You have to nitpick to find issues in Total's (NYSE:TOT) most recent earnings reports. Like its big oil peers, it is benefiting immensely from higher oil prices, but there aren't many others that are also increasing production at close to double-digit rates as well as nurturing a fast-growing power and renewable energy business. This past earnings report was another reason why Total is a great energy stock to consider right now.
Let's take a look at the company's most recent earnings report to see what happened this past quarter and why it further strengthens the investment case for Total's stock.
By the numbers
|Metric||Q3 2018||Q2 2018||Q3 2017|
|Revenue||$54.7 billion||$52.5 billion||$43.0 billion|
|Net income||$3.95 billion||$3.72 billion||$2.72 billion|
|Operating cash flow||$5.74 billion||$6.25 billion||$4.36 billion|
Up and down the financial statements and operating metrics, this was a great quarter for Total. Higher oil prices led to a near doubling of its exploration and production earnings, and investments in liquefied natural gas (LNG) trading and sales is turning its nascent gas, renewables, and power business into a $1 billion-per-year segment. Its downstream business segments suffered somewhat, but that is expected since its costs were up from higher crude oil prices.
The only metric that stands out in Total's third-quarter results is the decline in operating cash flow compared to the prior quarter. That's because the company had a significant working capital increase, which ate into cash flows. Working capital builds and drawdowns tend to ebb and flow from quarter to quarter. Since the company is still maintaining high rates of return on its capital employed, this shouldn't be too much of a concern.
What happened this past quarter?
- Production for the quarter was up 8% year over year to 2.80 million barrels of oil equivalent per day and for the year is up 8% compared to 2017. Even though natural field decline was high -- reducing production from existing assets by 4% -- it was more than offset by new assets that were either starting production or were acquired.
- This was a busy quarter for Total on multiple fronts. On the mergers and acquisitions side of things, the company finalized the acquisitions of Engie's LNG business, French electric utility Direct Energie, two natural gas-fired power plants in France, electric charging station developer G2mobility, and signed an alliance with Indian company Adani.
- Continuing on its plan to significantly ramp up its investments in LNG, the company started operations at two of its new liquefaction facilities: Ichthys in Australia and train two at Yamal LNG in Russia.
- Total also made several moves to boost its refining and chemical segment by giving the green light for a new petrochemical facility in the U.S. Gulf Coast, started engineering and design work for a petrochemical complex in Saudi Arabia, and agreed to co-develop a polypropylene plant in Algeria.
- The board of directors approved a 3.2% increase in its dividend and bought back $1 billion of shares in the quarter and intends to repurchase $1.5 billion by the end of the year.
What management had to say
Since Total had its strategy and outlook presentation back in September, there wasn't much on the conference call that was too revealing. However, CFO Patrick de La Chevardiere did discuss some of the investment and shareholder return priorities that will shape how the company grows over the next several years.
The 2018 interim dividend has been increased by 3.2%, in line with the 10% increase of the full year. We have bought back all of the scrip shares issued this year. And on top of buying back the scrip share, we bought back $1 billion of stock through the end of September as part of the $5 billion buyback announced in February. And we will buy back $1.5 billion this year.
We also announced that the strategic priority is maintaining a strong balance sheet with gearing below 20%, and we are delivering here as well. Gearing was 18.3% at the end of the third quarter despite cash outlay of $3.6 billion for the net acquisition in the quarter, comprised mainly of Direct Energie and Engie LNG, plus a bridge in working capital that was partially due to integrating this acquisition into our accounts as well as high crude oil price at the end of September.
Thanks to production growth and low breakeven, we are confident that increasing free cash flow will allow us to reduce debt and strengthen the balance sheet. And we have indicated that additional cash flow shall be allocated, first, to Direct Energie; and second, to share buyback.
The most surprising thing in that statement is that the company has a priority to invest in utility Direct Energie. Total has been investing heavily in assets outside of the traditional oil and gas value chain including electric utilities, renewable power, and energy storage. This statement suggests that we should expect these investments to ramp up in the future.
This great stock looks even better
Total has arguably been the most creative and innovative integrated oil and gas companies over the past decade. The company caught a break by completing a large portion of its major capital projects in 2015, which allowed management to reduce capital spending as oil prices were tanking. The serendipitous timing set the company up for success today as it has taken advantage of the downturn to make some large acquisitions and drastically reduce its cost structure.
Today, the company is producing best-in-class rates of return and its high levels of cash generation are giving management the freedom to take a few swings for the fences with investments designed to diversify away from oil and gas.
Even though Total's stock hasn't done much so far in 2018, the company is set up incredibly well over the next several years. It expects to grow production by 6% or more annually through 2022, as well as its efforts to grow its downstream assets and its renewables and power business. Today, shares trade at a modest enterprise value-to-EBITDA ratio of 5.4 times and its dividend yield of 5.1% looks very attractive considering management's intention to grow its payout 10% annually. The company has been one of the best investments in the big oil industry for the past several years, and continues to strengthen the investment case for its stock.