S&P revises Total’s outlook from negative to stable

Credit ratings agency Standard and Poor’s has revised its outlook for oil major Total from negative to stable. S&P affirmed its ‘A+’ long-term and ‘A-1’ short-term corporate credit ratings on the company.

“The outlook revision reflects our view of Total’s strengthening cash flow generation. The strengthening reflects robust downstream performance, moderating capital expenditures (capex), and continuing cost efficiencies in the context of range-bound oil prices.

As a result, we project free operating cash flow of $5 billion-$7 billion in 2017, after capex,” S&P said.

This is an increase of more than $6 billion from 2016.

The credit agency said that, to bolster credit quality, the company will need to continue delivering on its strategy to reduce operating costs, and contain capital investment to reduce leverage and rebuild headroom at the ‘A+’ rating level.

Divestments important to counterbalance acquisitions

Standard and Poor’s has noted the fact Total has agreed to acquire or make several material investments, including the acquisition of Maersk Oil, two Brazilian pre-salt blocks, an additional share in a Ugandan oil greenfield project, and Engie S.A.’s liquefied natural gas (LNG) portfolio.

To maintain credit quality, it will be important for Total to continue to offset half or more of these expenditures by disposing of assets in a timely fashion, the agency added.

Total has so far sold Atotech B.V. for $3.2 billion and, yesterday, agreed the sale of its interest the Martin Linge field and Garantiana discovery to Statoil for $1.45 billion. Reported net debt will likely increase in the fourth quarter due to the payment of about $2 billion in Brazil, subject to working capital movements, S&P said.

S&P: $55 oil in 2018

In the context of still relatively weak oil prices, robust refining and chemicals performance continue to support operating performance. This division is generating a majority of the group’s free cash flow, at about $3 billion in 2017.

“We anticipate the upstream division to return to free cash flow generation in 2018 under our assumptions. Continuing supportive production and cost dynamics should result in stronger cash flows, even as taxes rise,” S&P said.

Furthermore, S&P said its ratings reflected Total’s positive business characteristics, including a massive and diversified global upstream portfolio; its strengthened position in the global LNG business, with further growth prospects; and its diversification benefits from sizable and profitable downstream activities.

“The company’s exposure to volatile and capital-intensive industries with material inherent risks, including depressed oil and gas prices, and emerging-market exposure balance these credit positives. The stable outlook reflects Total’s consistent drive to reduce costs and strengthen cash generation. We forecast that this should result in FFO-to-debt of about 40% in 2017 and above 45% in 2018 and after,” the agency added.

Reducing leverage is especially critical because the group’s metrics were persistently below our guidelines for the ratings in 2015 and 2016.

“We view at least 45% on average as commensurate with the current rating, factoring in our assumption of Brent crude oil at $55/bbl from 2018. We recognize that Total’s operating performance, although weaker, was more resilient than that of peers in 2015 and 2016,” S&P said.