It was pretty much a foregone conclusion that eventually, oil and gas companies were going to start spending more money on exploration and development of new sources. The amount of underinvestment is going to start affecting production levels, and new investments are cheap thanks to lower oil services costs. The company that can capitalize on this market dynamic early has an opportunity to make a lot of money, and Total's (NYSE:TOT) management plans to do just that.
One reason Total will be able to is because the company's results have improved to the point that it can spend more money. Here's a look at the company's most recent earnings and why management thinks now is the time to spend.
Total's results: The raw numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$39.915 billion||$41.183 billion||$37.215 billion|
|Net income||$2.027 billion||$2.779 billion||$2.118 billion|
|Cash flow from operations||$4.64 billion||$4.701 billion||$2.882 billion|
It's a bit surprising to see Total's net income for the quarter end up lower than the same time last year, especially when oil prices, natural gas prices, and European refining margins were all higher this quarter compared to Q2 2016. It appears that the difference between the two came down to accounting. Between inventory value adjustments, asset sales, and other impairments, the company had $437 million in charges this past quarter. Looking at adjusted net income, Total's $2.75 billion result is much more in line with the prior quarter's result.
The same can be said for the company's cash flow results as well. While $4.6 billion in operating cash flow is nothing to scoff at, cash flow was $5.3 billion before those working capital adjustments. Chances are we will see that adjustment work in Total's favor in future quarters.
The strength of this quarter came from exploration and production as well as high margins for its marketing and services business. The refining and chemicals business suffered a bit, but that was due in large part to elevated levels of maintenance at its refineries. Refinery throughput for the entire company dropped 7% as Total shut down its Antwerp refinery for a new expansion project there. Gas, renewables, and power continues to be a nascent part of the business but should grow over time, as management has committed to $500 million in capital spending annually in renewable projects.
What happened with Total this quarter?
- Production grew 3% year over year to 2.5 million barrels of oil equivalent per day (BOE/D). The largest driver of those gains was in its Americas business, which saw a 37% year-over-year increase. This is mostly tied to a deal last year where it bought the remaining 75% interest in its Barnett shale assets from Chesapeake Energy. Also, project ramp-ups from several other major projects have helped to offset the impact of field decline and the impact of OPEC quotas.
- Unlike prior quarters where management was active with acquisitions and sales, this quarter was more about execution. Total started up operations at the Al-Shaheen field in Qatar, the Badamyar gas project in Myanmar, and began work to upgrade its Antwerp and Dasean refining and petrochemical complexes. It also started development of phase 3 for the Halfaya project in Iraq.
- The one deal that the company did sign this quarter was a big one, though. It announced that it would be the operator to develop phase 11 of the South Pars gas field in Iran. The development project will increase Total's production by 200,000 BOE/D and will start up in 2021.
- The company won bids for offshore exploration blocks in Mauritania, Senegal, Gabon, and Ireland, as well as increased its working interest in a license in the Vaca Muerta shale reservoir in Argentina.
- Total's cash pile continues to grow from operational cash and limited spending, which is lowering its net debt metrics. At the end of the second quarter, the company was sitting on $28.7 billion. Combined with a $1 billion reduction in short and long term borrowings, Total ended the quarter with a net-debt-to-capital ratio of 20.3%.
What management had to say
CEO Patrick Pouyanne's comments on Total's most recent results suggested that he had a lot of confidence in the company's work over the past couple of years. He also stressed that it remains in a position to pounce on any opportunities that may arise with the market for oil and gas remaining weak.
The Group is also continuing to prepare for the future, with the signing of a contract related to the development of Phase 11 of the giant South Pars gas field in Iran, the start-up of operations on the giant Al-Shaheen field in Qatar and the final investment decision for Phase 3 of the Halfaya project in Iraq.
Total has a stronger balance sheet having reduced gearing to 20%. As a result, in line with its strategy, the Group has the flexibility to take advantage of the low-cost environment by being able to launch profitable projects and acquire resources under attractive conditions.
If Total's management wants to get aggressive and invest in the business, it certainly has the financial foundation to do it now. With that much cash sitting in its war chest and cash flows that more than support its current spending plan, Total is in an ideal position to grow the business.
How many more projects it can take on, though, is a little less clear. Developing South Pars, Halfaya, Vaca Muerta, and Al Shaheen at the same time will cost a big chunk of change, and that doesn't even include the recent agreements with Algeria's national oil company to boost gas production there, or its agreement with Petrobras to take over operations at several offshore exploration blocks. There is no doubt that the global oil market isn't spending enough right now, but Total can't take on too much with oil and gas prices remaining as low as they are.