BAKU, Azerbaijan, April 1
By Leman Zeynalova - Trend:
Total's downstream earnings could decline up to 20 percent in 2020 and then progressively recover in 2021, Trend reports citing Moody's Investors Service.
Moody's has changed the outlook on Total S.A. and its guaranteed subsidiaries to negative from stable. Concurrently, Moody's has affirmed all the Aa3 long term ratings and P-1 short term ratings of Total, its guaranteed subsidiaries, as well as the ratings of revenue bonds guaranteed by Total. The full list of all affected ratings and entities is included in the end of the press release.
The negative outlook reflects increasing likelihood that Total will not be able or willing to sustain credit metrics commensurate with an Aa3 rating, such as retained cash flow (RCF)/net debt sustainably above 30%. Even before the outbreak of the coronavirus pandemics Total's ratings have been positioned relatively weakly in the Aa3 rating category. Total achieved retained cash flow (RCF)/net debt, as adjusted by Moody's, of around 29% in 2019 and we expect that the metrics will deteriorate significantly in 2020 before starting to recover in 2021 with an expectation that the metrics will move closer to the requirements to maintain the Aa3 rating.
The deterioration of Total's metrics in 2020 will be driven by a meaningful reduction of the company's earnings and cash flows across most of its businesses. Total's upstream earnings will suffer from significantly lower oil prices, which on the wake of coronavirus pandemics and with a price war in the industry plummeted in March 2020 below $30/bbl. Moody's believes that there is a risk that the oil prices will not return to the agency's fundamental medium-term price range of $50-$70/bbl (WTI) before 2022. Moody's base case is based on the assumption that the oil prices will remain low at around $40/bbl in 2020, progressively improving towards $50/bbl in the course of 2021.
In addition, despite benefitting from significantly cheaper feedstock, in 2020 Total's downstream businesses will not provide the usual offsetting effect, given the pressure on demand for a number of refined and petrochemical products driven by worsened economic conditions and current lockdowns in many countries in the world. Moody's expects the Total's downstream earnings could decline up to 20% in 2020 and then progressively recover in 2021.
The negative outlook also reflects the emerging threat to oil and gas companies' profitability and cash flow from growing efforts by many nations to mitigate the impacts of climate change through tax and regulatory policies that are intended to shift global demand towards other sources of energy or conservation.
Today's affirmation also considers that Total is taking immediate measure to protect its cash flows and its balance sheet. The company commented that in $30/bbl scenario (2020 price looking forward) it expects shortfall of around $9 billion operating cash flows in 2020 (excluding working capital, which may be released at least in the upstream business) comparted to its original budget set for $60/bbl. Totals intends to fund the difference through (1) cut of organic investments across all businesses up to around 20% ($3.3 billion savings); (2) immediate discontinuation of ongoing share buyback programme ($1.5 billion savings); and (3) an acceleration of operating expenses reduction by roughly $0.5 billion. However despite the still sizeable funding gap the company has not communicated any cuts in dividends, which may indicate its lower willingness to protect its Aa3 rating, and which is also reflected in the negative outlook.
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