French oil giant Total (TOT +0.00%) has quietly been putting together a case as one of the best investments in the integrated oil and gas business for years. Its fast production growth rates, the ability to increase capital spending while also trimming its debt load, and producing some of the best rates of return in the business have positioned the company incredibly well for the next several years. This most recent earnings result was another piece of evidence to show that the company is on this track. Sure, its bottom-line number may have come in below analyst estimates, but its results were by no means bad.
Let's take a look at Total's fourth-quarter earnings and find out what investors can expect from the big oil giant for the coming years.
By the numbers
| Metric | Q4 2018 | Q3 2018 | Q4 2017 |
|---|---|---|---|
| Revenue | $52.5 billion | $54.7 billion | $47.3 billion |
| Net income | $1.13 billion | $3.95 billion | $1.02 billion |
| EPS (diluted) | $0.40 | $1.47 | $0.37 |
| Operating cash flow | $10.6 billion | $5.74 billion | $8.6 billion |
DATA SOURCE: TOTAL EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
These numbers were respectable for a quarter in which oil prices were on the decline, but the $10.6 billion in operating cash flow is a little misleading. The company had a large drawdown in working capital this past quarter that helped boost that number. This is common in the fourth quarter for Total. Absent changes in working capital, Total's operating cash flow would have been $6.1 billion in Q4 2018 and $6.2 billion in the fourth quarter of 2017.
Even though oil prices were down this past quarter compared to the prior one, prices were still considerably higher than a year ago. So, unsurprisingly, year-over-year gains came mostly from the company's exploration and production segment thanks to price realizations and a considerable boost in net production. The other segment worth pointing out is its refining and chemicals segment, not because of a strong result, but because it was able to maintain earnings even though refining margins were considerably lower this past quarter. The company was able to get more out of its refining segment thanks to high utilization rates and expanded production outside of Europe.
Data source: Total SA. Chart by author.
The highlights
- Net production increased 10% compared to this time last year to 2.88 million barrels of oil equivalent per day for the fourth quarter. Average production for 2018 was up 8% to 2.77 million barrels of oil equivalent per day. The gains were largely attributed to new project start-ups and the acquisition of Maersk's oil and gas assets, which more than offset the company's natural field decline that averages 4%.
- Unlike prior quarters that have been full of merger and other deals, this one was rather quiet in terms of completed deals. Total did, however, lay the groundwork for several new investments including expanding is upstream and downstream operations in Angola, agreeing to be a buyer or potential equity partner with Sempra Energy for two of its LNG export facilities, and another LNG export facility in Papua New Guinea with ExxonMobil.
- The company also announced significant discoveries at an offshore block in the North Sea and one off the coast of South Africa. In addition, it won new exploration concessions in Mauritania and the United Arab Emirates.
- Management completed its $1.5 billion share-repurchase authorization, and the board authorized another $1.5 billion in repurchases in 2019.
Image source: Getty Images.
What management had to say
In Total's press release, CEO Patrick Pouyanne discussed some of the company's accomplishments in 2018 and some of the major projects that have allowed it to significantly grow production.
[T]the Group reported adjusted net income of $13.6 billion in 2018, an increase of 28%, a return on average capital employed close to 12%, the highest among the majors, and a pre-dividend breakeven of $30 [per barrel].
The excellent results reflect the strong growth of more than 8% for the Group's hydrocarbon production, which reached a record level of 2.8 [million barrels of oil equivalent per day] in 2018 and led to a 71% increase in Exploration & Production's adjusted net operating income. The year was highlighted by the start-up of Ichthys in Australia, Yamal LNG in Russia, deep-water projects in Kaombo North in Angola and Egina in Nigeria, as well as the counter-cyclical acquisitions of Maersk Oil and new offshore licenses in the UAE.
Strong prospects for 2019
Even though Total has delivered on all of management's targets of cutting operating costs, lowering its break-even production cost, and getting the best rates of return in the industry, its stock hasn't exactly reflected those changes. The company expects 2019 to be another year of stellar production growth with the ramp-up of those projects Pouyanne mentioned, as well as several new start-ups and a 40% increase in LNG production. That production growth rate is set to slow down afterward to just over 2% annually from 2020 to 2025, but that could change if some of its recent finds are promising enough to accelerate the development timetable.
Overall, though, the company is in a solid position over the next several years. It has a lucrative suite of development projects in the wings, it is accelerating its investments in renewables, and it still has plenty of cash to pay investors dividends and buy back stock. It's hard to say what will happen with oil prices over the next year or so, but Total's business is becoming increasingly resilient to low prices, and the company should be able to create value for shareholders through the ups and downs of the commodity cycle.
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