Total (NYSE:TOT) has been doing its absolute best to put forth a value proposition that would attract investors. This past quarter, that value proposition came into focus as the company posted another quarter of improving results and management started to reward shareholders with a rising dividend and share repurchases.
Looking at the headline numbers, though, you might not think that was the case. So let's dig through the results for the first quarter and see what happened at Total.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$49.61 billion||$47.35 billion||$41.18 billion|
|Net income||$2.63 billion||$1.02 billion||$2.84 billion|
|Operating cash flow||$2.08 billion||$8.61 billion||$4.70 billion|
As can be the case with large oil companies like Total, there were a lot of wonky numbers in this most recent earnings report that obfuscate the underlying strength of the business. Even though the company did report a lower net income result this past quarter, it was largely due to some one-time sales gains in the prior-year period that boosted the bottom line. Adjusting for asset sales, its net income result was 13% higher than this time last year.
Almost all of those gains came from, unsurprisingly, Total's exploration and production segment, which grew earnings 58% year over year. The average realized prices for its oil and gas were $60.3 a barrel and $4.73 per million BTU, respectively. Those are a far cry from the numbers we saw this time last year. Also, the higher crude prices led to lower margins for its refining and chemicals results.
The other number that looks a little off in these results is operating cash flow. One would assume that higher revenue and earnings would result in higher cash flow, but the company had a massive working capital build in the quarter -- $3.2 billion more than the prior year -- that kept cash flow weak. Typically, Total benefits from reductions in working capital in the second half of the year. As a result of the weaker cash flow numbers, net debt to capital increased to 15.1%, which is still a very healthy number.
- Production for the quarter increased 5% compared to this time last year to 2.70 million barrels of oil equivalent per day. The gains came from several recent project start-ups including the Fort Hills oil sands facility, the Libra field in Brazil, Yamal LNG in Russia, and Moho Nord in the Republic of Congo. Total closed its recent deal to acquire Maersk Oil & Gas in March, so it only got less than a month of production results from this new asset. Investors can expect production to increase significantly next quarter.
- Management continued to invest heavily in the Middle East with an expansion of its partnership with the United Arab Emirates by taking a working interest in three of its offshore fields, as well as a 16% interest in the Waha concession off of the coast of Libya. These low-cost concessions should add about 130,000 barrels per day to its existing portfolio.
- It expanded its exploration portfolio with its newly announced Ballymore discovery, won the bankruptcy auction for Cobalt International Energy's Anchor and North Platte discoveries, and acquired exploration permits in Guyana and Lebanon.
- Total is also expanding its refining and chemicals segment by increasing the capacity of its 400,000-ton-per-year polyethylene facility in Bayport, Texas, by an additional 625,000 tons per year. It also signed a memorandum of understanding with Saudi Aramco to build a $9 billion petrochemical complex at their joint-venture refinery in Saudi Arabia.
- In order to further branch away from oil and gas, Total also acquired electricity retailer Direct Energie for $1.7 billion.
What management had to say
Here's CEO Patrick Pouyanne on the company's results and some of the initiatives management has put in place to enhance shareholder value:
[T]he Group's adjusted net income and DACF [debt adjusted cash flow] continued to increase, achieving growth of 13% and 16%, respectively, compared to a year ago, in line with announced sensitivities. Cash flow after organic investments increased to $2.8 billion, up by more than 50% from a year ago, thanks to good operational performance and continued spending discipline. Return on equity was 10%.
In line with the shareholder return policy announced in February, the Group is raising the first 2018 interim dividend by 3.2%. Scrip [dividend] shares issued ... were bought back to prevent any dilution. In addition, the group bought back a further $300 million of shares to return to shareholders [as] part of the benefit realized from higher oil prices.
The numbers behind the numbers look good
It can be easy to get caught up in the headline numbers when a company reports results, but Total's most recent earning report is an example of a time when investors need to look beyond earnings per share to see what's going on with the business. With several acquisitions closing in recent months and relatively high oil prices lately, investors should expect results to improve through the rest of the year. If management holds to its promise about repurchasing shares when oil prices exceed its projections, then we should also expect more significant repurchases this year.