Total: Increasing Production Volumes And Cutting Costs

| About: TOTAL S.A. (TOT)


Production volumes are expected to increase by 4% Y/Y.

Capex at the same time is expected to fall by approximately 8% in 2014.

Launched a new cost cutting program throughout the company.

Similar to its peers, Total S.A. (NYSE:TOT), the French-based integrated international oil and gas company, has set its focus on capital efficiency and is trying to stage a comeback in 2014. While the company's production volumes are expected to increase by 4% Y/Y, capex at the same time is expected to fall by approximately 8% in 2014. Moreover, the company has also launched a company-wide cost saving plan. Although TOT has not provided any details on the potential scale of the savings the company plans to eventually make, the company remains confident on its ability to return to positive free cash flow as is evident from a recent hike (3.4%) in the dividend.

The company has previously described 2012-2014 as a period of transition to a better 2015-2017. In the last couple of years TOT's capex has exceeded organic cash flow. Moreover, production growth has also been limited, which is usual before the start-up of new projects. While 2014 will not change the fortunes of the company significantly, the markets should still start to see improvements as the company's capex declines and new projects come online. Both the declining capex and increasing production should result in an improvement in free cash flows.

Increasing Production

Shell reported a half percent decrease in Y/Y production in 4Q13. Security issues in Nigeria and Libya resulted in a slight decrease in volumes. However, the start-up of the new projects and improvement in conditions in Yemen partially offset the decline in volumes. Excluding the impacts of ADCO license expiry, Total is expected to increase underlying production by 4% Y/Y in 2014. However, if we include the impacts of ADCO, which contributed 140kboe/d in 2014, production is expected to decline by 2% Y/Y. While the company is taking a conservative view on the ramp-up of production from Kashagan and is only including it from 2014 onwards, the ramp-up of all new projects should add more than 150kboe/d to production in 2014. At a cash margin of $50 per barrel this should add $2.7 billion of cash flow to the company. Moreover, the company is targeting production of 2.6mboe/d and 3.0mboe/d for 2015 and 2017 respectively.

Declining Capex And Cutting Costs

Oil majors in the past few years embarked on major capital expenditure programs and acquisitions, which resulted in declining FCF for all these companies. However, industry trends have been changing and companies have shifted focus to capital efficiency now. Total, like its peers, is focusing on its ability to control capex going forward. However, this is not just about cutting down number of projects. This is more about taking out cost inflation and driving efficiency. Total's capex is expected to decline by 8% in 2014 from the peak levels of 2013. 2014's total budget has been set at $26 billion, which the company targets to cut further to $24 billion by 2017.

In addition to cutting down its capital expenditure, the company has also launched a companywide operating cost saving plan. Although the company has not provided any numbers, it is expected to update the market in the coming months once it has established targets. If the company sets similar targets to Statoil (NYSE:STO), which is targeting 2% in operating costs savings, TOT should be able to save ~$600 million.

Synergies And Cost Savings

TOT has shown superior capability compared to its peers to drive synergies and cost savings in refining and chemicals. With every company in the sector trying to achieve the same, it usually leads to the breakeven margin than increased profitability. However, TOT has gained around $250 million, $50 million more than the $200 million guidance given by the company, in the planned efficiency program in downstream since 2012. Even more admirable is the significant improvement in relative profitability with earnings of $1.1 billion more than those generated in 2009 in a similar margin environment. The benefits gained by TOT due to the synergy can clearly be seen in its downstream profitability, in which the company has significantly outperformed its competitors in the past few quarters.


We are long TOT. Total is set to deliver strong financial and operational momentum. The company is well positioned to grow significantly both its production volumes and cash flows for the next few years. This combined with declining capex should provide a solid return to cash flow neutrality. Other than reducing capex, the company has also launched a cost saving plan throughout the company. The company has not set any targets. However, if we consider similar targets to Statoil, which is targeting 2% in operating costs savings, TOT should be able to save ~$600 million. Total is expected to present numerical targets at its investor day in September this year. What's more important is the company's confidence in it is ability and focus on returning the group to positive cash flow, which is also evident in a recent increase of 3.4% in TOT's dividend. TOT has a high dividend yield of 5.2%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.