French oil giant Total SA (TOT +0.00%) was the latest integrated major to report a sharp decline in fourth-quarter earnings. To improve its performance going forward, the company has vowed to slash capital spending and return more cash to shareholders. Will it pay off?
Fourth-quarter highlights
On Wednesday, Total reported fourth-quarter earnings of $2.18 billion, down 28% from $3.04 billion a year earlier. The main culprits behind the plunge in profits were a 0.5% drop in production and weaker refining margins -- common factors across Total's peer group.
The company said its fourth-quarter production fell to 2.284 million barrels a day, affected by normal decline in its asset base and security issues in Nigeria and Libya. Meanwhile, its refining business continued to suffer because of global refining overcapacity and weak demand for gasoline and diesel in Europe.
While weak refining margins are likely to persist for some time and growing production will be an ongoing challenge, there are a couple of encouraging signs for Total -- a decline in its capital spending and much stronger cash flow growth, both of which bode well for the company's ability to sustain and grow its dividend.
Falling spending, growing cash flow
Like its peers, Total has spent aggressively over the past few years in a bid to boost its stagnant oil and gas production. Over the past three years, the company's capital spending has averaged more than $30 billion per year. Yet operating cash flow has averaged only about $28 billion, forcing Total to finance its dividend largely through proceeds from asset sales.
Going forward, however, capital spending is expected to decline, while cash flows are set to increase sharply. Last year, Total said its 2013 capital spending of around $28 billion would represent a peak in its capital expenditures and that spending would fall to $26 billion in 2014 and to $24 billion to $25 billion over the period 2015-2017.
At the same time, cash flows should improve significantly as a wave of new oil and gas projects start up over the next three years. This year alone, Total plans to start up the ConocoPhillips (COP 4.56%)-operated Ekofisk South project in the Norwegian North Sea, CLOV in Angola, Laggan-Tormore in the U.K. North Sea, and Ofon 2 in Nigeria, with an additional nine major projects slated to commence production between 2015 and 2017.
Additional dividend increases?
In fact, the company actually plans to nearly double the number of project start-ups over the next three years compared with the previous three years. These and other upcoming projects are expected to boost Total's cash flow from operations by a whopping 30% from 2012 to 2017. Signaling its confidence in its ability to grow cash flow, Total recently raised its quarterly dividend from 0.59 euros a share to 0.61 euros.
Peers Royal Dutch Shell (NYSE: RDS-A) and BP (BP 6.38%), both eager to improve shareholder returns, have done the same. Shell, which has vowed to sharply reduce its spending over the next few years, announced in January that it will boost its dividend by 4.4%, while BP increased its dividend by 5.6% in October and is also planning to return more cash to shareholders through share buybacks funded by $10 billion in asset disposals. Like Total, both companies are expecting much stronger growth in cash flow over the next few years.
The bottom line
While it isn't immune to the fundamental challenges plaguing the integrated majors -- namely, stagnating production and rising finding and development costs -- Total looks better positioned over the next three years than it did in the previous three. With capital spending expected to fall and a wave of new high-margin projects set to boost cash flow, Total should finally able to grow its dividend at a modest pace through 2017 -- reversing a previous trend of extremely limited dividend growth.
