Image source: Total investor presentation.
Total (TOT +0.00%) has been a beacon of light in what has been a rather dark oil and gas market over the past couple of years. Even though oil prices have been well below the $100-a-barrel mark that we saw back in 2014, the company has been able to churn out much better earnings results than the rest of its big oil peers. This hasn't been complete luck, though. Total's management has been able to get there through some large cuts to its operational budget and bringing a quiver of large projects online.
These five quotes from CFO Patrick de la Chevardiere help paint a pretty good picture as to how the company has been able to outperform its peers and what the company needs to focus on in the coming quarters and beyond if it wants to keep up this momentum.
Cutting production costs
Just about every oil and gas company out there is saying that they are cutting costs and getting ready for that lower-oil-prices-for-longer scenario that so many have feared. Based on some of the results de la Chevardiere highlighted during the most recent conference call, Total is indeed making those deep cost cuts to its operations:
We are continuing to cut costs in line with our target for a further reduction of $900 million for the group on top of the $1.5 billion we got last year. Using first-quarter numbers, OpEx is below $7 per BOE, in line with our objective to reduce OpEx from $7.40 per BOE last year to $6.50 per BOE on average for this year.
All of that cost-cutting is a primary reason why Total's net income result declined only 18% from 2014 to 2015 while its integrated oil and gas peers saw net income declines of 40% or more.
Cleaning up the cash balance
Despite Total's strong results lately, the company is still spending more money than what's coming in the door. De la Chevardiere points out that the company is close, but there is one caveat:
As an industry, we are back to volatility, and Total's response is to continue to execute and deliver on the strategy that makes us more competitive in any environment, so the key here is to reduce the cash breakeven. Looking at the first quarter with Brent at $34 per barrel, we came close to balancing the cash from operations with a cash outlay for net investment. This was $3.7 billion and $3.9 billion, respectively. The results show that we are rapidly reducing the cash breakeven, mainly as a result of managing down the CapEx as we exit an intensive investment period and at the same time, maximizing the cash generated from operation by increasing production.
Net investment is the key word here, because that includes asset sales the company used to gain a little more cash. Selling diminishing assets or those that don't necessarily fit into the company's long-term vision is pretty common in this business, but it shouldn't be relied upon as a steady source of cash. The bigger focus needs to be on cutting its costs such that it can generate cash profits without needing to sell assets.
Breaking even thanks to flexibility
Another way that the company can get closer to that cash breakeven is to cut spending. According to de la Chevardiere, there is plenty of room in the 2017 budet to do that if necessary:
In February, we indicated the cash breakeven for 2016 should be around $45 per barrel Brent, but in the first quarter, the breakeven was around $40 per barrel Brent...about 40% of our 2017 CapEx was uncommitted. So we have a lot of flexibility in our investment and cash breakeven.
Keep in mind though, that breakeven here is for its capital expenditures only and does not include its dividend payments. Sill, this is pretty good progress. Just last year the company's breakeven price projection was $60 a barrel, but that was also based on $19 billion in capital spending. With only 60% of that budget committed, there is a chance that breakeven for 2017 could come down significantly depending on where oil prices are and how aggressively the company wants to pursue some of its larger investments over the next couple of years.
More production gains coming
Last year, Total blew away its integrated oil and gas competitors by posting a production gain of 9%. It appears that Total could be in line for another big bump this year as well:
In the first quarter, we started up two new projects, Laggan and Vega Pleyade, plus a ramp-up on nine start-ups for the last year. So we are in line with our target to increase production by 4% this year.
We should also keep in mind that this production increase projection was before the company announced that it had won a concession contract with Qatar for the Al-Shaheen offshore field. The 25-year concession project will result in a production boost of just under 100,000 barrels per day for Total in a place where oil production is cheap in relation to other projects.
Planning for the future
Even beyond these current catalysts, Total's management is also cognizant that it needs to keep spending to grow and replace any declining production. So de la Chevardiere made a point to highlight the progress on one of its largest future projects, the Yamal LNG facility in Russia:
I can tell you that for Yamal, project financing of $4 billion equivalent is being finalized with Russian banks as we speak, and significant progress has been made recently with Chinese banks for another $12 billion equivalent.
Clearly Yamal is going to take a lot of spending to get off the ground, but the size of Russia's gas fields and the total cacpacity of this project should make it worth it long-term as long as Total and its partners can keep the facility's construction on time and on budget. Keep an eye out over the next several quarters for more updates on this project.
