Finally, we have a winner! The last of the big five oil majors, French giant Total SA (NYSE:TOT), reported earnings on February 6, and results were impressive. Not only did the company beat earnings expectations, but it became the only oil major to post higher net income and earnings per share in Q4 2019 than in Q4 2018!

The stock market was so impressed that it... sent shares down by 1.5%. That's not what you'd expect when a company reports serious outperformance. Here's why Wall Street yawned at Total's accomplishment. 

An offshore oil rig at sunset.

Total outperformed its year-ago quarter, but there's more to the story. Image source: Getty Images.

By the numbers

Metric Q4 2019 Q3 2019 Q4 2018 % Change (YOY)
Revenue $49.3 billion $48.6 billion $52.5 billion (6.1%)
Net income $2.6 billion $2.8 billion $1.2 billion 116.7%
Earnings per share (diluted) $0.97 $1.04 $0.40 142.5%
Cash from operations $6.6 billion $8.2 billion $10.6 billion (37.7%)
Total production 3,113 kboe/d 3,040 kboe/d 2,876 kboe/d 8.2%

Data source: Total SA. YOY = year over year. kboe/d = thousand barrels of oil equivalents per day.

The 8.2% rise in production was mostly attributable to production start-up at the Johan Sverdrup field offshore of Norway and ramp-up at several other new projects, including Yamal LNG in Russia, Egina in Nigeria, Ichthys in Australia, Kaombo in Angola, and Culzean in the U.K. Increased production was offset by lower prices, resulting in the slight decline in revenue. 

However, the massive increase in net income was due to $2 billion in after-tax impairments in the year-ago quarter, primarily an inventory impairment due to lower oil prices and charges related to the $1.6 billion sale of a 4% stake in the Ichthys field. Adjusted net income, which strips out these types of charges, stayed essentially flat year over year, at $3.2 billion.

Compared with the other oil majors, though, even flat adjusted net income is something of an accomplishment. It wouldn't have been possible without the increase in production, as Total's refining and chemicals segment was hit by the same weaknesses that plagued its peers during the quarter:

A bar chart showing Total's adjusted net operating earnings by segment

Data source: Total SA. Chart by author.

Highlights from the quarter

  • On October 5, Phase I production began at the Johan Sverdrup field in the North Sea. Total acquired an 8.44% stake in the project through its 2018 purchase of Maersk Oil. Phase I production is expected to reach 440,000 barrels of oil per day (BOE/d), but a Phase II development has already begun and is slated for completion in 2022, which is projected to bring total production to 660,000 BOE/d.
  • Total announced first oil from the first unit at the Iara deepwater field offshore of Brazil on November 15. A second unit is expected to begin production at the site in 2020. Each unit has a capacity of 150,000 BOE/d. Total holds a 22.5% interest in the project.
  • The company embarked on some significant partnerships during the quarter. It reached an agreement with the national oil company on participation in the Waha concession in Libya. Offshore of Suriname, it acquired a 50% interest in Block 58 on December 22 from Apache. Just over two weeks later, the companies announced a "significant" oil discovery at the Maka Central-1 well. 
  • On the offshore exploration side, the company added a deepwater exploration block in Brazil's pre-salt area. In Angola, it also acquired two offshore blocks (20 and 21) and extended an existing license for Block 17 through 2045. 
  • Asset sales continued, with the company signing an agreement to sell its interest in Brunei offshore block CA1. It also sold a 50% interest in a portfolio of French wind and solar assets to Banque des Territoires.
  • As part of its renewable energy efforts, Total was awarded a contract to construct a large-scale solar power plant in Qatar.
  • In a separate press release, Total announced a 6% quarterly dividend increase to 0.68 euro/share.

2020 outlook

Because Total is a French company, it doesn't often release quotes from management in English. But in a press release, Total -- referring to itself as "the Group" -- was frank about the market realities it is facing:

The environment remains volatile, given the uncertainty about hydrocarbon demand related to the outlook for global economic growth and a context of geopolitical instability. The Group has strong capacity to generate cash flow and, in a $60/barrel environment, expects to increase it by approximately $1 billion per year starting from 2019. ...

The Group will complete its $5 billion asset sale program over the years 2019-20 [with about $3 billion already announced].

Organic production growth should be more than 2% in 2020, thanks to ramp-ups of projects started in 2019 and expected start-ups in 2020, notably Iara-2 in Brazil.

Since the start of the fourth quarter, global refining margins are weak as a result of high product inventories and oil prices supported by OPEC. The [Group's downstream unit] will continue to rely on its diversified portfolio, notably its integrated platforms in Refining & Chemicals as well as its non-cyclical businesses.

Taking into account the strong visibility on cash flow, the Group will continue to increase the dividend with a guidance of 5% to 6% per year. It will also continue to buy back shares, with an amount expected for 2020 of $2 billion in a $60/barrel environment.

Why the market yawned

Total had a very good quarter, exceeding expectations, increasing production, and outperforming its peers in spite of energy industry headwinds. However, the market is aware that those headwinds seem to be even stronger in Q1 2020 than they were in Q4. For example, Total's outlook is based on $60/barrel oil, but Brent Crude is currently trading at about $54/barrel, while WTI Crude is about $50/barrel. Both those prices are lower than they were at any point during Q4 2019. 

Total's outperformance in the face of poor market conditions, coupled with its $27.4 billion cash hoard, should reassure dividend investors that it can continue to support its payout, currently yielding 5.9%. But other investors may want to take a "wait and see" approach to this volatile industry for now.