Total (NYSE:TTE) combined aggressive spending cuts with increased hydrocarbon production to effectively combat low oil prices. For the second quarter, the French integrated oil company posted an adjusted net income of $3.1 billion -- a 2% drop from the year-ago figure -- while beating analyst estimates by a comfortable $0.19 a share.

Digging deeper
Once again, the Paris-based Total took full advantage of a resurgent refining and chemicals market to significantly offset operating losses in its upstream division. Total sales fell 29% from last year's second quarter to clock in at $44.7 billion. Below is a breakdown of the company's adjusted operating earnings by segment:


Q2 2015 
(in millions)

Q2 2014
(in millions)

% Change





Refining & Chemicals




Marketing & Services








Source: Total earnings press release.

Production grows, but not enough to counter oil price dip
Upstream earnings, not surprisingly, fell a massive 49% due to average oil prices falling more than 40% over the last 12 months. However, overall production increased a solid 12% to 2.3 million barrels of oil equivalent per day while liquids production alone grew by a remarkable 23%.

From a fundamental perspective, what's encouraging is that the company brought its fourth major project online this year through its Termokarstovoye field in Russia. New project startups, including Q1 startup West Franklin Phase 2, contributed to an impressive 5% of the total production increase. New projects coming on line, as well as the ramping up of existing ones, will hold the key to how Total plans to combat low prices. The remaining 7% increase came from the addition of a new concession in the Emirates and other asset sales. However, the Yemen LNG project had to be shut down due to the prevailing geopolitical situation there.

Refining rides increased gasoline demand
The refining segment again contributed to a significant part of the earnings by tripling from last year's numbers. Thanks to increased gasoline demand and maintenance downtime in Asian refineries, Total's refinery output clocked in at 1.9 million bpd, a solid 18% jump from the year-ago quarter. While utilization rates of the company's refineries improved to 84% as a result, they are nowhere near that of its U.S. peers. In other words, there's still room for more crude oil processing in Total's refineries.

Another major point investors might want to take note of is that the European Refining Margin Indicator -- a measure of profitability of complex refineries that process a mix of crude oil and other feedstock -- is at its highest-ever value at $54 per tonne. With European refining margins moving north, it should definitely offset upstream losses to some extent.

Management focused on the right things
Overall, cash flow from operations fell by 10% -- a drop I'd consider modest -- to $4.7 billion. It does reflect management's focus on gaining operational efficiency despite the challenging conditions dominating the oil market.

Moving beyond performance, management made sensible moves by cutting down investments. Net investments fell to $4.6 billion from $8 billion last year -- a sharp 42% drop. Given that four more projects are expected to come on line in the second half of the year, it couldn't have made sense to pour more capital into new projects or acquisitions in the current low-oil-price environment.

Financial discipline helped the company boost its cash balances by a solid $1.5 billion this quarter, as well as an additional $750 million from favorable exchange rates beefing up total cash balance by a solid $2.2 billion.

Outlook for 2015
Management looks keen to start up three more major projects -- Surmont Phase 2, GLNG, and Laggan-Tormore -- and increase this year's production by more than 8%. With this strategy of controlling costs and increasing production, the company aims to reduce breakeven and increase cash flow. In the downstream space, higher demand for gasoline brings good news to refining, though the risk of overcapacity in the market exists.

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