better than many other O&G producers.

Total’s cost-saving initiatives combined with incremental production volume, accelerated asset sale program and optional scrip dividend are expected to reduce cash burdens materially by approximately $10 billion in 2015. In light of the Company’s prompt response to the challenging operating environment, DBRS expects free cash flow deficits after net asset sales to be manageable over the next several years, even if oil prices fall further from the current level. Total bolstered its liquidity in Q1 2015 as the Company issued EUR 5.0 billion junior subordinated notes. Total’s available liquidity should be sufficient to fund cash flow deficits over the next several years under a prolonged weak commodity price scenario; however, key credit financial metrics, particularly debt-to-cash flow and interest coverage ratios (ICRs), deteriorated significantly in Q1 2015 and are expected to remain well below the current rating category throughout 2015. The Stable trend assumes that Total’s financial metrics will improve gradually from 2016 as the Company progresses in transforming its production profile and reaching its potential production target of 2.8 million barrels of oil equivalent per day (mmboe/d) by 2017 (which was announced in September 2014; 2.1 mmboe/d in 2014 and 2.4 mmboe/d in Q1 2015).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Oil and Gas Industry (October 2014), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.

The R-1 (middle) rating for Total S.A., Total Capital SA and Total Capital Canada Ltd. applies to the Commercial Paper issued under the Canadian program only.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.