French oil giant Total SA (NYSE:TOT) recently said that it will sell its stake in a major gas field in Azerbaijan, as part of an asset sale strategy that will see the divestment of up to $20 billion worth of assets through the end of this year.
In combination with reduced capital spending and stronger cash flow growth, asset sales should allow the company to modestly grow its dividend during the next few years. But there's one major risk that could stifle Total's dividend growth.
Total to sell stake in Azerbaijan gas field
On Friday, Total announced an agreement to sell its 10% interest in Azerbaijan's Shah Deniz field and the South Caucasus Pipeline to Turkey's state-owned oil company, TPAO, for $1.5 billion.
Shah Deniz, located roughly 60 miles southeast of Azerbaijan's capital city of Baku in the Caspian Sea, is currently producing 200,000 barrels of oil equivalent per day. The field is operated by BP (NYSE:BP), which holds a 28.83% interest, alongside Statoil (NYSE:EQNR), which maintains a 15.5% stake in the field, and other companies including Azerbaijan's Socar, Russia's Lukoil, and Iran's state oil company.
Last year, Statoil reduced its equity stake in the project from 25.5% by selling a 10% interest to BP and Azerbaijan's Socar for $1.5 billion. The Norwegian oil company's move was part of a broad strategy to rein in capital spending and focus on projects with more certain payoffs, and less execution risk.
Total's motivation is similar. The company has been aggressively divesting assets during the past few years in order to raise cash and focus on more-promising opportunities with more immediate payoffs. Once the Shah Deniz sale is completed, Total will have sold nearly $16 billion worth of assets since 2012 as part of its $15 billion-$20 billion asset sale target for the end of 2014.
Is dividend growth attainable?
In recent years, Total has relied heavily on asset sales to fund its dividend. This was largely because the company's operating cash flows weren't enough to cover its high level of capital spending. Total's annual capital spending has averaged more than $30 billion during the past three years as compared to annual operating cash flows that averaged roughly $28 billion during the same period.
But this practice of funding its dividend payments through asset sale proceeds can't go on forever. To sustain its dividend, the company needs a combination of reduced spending and meaningful cash flow growth. Luckily, this scenario looks achievable, given management's decision to reduce spending and boost cash flows through a wave of new project start-ups during the next few years.
Capital spending is expected to fall from its peak of roughly $28 billion last year to $26 billion this year, and to a level of $24 billion-$25 billion from 2015 to 2017. Meanwhile, Total is set to nearly double the number of new projects it launches during the next three years as compared to the previous three, with 13 major project start-ups planned through 2017. Assuming these projects can be brought online on time and on budget, and assuming oil prices remain high, Total's operating cash flow should grow 30% by 2017 compared to 2012 levels, which should allow for decent dividend growth during the period.
One major risk to consider
However, that's a pretty big assumption given the increasing number of delays and cost overruns for projects undertaken by Total and other Big Oil companies. For instance, Total's plans to develop the Kaombo oil field offshore Angola were hindered by several delays due to cost escalation, while a gas leak at its Elgin platform in the North Sea caused the company to shut operations for nearly a year, resulting in a material loss of production. With the majority of Total's new projects in similarly high-risk, technically complex environments, the risk of delays and cost overruns is ever present.
If everything goes as planned, the combination of reduced spending and strong cash flow growth from the start-up of new projects should allow Total to modestly increase its dividend during the next few years. However, the company's cash flow outlook is predicated upon oil prices remaining high, and projects being brought online on-time and on-budget, which, investors should note, are inherently risky assumptions that may not pan out and could constrain dividend growth.