Fitch Downgrades Total To 'AA-', Outlook Stable
The downgrade reflects our expectations that Total's leverage will sharply deteriorate in 2015 following the recent dip in oil prices, and will remain above our previous triggers for a downgrade in 2016-2018. In addition, Total continues to rely heavily on disposals in order to finance its negative free cash flow (FCF), which may be difficult with current oil prices and result in more borrowings than we currently anticipate. The Stable Outlook reflects that we expect Total's cash flows and credit metrics to be supported by (i) rising upstream output from new projects coming on stream and ramping up in 2015-16; (ii) reduced capex budgets; (iii) improved opex discipline; and (iv) improved refining margins, at least in 2015.
Total is a leading global integrated oil and gas (O&G) company with 2014 production of 1.58 million barrels of oil equivalent per day (MMbpd) (excluding equity affiliates) and strong positions in deepwater offshore and liquefied natural gas (LNG) production.
KEY RATING DRIVERS
Depressed Oil Prices
In 2015 ratings of O&G companies will be increasingly dependent on how they react to lower oil prices and whether they will choose to keep credit metrics under control through capex and dividend reduction, or will resort to more borrowings. In February 2015 Total announced it will reduce capex to USD23bn-USD24bn in 2015 (from USD26.4bn in 2014) and will control opex through a recruitment freeze and staff reduction, as well as cuts to its exploration budget. However, these measures will not be enough to ensure positive or even neutral FCF, and Total will need to either rely heavily on disposals to finance its operations in 2015-2016, or to increase its net debt.
Weaker Financial Profile
At end-2014, Total's net funds from operations (FFO) adjusted leverage increased to 1.8x, up from 1.2x-1.3x in 2010-2012 and 1.5x in 2013. This resulted mostly from a combination of high capex, lower operating cash flows and higher off-balance sheet obligations. Although we expect Total's capex to edge down and the divestment programme to go ahead, lower operating cash flows will result in a significant deterioration of credit metrics. In 2015 we forecast net leverage may rise to 2.2x, marginally improving to 2.0x in 2016 on recovering oil prices and rising output, and settling between 1.5x and 2.0x in 2017-2018 when we anticipate Brent to stabilise at USD80/bbl.
We believe that Total's projected through the cycle net leverage (1.5x-2.0x) is more commensurate with a low 'AA' rating category as reflected in the downgrade. This is in line with previous rating guidance.
High Reliance On Disposals
Disposals should help Total maintain relatively high capex as its operating cash flows fall. However, high reliance on disposals in financing negative FCF is more risky when oil prices are low as asset valuations tend to correlate with oil prices, and potential buyers may find it harder to attract finance to support acquisitions.
We assume Total will receive USD4bn from already committed divestments in 2015 in addition to USD1.5bn raised in each of 2015 and 2016, and USD1bn in 2017 (USD8bn in total, instead of targeted USD10bn). It remains to be seen how Total will react if it is unable to raise this amount and whether it will chose to resort to borrowing instead, which could lead to worse than expected financial metrics and a possible downgrade. In 2011-14, Total divested USD28bn of assets, mainly non-core, midstream and downstream.
Upstream Output To Recover
Total's production (excluding equity affiliates) continued to fall in 2014, showing a 2% decline yoy. However, this negative trend finally reversed in 3Q14 as its Angola CLOV project came on stream. In 4Q14 Total's upstream output averaged 1.63MMbpd, 2.5% higher than in 1Q14.
We expect Total's production to rise by 4% yoy in 2015 and 3% in 2016 as its other large projects, Ekofisk South in Norway, Laggan-Tormore in the UK and OFON2 in Nigeria, come on stream and ramp up. The company's own plans seem more ambitious with an additional 600Mbpd contributed by projects started up in 2014-2017. However, a significant part of these projects are operated as joint ventures (JVs), where cash flows from the sale of hydrocarbons will first be used to repay the JV debt and no cash distributions may be available to Total for a number of years. We usually exclude such projects from our forecasts.
Solid Business Profile
Total is one of the world's leading hydrocarbon producers with expertise in production from deepwater offshore fields and a large presence in LNG. It has sizeable and geographically diversified reserves and strong proved reserves life of 13 years. In 2014 Total's upstream production (excluding equity affiliates) amounted to 1.58 MMbpd, close to the levels of Eni SpA (A+/Negative, 2013: 1.50MMbpd) and ConocoPhilips (A/Stable, 2013: 1.41MMbpd), and below that of Royal Dutch Shell (RDS, AA/Stable, 2013: 2.37MMbpd).
Downstream To Provide Some Cushion
The restructuring of the Refining and Chemicals (R&C) segment coupled with improving refining margins started to bear some fruit as the segment's EBITDA increased to USD4.2bn in 2014 from USD3.3bn in 2013. We believe that improved margins will partly alleviate the pain of low oil prices and will help Total level out its operating cash flows in 2015. However, the current boost in European refining is likely to be temporary as high competition from overseas refineries in the Middle East and Russia will continue to squeeze margins down. Consequently, we do not expect the segment's earnings to rise significantly above the levels reached in 2014.
- Fitch's Brent price deck: USD55/bbl in 2015, USD65/bbl in 2016 and USD80/bbl thereafter
- Upstream production rising by 4%yoy in 2015, 3% in 2016 and 1% yoy in 2017 (without equity affiliates)
- Capex at USD23bn-USD24bn in 2015-2017
- Dividends ranging from USD3bn to USD5bn in 2015-2018
- Net cash receipt from disposals of USD8bn in 2015-2017
- EUR5bn hybrid bonds issued in February 2015 treated as 50% equity/ 50% debt
Negative: Future developments that could lead to negative rating action include:
- Stagnating or marginally positive upstream production (excluding equity affiliates) in 2015-2016 (Fitch's current expectation: +4% yoy in 2015, +3% in 2016).
- FFO adjusted net leverage above 2x on a sustained basis (Fitch's current expectation: marginally above 2x in 2015-2016; between 2x and 1.5x in 2017-2018).
- Consistently negative FCF (Fitch's current expectation: negative FCF before disposals in 2015-2016; marginally positive or neutral in 2017-2018).
- Proceeds from disposals significantly lower than currently expected (Total's expectations: USD10bn in 2015-2017).
Positive: Future developments that could lead to positive rating action include:
- Positive FCF on a sustained basis.
- FFO adjusted net leverage within the range of 1x-1.5x on a sustained basis.
- Consistently rising upstream production.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity, Balanced Repayments
At end-2014 Total's short-term debt of USD10.9bn was fully covered by USD25.2bn in cash. Total has healthy access to international debt markets and should be able to refinance upcoming maturities when needed. Total's debt is mainly made up of bonds and its maturities are well balanced.
In February 2015 Total issued a debut two-tranches hybrid bond for the total amount of EUR5bn. We assume a 50% equity credit for the bond according to our criteria (Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis).