Source: Wikimedia Commons.

The integrated model is turning out to be a huge blessing for France's Total S.A. (NYSE:TOT), as it effectively combats low oil prices by cranking up refineries as well as organically increasing hydrocarbon production, a strategy also adopted by its English peer, BP.

For the third quarter, the French integrated oil company posted an adjusted net income of $2.76 billion -- a 23% drop from the year-ago figure. However, it beat analysts' estimates by a solid $0.26 a share. That said, upstream impairments of $650 million and inventory valuation charges of $760 million pulled down net income to $1.08 billion -- a sharp 69% slump from last year's third quarter.

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 33% from last year's third quarter to clock in at $40.5 billion while adjusted (pre-tax) operating income dived 49% to $3.03 billion. However, the refining and chemicals division contributed a massive 56% of the operating profits.

Below is a breakdown of the company's adjusted operating profit before tax by segment:


Adjusted operating income Q3 2015 (in millions)

Adjusted operating income Q3 2014 (in millions)

Change (%)





Refining and Chemicals




Marketing and Services












Source: Total S.A. earnings press release.

Production grows, but not enough to counter oil price dip
Not surprisingly, upstream operating earnings fell a massive 49% due to average oil prices falling 50% over the last 12 months. However, overall production increased a solid 10% to 2.34 million barrels of oil equivalent per day, or BOE/d, while liquids production alone grew by a remarkable 19%.

From a fundamental perspective, what's encouraging is that the company brought two major projects -- Surmont 2 in Canada and Gladstone LNG in Australia -- on line last quarter, bringing its major start-ups to six, out of the targeted eight for 2015. Production ramp-ups at first quarter start-ups, West Franklin Phase 2 and CLOV, and Q2 start-up at the Termokarstovoye project in Russia, contributed to an impressive 6% increase in total production. Additionally, the renewal of its production license with Abu Dhabi Company for Onshore Petroleum Operations earlier this year ensured another 6% increase in overall production. This low-cost increase is a blessing for Total when its integrated peers are witnessing costs spiral up in an effort to increase production. However, the production shutdown in Yemen contributed to a 4% decrease from last year's volumes.

Refining and marketing take advantage of higher margins
In a bid to take advantage of strong refining margins, Total cranked up its refineries to an overall utilization rate of 90% -- from 86% last year. Total refinery throughput, as a result, increased 5% to 1.97 million barrels per day, or bpd. Over the first nine months of 2015, however, refinery throughput increased an impressive 12% to 1.94 million bpd when compared to the first nine months of 2014.

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 $54.8 per tonne. With European refining margins moving north, it should definitely offset upstream losses to some extent.

Overall petroleum product sales grew 6% to 4.04 million bpd, with European sales growing 7% while Africa contributed to a 13% growth -- albeit on a smaller base.

Cash flows and outlook
Cash flow from operations fell 22% to $5.99 billion. Comparing it with its nearest European competitor, BP, whose operating cash flows fell a massive 45% in the same period to $5.18 billion, this isn't too bad. Cash management at Total has been far more efficient in comparison as it sold off assets worth $3 billion to boost cash reserves. It does reflect management's focus on gaining operational efficiency despite the challenging conditions dominating the oil market.

Management looks keen to start up two more major projects by the end of the year -- Laggan-Tormore in the UK Continental Shelf and the Moho Nord project offshore the Republic of Congo in Africa. 2015 production is expected to grow 9%, surpassing the initial target of 8%. The company reports that European refining margins have fallen so far into the fourth quarter but should remain at higher-than-average levels compared to past years.

Moreover, management is confident that free cash flow generated from operations will cover its cash dividend until 2017. During last month's investor day, management emphasized its plans to limit capital expenditures to $24 billion, while simultaneously increasing spending cuts to $3 billion. However, production is expected to witness strong growth from 20 major start-ups between 2014 and 2019.

Foolish bottom line
The refining and marketing segments have once again proved savior to Total as the downturn in the oil industry worsens. Moreover, management seems to have allocated capital wisely by bringing on line lower cost production during the worst part of the industry down-cycle. With dividends safe, this is a stock to watch out for.