Cost Discipline and Dealmaking Remain Hot Topics in Total's Earnings

The integrated oil and gas company continues to be one of the most active among its peers on the mergers and acquisitions front.

Tyler Crowe
Tyler Crowe
Jul 26, 2018 at 12:05PM
Energy, Materials, and Utilities

Oil major Total (NYSE:TOT) has developed a pretty good habit of delivering solid operating profits quarter after quarter. Although the company missed earnings expectations for the second quarter by the slightest of margins, it increased net income by 83% compared to this time last year. 

But the company is not sitting on its laurels. It kept up a pace of dealmaking this past quarter that both bolstered the bottom line and gave the company some interesting new avenues for growth for a world after oil and gas. Let's take a look at the company's most recent earnings report and see what management has been up to lately. 

Offshore oil platform and support vessels.

Image source: Getty Images.

By the numbers

Metric Q2 2018 Q1 2018 Q2 2017
Revenue $52.5 billion $49.6 billion $39.9 billion
Net income $3.72 billion $2.63 billion $2.03 billion
EPS $1.38 $0.99 $0.79
Operating cash flow $6.25 billion $2.08 billion $4.64 billion

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

What a difference higher oil prices make to the bottom line, right? With net income coming in 83% higher than this time last year, the company's profitability is back in the same range as it was when oil prices were above $100 per barrel back in 2014. Almost all of those gains are from management's ability to cut operating costs over the past few years.  

Unsurprisingly, most of the gains for this past quarter came from the exploration and production side of the business. Production increased 9% compared to this time last year thanks to several new development projects ramping up to full capacity, while realized prices for oil and natural gas increased to $69.5 per barrel and $4.49 per million BTU, respectively.

Something in this earnings report that was a little surprising, though, was that its other business segments maintained earnings relatively well. Typically, increasing oil prices will have a negative impact on refining and retail margins. This wasn't the case, as Total was able to increase utilization rates for its facilities, and margins for chemical manufacturing remained robust. Even though it still remains a small part of the business, earnings for its gas, renewables, and power business doubled thanks to several investments the company has made recently, including its stake in French gas utility Direct Energie.

TOT adjusted net operating income by business segment for Q2 2017, Q1 2018. and Q2 2018. Shows large uptick for exploration and production and gains for gas, renewables & power.

Data source: Total earnings release. Chart by author.

Thanks to healthy cash flow, the company was able to return a decent chunk of cash to shareholders by repurchasing stock. On top of management's initial commitment to buy back all shares issued under its scrip dividend program (in which investors elect to take additional shares in the company instead of cash), management repurchased $589 million in additional shares. As a result of these cash outlays and paying down some of its debt, net debt to capital increased slightly to 16.1%.

What happened this past quarter?

  • Production for the quarter was up 9% to 2.72 million barrels of oil equivalent per day. The gains came from a combination of seven new projects ramping up to full production rates, as well as acquisitions including a commission in Qatar, the Maersk Oil acquisition, and recent purchases in Brazil and Libya.
  • The company remained incredibly active on the acquisition front, especially on the natural gas side of the business. It expanded its partnership with Russian natural gas producer Novatek to take an additional 10% stake in the Arctic 2 LNG facility, extended a natural gas production license in Algeria and committed to a new petrochemical plant, and signed several agreements to build small-scale LNG plants to fuel marine vessels. 
  • Total also agreed to take a 25% equity stake in natural gas distribution specialist Clean Energy Fuels (NASDAQ:CLNE). Total and Clean Energy Fuels have also committed to funding a leasing program designed to place several thousand new trucks on the road that use natural gas instead of diesel. Total's commitment to the lease program today is $100 million.
  • The one bit of bad news for the company was that it had to withdraw its commitment to the South Pars development concession in Iran as part of the United States' withdrawal from the Joint Comprehensive Plan of Action (also known as the Iran nuclear deal). While management noted that it will try to obtain a project-specific waiver, it has suspended any spending until then.

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What management had to say

In his press release statement, CEO Patrick Pouyanne highlighted the company's efforts to reduce operational costs: 

Oil prices continued to increase, averaging $74 per barrel in the second quarter, supported notably by inventory reductions and geopolitical tensions. Total benefited fully from this by remaining focused on operational efficiency. ... Discipline on spending is resolutely maintained and the organic pre-dividend breakeven [price] continues to decrease, to less than $25 per barrel in the quarter. 

TOT Chart

TOT data by YCharts.

Making lots of money today to diversify the business for tomorrow

Total's efforts to bring down costs and generate some of the best rates of return are quite impressive. Those efforts have made the company one of the highest-return investments among the integrated oil giants. For investors today, it's a good time because the company is increasing profitability and creating a lot of shareholder value.

The other thing its efficient oil and gas business is doing is freeing up cash to invest in new ventures that will help diversify the business. In addition to the recently acquired stake in Clean Energy Fuels, it has a long-standing interest in solar power panel manufacturer SunPower and more recently purchased battery specialist Saft. The company is also expanding into power generation and natural gas distribution with its stake in Direct Energie. Most of these developing technologies are going to take time and capital to incubate, and having a well-capitalized patron like Total gives them a much stronger chance of succeeding. 

Even though earnings are strong today, and there is a clear strategy in place to diversify away from oil with a focus on natural gas and renewable energy, shares of Total are still reasonably priced at an enterprise value-to-EBITDA ratio of 7.2. For anyone looking to add exposure to a wide range of outcomes in the energy industry, investing in Total looks like a good bet.