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Total SA Q3 Earnings Suggest It's Not Done Making Deals

By Tyler Crowe - Oct 30, 2017 at 7:05AM

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After another solid earnings result and an improved financial position, don't be surprised if Total's management stays on the offensive.

Total (TTE 1.08%) has kept itself busy lately. On top of plans to cut costs and improve overall profitability, management has pursued several deals that will significantly boost production and potentially improve on the company's best-in-class rates of return. 

Even after all of this wheeling and dealing, its comments suggest that the company is nowhere near done bringing new assets into the fold. Let's take a look at what happened this most recent quarter and what we can expect from Total in the near future. 

Oil platform at sunset

Image source: Getty Images.

By the numbers

Metric Q3 2017 Q2 2017 Q3 2016
Revenue $43.04 billion $39.91 billion $374 billion
Net income $2.76 bilion $2.03 billion $1.98 billion
EPS $1.06 $0.79 $0.79
Cash flow from operations $4.36 billion $4.64 billion $4.74 billion

Data source: Total earnings release. EPS = earnings per share. 

Total has been a bright spot among the oil majors over the past couple of years, and that trend continued this past quarter as it posted another impressive gain in net earnings. Higher production rates and commodity prices, an improved refining environment, and a growing retail presence in retail markets all combined this past quarter to produce near double-digit returns with oil in the $50-a-barrel range, the best among its peers.

The one thing that looked off this quarter was the decline in cash flow. That number includes a $1 billion increase in working capital, though. Adjusting for working capital, Total's operating cash flow was well over $5 billion. 

Total's adjusted net operating income by business segment for Q3 2016, Q2 2017, and Q3 2017. Shows a big year-over-year increase for production and slight upticks for refining and marketing.

Data source: Total SA earnings release. Chart by author.

The highlights

  • Overall production for the group increased 6% year over year to 2.58 million barrels of oil equivalent per day (mmboe/d). There wasn't one particular project attributed to the gain, but there was a ramp-up at several existing projects and additions from investments in Qatar and the Barnett shale in the U.S.
  • As management indicated during its second-quarter earnings, the company went on the offensive with some dealmaking. The largest of those deals was the $7.5 billion acquisition of Maersk's oil and gas division, which will add 160,000 barrels of oil equivalent per day and is expected to have a cash flow breakeven below $30 a barrel.
  • Total also signed an agreement with Chevron (CVX 1.61%) to take a working interest in seven potential Gulf of Mexico projects currently being assessed. Total has the right to buy into these developments at a working interest between 25% and 40%.
  • The company is also jumping into the Mexican market by agreeing to rebrand 250 retail locations around the Mexico City region to the Total brand.
  • Thanks to a couple of quarters with robust cash flows, Total was able to pay back some of its debt load and even add more cash to the balance sheet. It ended the quarter with a net debt-to-capital ratio of 15.2%. This is expected to increase once the Maersk deal closes as it will assume $2.5 billion in debt from Maersk.

What management had to say

Last quarter, Total CEO Patrick Pouyanne hinted at the company taking a more aggressive role in the mergers and acquisitions market. Even after all the dealmaking it has done in recent quarters, his statement for the quarter suggest that management isn't done. 

With operating cash flow before working capital changes of $15 billion in the first nine months of 2017, an increase of $3 billion over last year, the Group continues to strengthen its balance sheet, with a net debt-to-equity ratio below 20%. This allows the implementation of the strategy for profitable growth, taking advantage of the low cost environment, notably by launching high-return projects. 

What a Fool believes

It usually takes a long time for a company of Total's size to adjust to a rapidly changing market, but it has proven to be surprisingly nimble. Even with lower oil prices, it has been able to lower its overall debt load to a place where it can be much more aggressive than its peers. 

This past quarter's results also come before it sees the impact of its most recent deals. With South Pars, Al-Shaheen, and Maersk assets expected to come into the fold in the coming quarter, we can expect Total's results to look even better.

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