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Total defies the odds

Succession of acquisitions and project ramp-ups help strengthen the company’s portfolio in a tough environment for the sector

Last year was an ordeal to test the finances of any commodity-focused energy producer—global prices stubbornly resisted all but the most short-term bullish triggers while grinding lower on fears of stuttering oil demand growth. Intensified tensions in the Middle East brought a twin whammy of only the briefest price spikes while injecting volatility and investor uncertainty.

But, while economic conditions were challenging, full-year financial results from Total show that not every international oil company (IOC) must necessarily suffer, if an individual firm is correctly positioned to cope with a rapidly changing industry and prolonged uncertainty.

The French major recorded $28.5bn in free cash flow (FCF) across 2019, up by $2.4bn year-on-year. Higher margins from newly arrived production—notably Yamal LNG in Russia, Ichthys in Australia, Egina in Nigeria and Kaombo in Angola—helped lift the FCF despite a fall of around $7/bl to the firm’s average realised Brent in 2019. Dividends to shareholders also increased by 5pc to €2.68/share—a payout Total aims to sustain in 2020.

Production growth was also strong. Total hydrocarbon output lifted by 9pc in 2019 while Total achieved FID on half of its upstream projects planned to start-up post-2023. The acquisitions of US independent Anadarko’s Mozambique LNG project and a 10pc stake in Russia’s Arctic LNG 2 highlighted the increasing importance of LNG to the company’s portfolio. Its LNG output in 2109 grew by over 40pc year-on-year and added $1.5bn to operating cash flow—predominantly from Yamal LNG and Ichthys.

LNG sales will continue to grow strongly in 2020. The start-up of Yamal LNG train 4 and the US Cameron LNG train 3 will contribute towards a target of over 30mn t/yr. Further ahead, Total aims to expand its LNG production portfolio to around 50mn t/yr by 2025—capitalising on a global gas demand growth trend which recorded a 13pc year-on-year increase in 2019. Uncertainty remains, though, on how the economics of future LNG production expansion will work as gas markets increasingly price in a lower-for-longer on their forward curves. 

$28.5bn - free cash flow

Core assets

Africa remains at the core of Total’s upstream strategy and earnings. African deepwater and LNG output added over $10bn to operating cash flow in 2019, while supply will grow to 900,000bl/d oe in 2020. Offshore Angola, the company extended its license to operate in Block 17 for another 25 years and acquired two discoveries in Blocks 20-21. Total is currently appraising its South African Brulpadda discovery and successfully reached FID on the Mozambique LNG project acquired from Anadarko.

In Latin America, Total acquired a 50pc stake in the offshore Suriname Block 58 and announced the discovery of light oil and condensates at the Maka-1 prospect in January. In 2020, Total says it will drill a further two to three wells in the block and another two to three wells offshore Guyana. Previous discoveries at the Jethro and Joe prospects, announced in the Orinduik block offshore Guyana—in which Total holds a 25pc stake—returned sulphurous, potentially non-commercial crude. A further discovery at the Kanuku block—in which Total has a 37.5pc stake—confirmed the presence of crude in that block but the net pay oil was much lower than expected, raising doubts about its economics.

Total is also ramping up output from Brazil’s prolific pre-salt reserves. In the Santos basin, the company achieved FID on phase 2 of the Mero ultra-deepwater field and expects to begin operations for 2022. In November, Total achieved first oil from the Iara license, also in the Santos basin, in which the company holds a 22.5pc working interest . A second FPSO is scheduled for 2020 which will lift production to 300,000bl/d.

In the Campos basin, Total acquired a 40pc stake in the C-M-451 block during the 16th bidding round and now plans to farm-down a 10pc share and begin drilling at end 2020 or early 2021.  

Financial risks

Despite strong production growth in 2019, company-wide earnings did come under pressure from volatile prices and sliding margins—a trend that was experienced across the global energy sector. Net income fell by $11.8bn across the business, a drop of around 13pc year-on-year. Upstream earnings slumped by 12pc, while the downstream and chemicals division also fell by 11pc. 

“Geopolitical risk and instability are back on the front scene once again, notably in Iraq, and elsewhere in the Middle East and in Libya,” Helle Kristoffersen, Total president, strategy and innovation, told an earnings call. “Opec+ cohesion is going to be a key theme this year, including the short-term market management of the situation in China, with possible extension of the existing cuts and ongoing discussions on more corona[virus] cuts.”

Kristoffersen added that, while the virus will certainly affect the market in the short term, it is still too early to project the full extent of its impact on demand.

“Geopolitical risk and instability are back on the front scene once again” Kristoffersen

Nevertheless, Total has handled the challenging economic conditions better than most of its peers. Shareholder return yield stood at 7.7pc, among the best in the industry. This was achieved in an environment where oil prices fell by an average of 10pc and European gas prices particularly suffered, tumbling by 38pc.

This year, Total expects price volatility to endure, while it is also projecting a slowdown in its production growth to 2-4pc. Price sensitivities reported by the company suggest that for every $10/bl change it will affect Total’s net operating income by $2.9bn and cash flow by $3.3bn.

The firm, as with its peers (with the notable exception of ExxonMobil) continues to seek refuge in capital discipline. US bank Jefferies notes that Total invested a net $17.2bn against guidance of $18bn, while it is committed to keeping capital spend in a $16-18bn range across 2020-23.

M&A and divestments have also been carefully balanced. In 2019, net acquisitions reached just over $4bn and added 4bn bl to reserves at around $2.40/bl added. This was offset by around $3bn in divestments, leaving a further $2bn to be finalised.

But, despite the vogue for reigning in spending, the capex spent in previous years on 2019’s four major start-ups—Kaombo, Egina, Yamal and Ichthys—will offer material benefits for years to come. Jefferies predicts that the combined assets will improve operating cash flow at a rate of $3.5bn annually. This may beg the question why limiting new project spend is such a popular strategy.

“We should never forget that we work to keep our future in the energy sector,” Patrick Poyanne, Total’s CEO, reminded the earnings call, while still being careful to tick the required capex probity box. “Growing the cash flows, reducing the breakeven under $25[/bl], discipline on opex and capex. We will execute this strategy by high-grading the portfolio and launching profitable projects on the upstream; developing our LNG position and delivering cash flow from it.”

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