French oil giant Total (NYSE:TOT) reported another solid quarter. The reported net income of $3.56 billion came in well ahead of the mid-point of the consensus of $3.1 billion, driven by modest beats across the income statement. The reported results came in 15% ahead of the consensus estimates that had been negatively revised in recent weeks. As has been the case with the other big oil companies that have reported results, the strength of the refining environment had a favorable impact on results while operationally the benefit of new high margin growth in the core upstream business is becoming apparent.
Strongest Downstream Quarter Since 3Q12
It was a solid quarter across the board. Adjusted downstream net income of $3.56 billion came in at the high-end of market expectations, largely driven by refining where earnings almost doubled Q/Q. Consensus had revised down from $4 billion to $3.1 billion in recent weeks. This was downstream's strongest quarter since 3Q12, a function of an improved refining environment, particularly in Europe that is beginning to benefit from the back-out of light, sweet crude feedstocks from the U.S. market. While refining benefited from higher benchmark margins, it was also able to capture those margins with improve plant utilization of 86% vs. 74% in the previous quarter.
Upstream Growth To Continue Through 2015
Core Upstream volumes were up 3% Q/Q reflecting lower maintenance activity and the start-up of new and high-margin growth project in Angola. The segment's $15 per barrel net income for 3Q was only down $0.4 per barrel year over year. This significantly outperforms the $8.7 per barrel decrease in Brent oil price. The strong results were helped by both the absence of low margin barrels in Abu Dhabi following license expiry and the CLOV project offshore Angola which reached plateau production of 160,000 boe/d ahead of schedule.
While the core upstream business reported strong Q/Q growth, management confirmed again that growth will accelerate through 4Q and throughout 2015 as new projects come online. The benefit of new high-margin growth should help TOT defend earnings against a backdrop of a weakening oil price environment. TOT's asset sales program and capex also remain on track. With the completion of a number of sales this year, the company will be able to full achieve $15-$20 billion asset sales target set for the 2012-14 period. Year to date capex of $19.4 billion also remains well within the full year target of $26 billion.
Strategic Targets Unchanged
Commenting on the oil prices, the company said that "the Group maintains a medium and long term outlook for the price of Brent that is higher than those seen since the start of October" but also added that "the recent decrease in the price of Brent highlights the importance of the programs we launched to reduce costs and control investments."
Although there was a signal of a need to reduce costs in a weakening oil price environment, the general message from the new CEO, Patrick Pouyanne, was that of continuity. Patrick repeated the strategic targets of the group which means the strategy set by Christophe de Margerie and his team as far back as 2010 remains unchanged. Total's heavy period of investment from 2012-2014 is set to deliver a material improvement in free cash flow over the next three years.
The company at its Analyst day in September set out a $2.0 billion pre-tax savings target over the next three years. This remains a priority of the new CEO, Patrick Pouyanne, who in his previous role was responsible for driving through a significant restructuring in the downstream. While the cost savings are likely to be across the business divisions, given the relative historical focus on costs in two divisions achieving savings will be relatively easier in the upstream than in the downstream.
2012-2014 has been a period of transition for the French oil giant, with the proportion of unproductive capital employed reaching almost 40%. However, the start-up of 15 new projects, 8 in the next 14 months, should see this proportion to fall to just 20% by the end of 2017. With the company essentially harvesting the capex put in place since 2010, the new projects should deliver a significant boost in both production and cash flow and in turn free cash flow.
Total's focus on improved capital efficiency, combined with improved decline rates, the benefits from the key 2H14 start-ups/ramp-ups, and the benefits from successful downstream restructuring should improve cash flow generation. A ramp-up of the current disposal program, in particular a potential longer-term partial monetization of the restructured downstream businesses, could provide further upside, especially if it led to further return of cash to shareholders in the form of buybacks. In the meantime, the company continues to offer high dividend yield of 5.5%.
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