Fitch Ratings has affirmed TotalEnergies SE's Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook.
TotalEnergies' ratings are supported by large scale, global operations, strong business diversification and robust financial profile. We forecast TotalEnergies will have strong credit metrics over 2022-2025, similar to other oil and gas (O&G) majors, due to the favourable hydrocarbons price environment. We consider the company's financial policy with dividends and share buybacks linked to cash flows as positive. The company has also made progress in adjusting its business profile to the expected changes in the long-term energy mix.
Key Rating Drivers
Strong Results in 9M22: TotalEnergies' cash flow from operating activities more than doubled in 9M22 yoy to USD41.7 billion. Stronger results were recorded across all operating segments, but the largest contribution came from the integrated gas, renewable and power segment (iGRP), where cash flows increased almost nine-fold to USD8.7 billion and the E&P segment where cash flow more than doubled to USD23.6 billion. Exceptional performance of the iGRP segment was driven mainly by high LNG prices and good trading results, but we also note that TotalEnergies has the highest net renewable capacity among European oil and gas majors (5.1GW at end-2021).
Strong Financial Profile: We forecast TotalEnergies will maintain a very strong financial profile until 2025 under Fitch's oil and gas price deck despite higher capex, shareholder distributions and windfall taxes. We expect funds from operations (FFO) net leverage to remain at around 0.5x over 2022-2024 and increase to below 1x by 2025 assuming moderating oil and gas prices. TotalEnergies refrained from giving a gearing target at the last strategic update due to the exceptionally low leverage expected in the near term. Historically, TotalEnergies maintained a gearing target of below 20%. The ratio amounted to 4% at end-September 2022 (excluding leases), according to the company's calculation methodology.
Lower O&G Production: TotalEnergies' consolidated oil and gas output fell to 2.1mmboe/d in 2021, down 9% compared to 2019. The drop is smaller than the company's global peers, who experienced falls from 11% for Shell plc (AA-/Stable) to 18% for BP plc (A/Stable). We expect a modest production growth in our forecasts until 2025. More broadly, TotalEnergies expects its oil output to grow until 2027 and to remain stagnant at the 2027 level until 2030. While the scale of oil and gas output is an important consideration for rating integrated oil and gas companies, the overall scale, diversification, financial results and the shift to low carbon emission technologies will gain more importance in the longer term.
Strategy Focused on LNG and Electricity: TotalEnergies continues to pursue a multi-energy strategy developing oil, natural gas and electricity assets. The company intends to grow LNG sales by 3% a year through to 2027 and boost LNG production by 40% to 2030, compared with 2021. Renewable capacity is expected to reach 100GW by 2030 with return on equity in excess of 10%. Traditional E&P business will focus on low cost projects, providing cash flows used to transform the group. We view TotalEnergies' strategic goals as positive. The company is also among the most advanced of its peers in terms of moving the business towards low emission energy sources.
Increase in Capex: TotalEnergies increased its capital expenditure plans to a range from USD14 billion to USD18 billion annually from USD13 billion to USD16 billion as announced in 2021. About a third of spending will be used for low carbon projects, including electricity, renewables and new molecules such as green hydrogen and biofuels (e.g. sustainable aviation fuel). We forecast FFO net leverage will be low by historical standards until 2025, despite higher planned investments.
Higher Shareholder Payouts: TotalEnergies plans a USD7 billion share buy-back programme for 2022 and to pay a special interim dividend of EUR1 per share in December 2022 (EUR2.6 billion in total). The company also expects to spend from 35% to 40% of cash flows on future shareholder distributions. We view the increase in shareholder payouts as being in line with peers, given strong cash flow generation. Adding to higher shareholder distributions will be a one-off payment to the global workforce in 2022, which could amount to 7% of global salary costs.
Windfall Taxes Uncertain: TotalEnergies estimates the EU's 'solidarity payment' could cost the group more than EUR1 billion for 2022, on top of a EUR1 billion windfall tax in the UK and EUR0.5 billion price cuts the group has implemented at its French petrol stations to help consumers tackle high fuel prices. We assumed a higher tax rate in our forecasts to account for potential additional tax liabilities, but note that windfall taxes are unlikely to materially change TotalEnergies' financial profile. This is because they only cover part of the profits, which remain high by historical standards due to the impact of geopolitical events and OPEC+ production cuts on O&G prices.
Russian Operations Maintained: In contrast to BP and Shell, TotalEnergies maintained shareholdings in some investments in Russia, including minority stakes in gas producer Novatek and LNG projects Yamal LNG and Arctic LNG 2. The company recognised impairments of USD10.7 billion for the assets in Russia in 9M22 on the deteriorating outlook for dividend income, but the latter still totalled USD0.7 billion in 9M22. Capital employed in Russia amounted to around USD6 billion as of end-September 2022 despite the impairments.
TotalEnergies does not plan new investments in Russia and we do not factor in dividends received related to the Russian operations in our forecasts from 2023 due to the uncertainty related to the sanctions. While the total cessation of Russian operations cannot be excluded, we assume this scenario would have a neutral impact on the rating given the scale of TotalEnergies overall operations.
Guarantees Broadly Excluded From Leverage: TotalEnergies provides a significant amount of guarantees against borrowings of its non-consolidated affiliates. At end-2021, these guarantees amounted to USD20.4 billion (USD14.1 billion at end-2020).
Guarantees related to Yamal LNG and Arctic LNG 2 projects totalled USD4.5 billion at end-2021. TotalEnergies disclosed in the latest annual report that EUR1.1 billion of those guarantees can be potentially called, if applicable. In April 2022, TotalEnergies declared force majeure on the Mozambique LNG project (guarantees of USD4.6 billion at end-2021) and removed all of its staff from the site due to the evolution of the security situation, but the company could resume works on the project in 2023.
Fitch believes that the possibility of large cash outflows associated with these guarantees is remote and therefore excludes the guarantees (except for Yemen LNG and EUR1.1 billion on Yamal and Arctic 2 LNG) from TotalEnergies' adjusted debt. In an unlikely scenario where all the guarantees were called, TotalEnergies' FFO net leverage would rise to 0.9x in 2022 from the current forecast of 0.5x.
Derivation Summary
TotalEnergies is a leading global integrated O&G producer with diversified assets in upstream and downstream. In 2021, its production of 2.1mmboe/d (62% liquids; excluding equity affiliates) trailed that of Shell plc (AA-/Stable; 3.0mmboe/d, 55% liquids), but was similar to BP plc's (A/Stable; 2.0mmboe/d, 47% liquids). TotalEnergies has strong downstream operations and is a global major LNG company.
Its upstream assets are well-diversified geographically, with higher exposure to institutionally weaker developing economies than Shell or BP, but lower exposure to the US. TotalEnergies' through-the-cycle net leverage is lower than that of BP, which is the main reason for TotalEnergies' higher rating, and similar to that of Shell.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Oil and gas prices in line with Fitch's latest base case price deck
Blended approach (Henry Hub and TTF) used for natural gas prices
Upstream production (excluding affiliates) remaining stable, averaging 2.1mmboe/d between 2022-2025
Gradual normalisation of refining margins
Capex averaging EUR16 billion per year between 2022 and 2025
Dividends and share repurchases in line with management's stated policies for 2022; distributions gradually normalising from 2023 but still in line with 35%-40% cash flow payout objectives
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
We do not expect an upgrade at least in the near term due to the long-term challenges posed by the energy transition. However, FFO net leverage or EBITDA net leverage below 1.0x coupled with a strong progress made in repositioning the business towards low carbon energy sources could be positive for the rating
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage or EBITDA net leverage sustained above 1.5x due to aggressive dividend policy and/or large capex
Failure to develop low-carbon business lines in lock-step with long-term declines in upstream production
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Ample Liquidity: As of end-2021, TotalEnergies had USD30.3 billion in cash and cash equivalents (including current deposits beyond three months and excluding restricted cash), against USD13.7 billion in short-term debt. The company also had USD12.3 billion of committed credit lines, of which USD11.6 billion was unutilised.
Issuer Profile
TotalEnergies is one of the largest global oil and gas producers with output in 2021 of 2.1mmboe/d and reserve life of over 10 years. TotalEnergies' business profile is well diversified with 48% of Fitch EBITDA from upstream segment, 26% from integrated gas, renewables and power, 21% from chemicals and 5% from marketing and services. TotalEnergies' upstream segment is well diversified, with 60% of production coming from investment-grade countries, while almost 30% comes from countries rated in sub-investment grade (largely in Latin America and Africa), and an additional 12% from others.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
We have revised TotalEnergies' ESG Relevance Score for GHG Emissions & Air Quality to '4' from '3' due to the fact that addressing Scope 3 emissions related to end-user consumption of oil and natural gas and products based on these hydrocarbons represents a long-term challenge, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
TOTALENERGIES SE 
