lundi 15 février 2016

Adaptation to the turmoil in oil and gas sector: Total's example

Oil and gas: what's up in Total?

ConocoPhillips is one of the few majors to have announced a drop in its dividend following oil price plunge. - ConocoPhillips
The French oil behemoth intends to cut its investments in 2016 by USD2 billion, from USD 21 to USD19.
Last Thursday, Patrick Pouyanné, Total CEO, did not hide his satisfaction when presenting the group’s results for 2015, thus keeping serene in face of oil price severe drop. In fact, as oil market price lost 45% in average last year (so did gas price by 28%), the French oil giant showed an obvious resilience. Thus its adjusted net income (excluding stocks and exceptional items) was reduced by 18%, to reach USD10,5 billion. « Other majors have recorded sharp decreases amounting to 45-50% », insisted Total CEO. Moreover, the group net income even increased by 20%, amounting to USD5 billion, as exceptional provisions amounted « only to USD5 billion (particularly on its Canadian project Fort Hills and Australian one Gladstone LNG), to be compared with USD7 billion of exceptional provisions in 2014. Analysts hammered the  surprise : last quarter net result exceeded by 20% the expected one.
No mass job cuts
First of all, Total benefited from its expense cut program initiated as soon as spring 2014, far before oil prices plunged severely, falling from USD110 in mid 2014 to somewhat USD30 today. « We were aware that oil industry was getting into trouble », explained Patrick Pouyanné. « But the best we have to do was to control what was available to us, namely our expenses ». The oil major indeed progressed farther than expected, by example limiting professional travels or helicopter use, but also by reviewing new upstream project design : thus expense cuts reached USD1,5 billion in 2015, instead of the USD1,2 billion expected. The targeted amount will be set to USD2,4 billion in 2016, « in order to reach the USD3 billion and more targeted by 2017 », announced the group. In September indeed, the group decided to change from USD2 billion to USD3 billion of expense cuts.
It’s worth to see that this huge expense cut program does not involve mass job cuts, conversely to many other majors (ExxonMobil excepted). Total only limits its recruiting policy (from 4,500 positions in 2014 to 2,500 in 2015 and 2,800 this year) and does not replace every retiring employee. Last year, the group staff was thus reduced by around 2,000 persons, off a total of 100,000 positions. « All the teams must be out on deck for our objectives. We shall need everybody when the barrel market price shall recover ! », said Patrick Pouyanné.
Increased production for falling investments
Moreover Total has benefited from a production increase by 9,4%, amounting to 2,347 Mb/d. A part of this increase comes from the renewal of a license in Abu Dhabi, which was cut off during a year. Then the group commissioned 9 new sites (among which CLOV in Angola or Gladstone LNG in Australia). These projects have thus balanced the transfers or production stops in Yemen and Lybia. Finally, the commissioning of Laggan Tormore in North Sea, last week, and of oils fields located in Argentina, Bolivia or Angola later in 2016 shall allow the corporation to record a 4% increase this year.
In 2015, the group did not launch new projects, and only Libra, in Brazil, may be commissioned in late 2016 or early 2017. « The drillings made this year proved that this site consists in a giant field, like block 17 in Angola », said Patrick Pouyanné. Investments will be reduced to USD19 billion in 2016 (from USD 21 to USD19, as expected until now), after reaching a USD23 billion level in 2015. He postpones the Zinia 2 project in Angola, in the hope to reduce this cost, and postpones sine die the Bonga South West deep offshore project, operated by Shell in Nigeria. « Our strategy consists in our positioning on low cost oils », insisted Patrick Pouyanné.
A Birman discovery
Total took a part in a significant gas discovery in Shwe Yee Gtun, in the Rakhine basin  located in the waters off the Birman coast, announced in early January.  « It’s a real wonderful discovery : indeed, it’s likely to be a gas region », commented Patrick Pouyanné, adding that it was one of the first permits negotiated by Kevin McLahan, the new exploration manager, who was appointed in September 2014. Even if the potential of the field, operated by Australia Woodside (40%), together with Total (40%) and the Birman operator MPRL, needs to be confirmed, this is good news for the French group : indeed Total has not announced a discovery for years. The project budget has been decreased, to amount to USD1,5 billion compared with USD1,9 billion in 2015, « which gives us quite a margin », commented the CEO. The group has recorded a reserve renewal rate of 107% in 2015 and of 118% by three years.
An exceptional year coming from refining sector

The downstream activities (namely refining-chemistry and marketing -services) recorded an adjusted net income of USD6,5 billion (58% of the total), recording thus a 76% increase compared with 2014. The group has taken advantage of high refinery margins, particularly in Europe, together with some asset transfers in Europe too. « We’ve made €300 million after taxes in France in 2015, among which €200 million come from refining-petrochemicals », outlined Patrick Pouyanné. Nevertheless refining margins were exceptional in 2015 and « their reduction may hinder Total performance this year », highlighted Alexandre Andlauer, an Alphavalue analyst. But restructuring works in La Mède refinery, which again recorded a €100 million loss in 2015, and the upcoming investments for Donges refinery, will provide new improvement sources. Patrick Pouyanné’s peace of mind is thus ingrained, although difficulties are piling up in his environment. He has been appointed CEO in last December.

Total faces a 18% drop of its results, thus recording the best performance among world oil majors -SIPA

Although facing a reduction of its revenues because of oil barrel price steep fall, Total has confirmed that the group shall pay a dividend. All majors of the sector are following suit.

Total was no exception. The group announced that it shall maintain its dividend although its income decreased because of the fall of oil market price. The payment should be made in shares with a 10% discount, as it was decided last year. « Around 50% of the shareholders chose this alternative at the three due dates in 2015 », highlighted Patrick Pouyanné, the group CEO. « This option will allow us to divide by two the cash to be paid ».
For oil majors, seen by the market as capitalisation values, maintaining the dividend is a gold rule. « Their value is based on this parameter», said Mathias Pestre-Mazieres, sector manager by Morgan Stanley. Though the barrel price drop, only a few companies have made exception to the rule : ENI, with a dividend reduction of 30%, and ConocoPhillips, which has just announced a 66 % dividend cut. But ExxonMobil, Chevron, Shell and BP have confirmed that they won’t change theirs.

Impossible choice

How long will it last ? « That’s the question for the moment », said Mathias Pestre-Mazieres. « Some companies have exhausted all their possible leviers». In front of their income sharp reduction, majors have tried to avoid cash distribution, through investment reduction and asset transfers. But the most part of them were compelled to take on new debts to pay their dividend. Total is facing this situation, as the group cashed USD22,6 billion thanks to its operations and asset transfers, but which has paid USD26 billion for its investments and dividends. Total is allowed to do so as its indebtedness rate fell to reach a 28% level. « A healthy financial statement », insisted Patrick Pouyanné. These financial statements may allow Total to cope with new oil price cuts.

Nevertheless, companies may face an « impossible choice : paying dividend or favoring rating  », outlined Mathias Pestre-Mazieres. Standard & Poor’s has downgraded Shell and put other European companies (among which Total stands) under watch in early February. « Maybe the most part of the companies will be downgraded », outlined Patrick de la Chevardière, Total financial manager, on Thursday, highlighting a negligible impact on his company.

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