Will These New Projects Pay Off for Total SA?

French oil major Total SA (NYSE: TOT  ) announced that it has made a final investment decision to develop the ultra-deep offshore Kaombo project in Angola, after the company reduced the project's estimated cost from $20 billion to $16 billion.

Let's take a closer look at how this new project could further cement Total's leading position in Angola, one of its top-producing regions, and why the company may be poised for stronger dividend growth in the years ahead.

Photo Credit: Wikimedia Commons

Total to develop ultra-deep Angola
The Kaombo project, located about 160 miles off the Angolan coast in water depths of 1,400 to 1,900 meters, will be able to produce as much as 230,000 barrels per day when it comes online in 2017. The project will involve the development of six oil fields through 59 subsea wells, which will be connected to two floating production, storage and offloading (FPSO) vessels through nearly 200 miles of subsea lines.

Total said it was able to reduce the project's expected cost by using two converted supertankers as floating platforms, as opposed to constructing new storage containers, as well as by doing less construction and other work related to the project in Angola, where rates are relatively high.

While the markets cheered Total's $4 billion cost reduction for the project, sending shares 2.3% higher in New York, the company's true test will be whether or not it can actually deliver the project on time and on budget. In recent years, megaprojects pursued by Big Oil companies have frequently failed to live up to their hype, as cost escalations and delays have weighed on returns.

Total's big opportunity in Angola
Though Kaombo won't start producing until 2017, the project further cements Total's dominant position in Angola, where the company has been operating since 1953 and, last year, produced an average of 186,000 barrels of oil equivalent per day (boe/d). As of year-end 2013, Total operated nearly 600,000 boe/d in Angola, equivalent to roughly a third of the nation's total oil production.

Total's main asset in Angola is its deep-offshore Block 17, which it operates with a 40% interest. The block's acreage consists of three producing zones -- Girassol, Dalia, Pazflor – and CLOV, which is slated to begin production by the middle of this year. Angola is Total's fifth highest-producing region, behind only Nigeria, Norway, Russia, and the United Arab Emirates.

"With the launch of Kaombo, the upcoming start-up of CLOV and three exploration wells planned in the Kwanza basin this year, Angola remains a priority country for Total," said Yves-Louis Darricarrere, President of Total Upstream, in a company statement.

More dividend increases on the way?
Assuming Total can deliver new high-impact projects like CLOV on time and within budget, and assuming commodity prices remain relatively high and stable, the company's future looks a lot brighter. Capital spending peaked last year at $28 billion and is expected to fall to $26 billion this year and to $24 billion-$25  billion during the period 2015-2017.

Meanwhile, cash flows are expected to grow sharply thanks to a wave of new project start-ups during the next three years. This year, the company expects to bring online high-impact projects such as Ekofisk South project in the Norwegian North Sea, CLOV in Angola, Laggan-Tormore in the UK North Sea, and Ofon 2 in Nigeria. An additional nine projects slated to come online between 2015 and 2017 should help the company meet its target of producing 2.6 million boe/d in 2015 and 3 million boe/d in 2017, up from 2.3 million boe/d last year.

As CLOV and other high-impact projects come online, Total's operating cash flows in 2017 should be 30% higher than in 2012, while capital expenditures will be about 10%-15% below 2013 levels. This means the company will no longer have to rely on asset sales to fund its dividend, as it did in previous years, and bodes well for stronger dividend growth. Indeed, Total recently raised its quarterly dividend from 0.59 euros a share to 0.61 euros – likely reflecting its confidence in generating stronger cash flow growth. 

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