Total Expects Oil-Industry Downgrades as Dividends Maintained

  • French company announces further cuts to costs and investment
  • Oil and gas producer will sell more assets such as pipelines

Total SA became the latest major energy company to keep investor payouts, accepting that the industry risks credit-rating downgrades by maintaining dividends amid the worst oil crash in 30 years.

“Probably most of the industry will be downgraded,” Chief Financial Officer Patrick de la Chevardiere said Thursday at a press briefing in London. The impact on Total will be “very negligible” since the market has already priced in the higher cost of credit amid crude’s collapse, he said.

Oil producers including BP Plc and Royal Dutch Shell Plc have stuck doggedly to their dividends, cutting operating costs and investments to free up cash for shareholders as the price plunge dents earnings. Total was among several European oil and gas companies assigned a negative outlook by Standard & Poor’s this month as the market rout continued.

The French producer, which reported a 26 percent decline in fourth-quarter earnings on Thursday, kept its dividend unchanged from the third quarter at 61 euro cents a share and offered investors the option of taking the payout in stock discounted by 10 percent in a bid to conserve cash.

‘Strong’ Model

“We maintained the dividend because we are convinced that our business model is strong enough to support it,” the CFO said. He reiterated that Total plans to fund its dividend next year from the cash it generates pumping, refining and selling oil, without the need to take on debt or sell assets with crude at $60 a barrel.

Brent crude, the global benchmark, is currently trading at around $30 a barrel, more than 40 percent below its level a year ago. S&P sees Brent at $40 this year and $45 in 2017, the ratings company said Feb. 1 as it cut Shell’s credit rating and said Total, BP, Eni SpA, Repsol SA and Statoil ASA may follow suit.

Total said Thursday it will exceed a target to save $3 billion by 2017 compared with its 2014 cost base. It will reduce investment to $19 billion in 2016 from $23 billion last year. In September it planned to invest as much as $21 billion in 2016. For 2017, Total repeated a previous forecast to spend $17 billion to $19 billion.

Disposal Program

The company also reiterated a plan to sell $10 billion of assets in the three years through 2017 including $4 billion in 2016, having already sold $4 billion last year. Divestments may include pipelines and storage facilities, De la Chevardiere said. Acquisitions remain limited by the excessive valuations of target companies, he said.

Total maintained its goal to increase oil and gas production by 5 percent a year in the 2014 to 2019 period, saying the supply glut will be absorbed by 2020 as lower crude prices boost consumption.

“By 2020 you see there is a lack of production, which has to come from somewhere to match the demand,” the CFO said. “There will be a need for a better oil price to sustain the development of further projects.”

Before it's here, it's on the Bloomberg Terminal.