For this particular CDS trade, Total CDS widened more than Equinor and/or iTraxx ESG. The differential had gone from 5/7/-13bp at trade inception to 10/14bp/-9bp, generating non-annualised IRRs in the region of 2-3%. Given this performance and in addition to the update from the International Energy Agency, we see a further relative widening of spreads as likely because of two key arguments. First, Equinor continues to be extremely well supported by its domestic government and we believe it is likely that Norway will view further exploration and drilling in the Arctic as aligned with the IEA planning.
We do not agree, but that is likely what will be argued. Second, Total is more dependent on further new explorations and developments, with less supportive (and non-government owners). Recent controversy around a Ugandan pipeline illustrates Total’s difficulties. The IEA report is likely to induce more stress on Total’s balance sheet as more ‘assets’ are now becoming stranded.