Total said it’s ready and able to make acquisitions and pursue growth, shrugging off uncertainties about oil prices as its financial position strengthens.
Europe’s second-largest oil and gas company has the firepower to buy up fields on the cheap and press ahead with new developments, taking advantage of lower levels of debt, rising profit and surging cash flow, according to a statement Thursday.
“Total has a stronger balance sheet,” CEO Patrick Pouyanne said as the company reported second-quarter earnings that beat expectations. “The group has the flexibility to take advantage of the low-cost environment by being able to launch profitable projects and acquire resources under attractive conditions.”
The French company is balancing the continued weakness in oil prices with its ambitions for growth. Pouyanne sees an opportunity to tap new resources by exploiting the reduction in costs for drilling rigs and other equipment during the industry downturn, anticipating that the market will swing from glut to shortage by the end of the decade.
At the same time, the failure of OPEC’ supply cuts to significantly boost prices makes it crucial for companies to keep a lid on spending. While Total’s adjusted net income rose 14% from a year earlier to $2.47 billion in the second quarter, exceeding estimates of $2.33 billion, it was slightly lower than in the first three months of 2017 after crude prices dropped.
“Results are somewhat positive but investors might have wanted to see some more cuts on capex and costs as a buffer against lower oil prices,” Alexandre Andlauer, an analyst at AlphaValue in Paris, said by email. “They are walking a tight line on free cash flow,” and “the scrip dividend can’t last for years because it’s dillutive for shareholders.”
The company has said it’s curbing costs to fund operations and the cash portion of its dividend without borrowing at $50/bbl this year. It has also said it would remove the discount on the part of its dividend paid in shares when oil rises to $60.
Total’s shares were little changed at €43.19 in Paris, having dropped more than 11% this year.
Among Total’s new projects are a $1 billion contract to lead the development of phase 11 of the giant South Pars gas field in Iran. In April, the company decided to develop resources in Argentina’s Vaca Muerta, one of the most promising shale formations outside the U.S. It’s also part of a consortium behind the third phase of the Halfaya oil field in Iraq.
Total reiterated plans to boost production by more than 4% this year, aided by field startups in Congo, Brazil, and the UK, plus its entry into the Al Shaheen concession in Qatar. In exploration and production, Total’s operating cash flow before working capital changes climbed by 47% to $3.25 billion. Adjusted net operating income rose 30% to $1.36 billion. Oil and gas output increased by 3% to 2.5 MMboed. Adjusted net operating income in the refining and chemicals division dropped 15% to $861 million. Profit in the marketing and services division, which mainly comprises its filling stations in Europe and Africa, climbed 3% to $433 million. Earnings from its gas, renewable and power unit more than doubled to $95 million. Net debt fell to $21.96 billion at the end of the second quarter from $29.83 billion a year earlier, helped by the $3.2 billion sale of Atotech in January.