There are few integrated oil and gas companies that are working as hard as Total SA (NYSE:TOT) to get their cost structures under control. For the past few quarters, the company has steadily outpaced its peers in maintaining profitability levels, and based on the results so far, it looks like Total will keep this crown through 2016. Let's take a quick dive into Total's numbers for the quarter and see what the company is doing to stay ahead of its big oil peers.
Total's results: The raw numbers
||Q1 2016||Q4 2015||Q1 2015|
|Sales||$32.841 billion||$37.749 billion||$42.313 billion|
|Net income (adjusted for non-cash charges)||$1.636 billion||$2.075 billion||$2.602 billion|
|EPS (adjusted for non-cash charges)||$0.68||$0.88||$1.13|
|Cash flow from operations||$1.881 billion||$4.838 billion||$4.387 billion|
The numbers in this result are pretty indicative of the overall environment for oil and gas companies. Total was able to increase its overall production by 4% year over year to 2.47 million barrels of oil equivalent per day, but the company's average realized hydrocarbon price fell to $26.4 per barrel of oil equivalent from $41.8 per barrel of oil equivalent during the same period last year. Keep in mind that the per barrel equivalent number is a weighted average of price for the production of both oil and natural gas.
As expected from the decline in realized prices, upstream production was the largest contributor to the decline in earnings, while its other segments pretty much held serve. One thing to consider, though, is that despite such a low realized oil and gas price, Total was able to still eke out a profit from that side of its business. Compare that to BP's most recently quarter results, which showed the primary thing the upstream part of its business is producing is losses in the billion-dollar range.
The one number from the report that probably jumps out the most is the decline in cash flow from operations. That drop is in part due to a large build in working capital. Excluding working capital changes, cash flow operations from the quarter would have been $3.7 billion. The 20% decline that number reflects is considerably smaller than the 40% decline in earnings per share. At a time where oil and gas companies are starved for liquidity, it's good to see cash flow declining at a slower rate than earnings.
What happened at Total this past quarter
- Its Laggan-Tormore production facility came online and is now delivering 90,000 barrels per day of oil equivalent.
- Production started at its Vega Pleyade gas field off the cost of southern Argentina at a rate of 70,000 barrels per day of oil equivalents. We should expect to see the full effects of those two new production sources on overall production in the coming quarter.
- About $985 million in divestments were executed, consisting mostly of pipelines in the North Sea and an equity interest in a Northern Russian oil field.
- It signed an additional 1.5 million tons per year of LNG supply contracts with various buyers; the LNG supplies will come from the company's various LNG produciton facilities.
- Current and long-term borrowings actually declined from $55.4 billion to $53.9 billion, but a decrease in cash on hand to $20.6 billion left the company with a net debt to equity ratio of 30.2%, a slight uptick from prior quarters.
What management had to say
The oil and gas industry has had a rough go of it lately, but Total's earnings have held up well compared to its peers, CEO Patrick Pouyanne's recent statements reflect a company that has managed rather well during the downturn, and one that is continuing to cut costs, remaining one of the more profitable companies in its space throughout this cycle:
Despite a 37% fall in the Brent price to 34 $/b since the first quarter 2015, the Group's adjusted net income was $1.6 billion. Operating cash flow before workfing capital changes was $3.7 billion, a decrease limited to 20% due to the resilience of our integrated model...
All teams continue to pursue their cost reduction efforts. The organic investment of $4.6 billion during the first quarter is in line with the objective of limiting Capex to less than $19 billion in 2016. Operating costs are decreasing as planned with the objective of achieving $900 million in savings during the year.
Total's refining & chemicals and marketing & services businesses have looked strong in recent quarters, but Total won't see a return to larger profits until we see a decent uptick in oil and gas prices. That the company's upstream segment has remained modestly profitable is a testament to its cost-cutting efforts; in the coming quarters, it's worth watching to see if it can eke out slightly better profits, even with these low oil prices. If it can, then when the market for oil does turn, expect Total to be in very good shape.
It would be easy to look at the 40% decline in earnings and say that Total is suffering in this market just like everyone else. If you look beyond the numbers for a second, though, you can see a company that is still generating profits from oil and gas production despite very low prices and a weak environment for refining and chemicals. These are signs that the company is in a much better place than when we started this oil decline, and could be one of the better investments in the oil patch today.