TOTAL Stays With The Present, But Has An Eye On The Future

| About: TOTAL S.A. (TOT)

Summary

TOTAL’s adjusted Q2 net income fell 30% to $2.17 billion, but beat analyst estimates.

TOTAL has balanced cash flow at a Brent price of $40.00 per barrel, close to where it is at present. The company uses oil price $50-80 for long-term planning.

An increase of $10 per barrel provides TOTAL with ~$2 billion of cash annually.

TOTAL hopes for oil at $60 to pay full cash dividend in 2017.

Saft acquisition consolidates renewable strategy by buying best of breed; Lampiris acquisition furthers vertical integration of renewable energy supply.

Last week TOTAL (NYSE:TOT) gave its Q2 report and CFO Patrick de La Chevardiere conducted Q&A with 13 analysts from major investment banks. The core of this process was similar to earnings reports of other major oil and gas companies. They are all challenged by the recent oil price crash, and even though there was a partial recovery in Q2, since June the oil price has been sliding again.

Operations report

TOTAL had some good news and bad news. The bad news was that Q2 net income fell by 30% year-on-year to $2.2 billion ($0.90/share). Because of recovery in the oil price in Q2 compared with Q1, upstream did better than in Q1 (up 25%). Despite the poor year-on-year result, analyst forecasts were beaten by getting ahead of the planned cost cuts, having already reached the $2.4 billion OpEx savings planned for end of 2016 and more anticipated savings to come.

Patrick noted that things are going sour on oil price again in Q3, so the company is once again reducing cash needed for breakeven. This is a familiar theme throughout the industry.

A major benefit was obtaining a 30% interest in the giant Al-Shaheen field in Qatar, which has low breakeven and can lead to 90,000 barrels/day production increase for 25 years. TOTAL foreshadows other projects in Angola, Brazil, Uganda, Argentine and Papua New Guinea, which provide long-term growth potential.

Downstream net operating income from refining and chemicals was down 10% to $1 billion in Q2 compared with Q1. This was seen to be a satisfactory result. Net operating income from affiliates (both upstream and downstream) was strong in Q2 at $797 million.

CapEx for the year is expected to be below $19 billion and may even be low end $18 billion. First half operating cash flow (before working capital charges) of $7.7 billion covered the net investment of $7.7 billion. So at a Brent price of $40/barrel (achieved in 1st half) cash flow and net investment were balanced (without paying a dividend).

Dividend

Like the other oil majors, TOTAL has maintained its quarterly dividend (at euro 0.61 or currently ~$0.68) since 2014. The dividend can be taken as shares or cash, with the latest dividend being 62% shares and 38% cash. The cash amount is ~$625 million for the current quarter.

I noted in a recent article on BP's 2Q earnings, that BP's dividend in 2017 is contingent on Brent oil price of $50-55/barrel.

TOTAL is using Brent $60/barrel in 2017 as a basis for paying a full cash dividend. It isn't clear what the payout will be if the oil price is less than Brent $60/barrel.

There starts to be some consensus about where the oil price needs to get to next year for dividends to be maintained.

Unfortunately, the oil price is now establishing a pattern in the wrong direction, as the Brent price continues to slide towards $40 (today closing at $42.14). With some US wells opening again (presumably in response to the increase in oil price in Q2) and significant oil stockpiles, a number of analysts are not confident that the price will increase any time soon.

Renewable energy

The TOTAL Q2 earnings report broke ranks with the other oil majors in its discussion about a significant new direction for the company.

It has set up a new business segment, which includes gas, renewable energy and power along the gas and electricity value chain.

Tangible outcomes of this are new investments in renewable energy, storage and distribution. Less clear in relation to gas and renewables (although clearly a strategic move that relates to Total's oil distribution network in Africa) was the significant acquisition of Gulf Africa Petroleum Corporation's (GAPCO) logistical terminals and 100 service stations in Kenya, Uganda and Tanzania.

Part of this restructuring involved the sale of Total's German specialty chemicals group Atotech, which will bring net asset sales to $2 billion for 2016.

TOTAL acknowledges that by 2050 solar power will become the largest source of electricity, and so the company is investing to become part of that future. It is interesting that there was significant discussion about Total's plans for its renewable energy investments in the Q&A after the Q2 results announcement. This is in stark contrast to the Q&A sections of other oil & gas majors' Q2 reporting.

TOTAL now has significant positions at several levels of the renewable energy (especially solar) chain. There was discussion about the acquisition of the battery company Saft and also Lampiris, a Belgian gas and renewable energy retailer.

While renewable energy doesn't significantly contribute to Total's bottom line (yet), the investments in this space are hard-nosed and focused on profitability. Unlike Shell (NYSE:RDS.A) (NYSE:RDS.B) which talks about its investment in wind but seems to have mostly legacy wind investments, TOTAL has restructured the company to include renewable energy in its organisational structure.

At this time Total's ambition in renewable energy is modest ... "20% low carbon businesses in 20 years' time", but it does provide the company with a foothold if/when the pace of change accelerates.

Saft battery investment

Saft is "only" a $1 billion investment (dwarfed by CapEx), but it expands Total's participation in the renewable energy/electricity value chain. TOTAL believes that batteries are going to be important because solar and wind power are intermittent.

Total's strategy regarding Saft is the same as that used for the SunPower (NASDAQ:SPWR) investment. The company is serious about participation, so it bought a leading battery company.

TOTAL makes the point that its investment in renewables is because it believes these investments will be profitable. It is in it to make money. Indeed Saft is already profitable.

The company sees the 21st century as the era of electricity being the way power is delivered, and so it has created the new gas, renewables and power segment. Note that unlike SunPower, in which TOTAL has a minority position, in the case of Saft, TOTAL will own it outright (already 90% acceptance).

When asked about how TOTAL plans to deal with the different renewable energy technologies, it was made clear that they all form part of a new division which includes all renewable energy investments, but there is no pressure on the companies to co-operate (yet?), although it is excellent if they do. So SunPower doesn't have to deal with Saft on batteries.

Other investments related to renewable energy

In June TOTAL acquired Lampiris, which, with 1 million accounts, is Belgium's third largest natural gas, renewable energy and energy services supplier to the residential sector.

Of course the spend by TOTAL in taking several positions in the renewable energy and connection to customers space, is small when compared with its CapEx. However, the company is learning about the space and also taking significant stakes in emerging companies.

It does give it knowledge about where to take the company when (not if) oil is challenged by the need to decarbonize and the emergence of electric vehicles.

Conclusion

I'm skeptical about investment in the oil and gas majors, as I see too much similarity in the way they position themselves to the failure to face reality that led to bankruptcy in many coal stocks.

The oil and gas majors aren't making enough money to continue dividends at historic levels and this should be of concern to many investors who rely on these dividends. I'm skeptical that the oil price will rise sufficiently to make paying dividends possible into the future.

TOTAL's report is different because it includes a future beyond fossil fuels. On that basis, if you are looking for exposure to oil and gas stocks, TOTAL might be worth a look as there is a link to the future.

Disclosure: I/we 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.