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Total's 2019 Debt-Adjusted Cash Flow Beats Peers

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While results season saw most of Total's larger competitors announce weaker 2019 earnings and lower, or flat, cash flows, the French major reported 2019 debt-adjusted cash flow that was up 9% year-on-year at $28.5 billion (see table). The increase exceeded most analysts' expectations, with one investment bank describing Total's results as "arguably the best in the sector." The French major noted that it was "the only IOC [international oil company] able to increase its cash flow." So, what is making Total tick along so nicely? All of the Big Five IOCs claim to have built portfolios that will thrive in a future where oil prices are lower and more volatile than is currently the case (EIF Feb.12'20). But even among these, Total appears to have some business advantages that its four main rivals lack. Firstly, Total's management team is keen to highlight the group's resilient balance sheet. Lower gearing -- 20.7% at the end of 2019 -- means that, proportionately, it has much less debt to service compared to the other four big majors. The cost of financing Total's debt in 2019 was less than $2.4 billion, while BP's was almost $3.5 billion -- even though the two companies have similar market capitalizations. Secondly, the maintenance of a strong balance sheet has had other benefits, according to the company. As well as helping Total weather cyclical downturns, CFO Jean-Pierre Sbraire said it provides the group "with the financial flexibility to seize opportunities," such as a profitable package of North Sea producing assets that came with the acquisition of Maersk Oil and last year's $8.8 billion purchase of Anadarko's African assets, including an operated interest in Mozambique LNG (EIF Aug.21'19). Those acquisitions have enhanced cash flow, with CEO Patrick Pouyanne pointing out, for example, that the deal to buy Maersk's assets was made when crude oil was trading around $50 per barrel in 2017 but that benchmark Brent averaged $72/bbl in 2018 and $64/bbl last year. Then there is Total's significant exposure to Africa, which has been a boon to the company. Africa generated approximately $10 billion of Total's $26 billion cash flow from operations last year. Here, the company has for some time combined the smart use of production technology in low-cost basins to generate strong cash flows. Even when oil prices were near their post-crash lows, in early 2016, Total's CEO highlighted how the company's deepwater Clov development, offshore Angola, had been designed to break even at less than $30/bbl thanks to its use of a floating production system. Since then Total has sanctioned further projects employing floating production, storage and offloading (FPSO) vessels offshore Angola (EIF Nov.21'18). Total identified Kaombo, in Angola, and Egina in Nigeria, as two recent ultra-deepwater African field start-ups that delivered especially strong cash flows in 2019. Cash margins from these projects are greater than $30 per barrel of oil equivalent in a $60/bbl environment. Again, these projects make use of FPSOs, with the Egina FPSO -- connected to 44 subsea wells, 1,600 meters deep, and producing up to 200,000 barrels per day -- being the largest that Total has ever commissioned (EIF Jan.3'19). And although energy prices saw big declines during 2019, with European gas prices lower by some 38%, Total's Integrated Gas, Renewables & Power (iGRP) business held up well, producing an adjusted net operating income that was just 1% lower than in 2018. The LNG market grew more strongly in 2019, fueled by lower gas prices as well as help from local climate policies that favor gas, Total said, and the company took advantage by ramping up high cash margin production in Australia and Russia. During 2019 the iGRP business increased production by 47% to 560,000 boe/d. This was linked to the third-quarter start-up of Ichthys (the massive Inpex-operated gas-to-LNG project off Australia's northwest coast) and the start-up of a third train at Novatek's Yamal LNG development in Russia. These LNG projects combined with the Kaombo and Egina African oil projects to generate more than $3.5 billion of cash flow last year. Meanwhile, Total claims to have benefited from being absent from one part of the upstream that has proved popular with many other IOCs in recent years: US shale. Pouyanne noted that M&A activity within the US shale sector last year involved equity deals only and that there was "no cash in any transaction ... No fresh money coming in the US shale." Total's absence from US shale means no write-downs and "no problems today in our own results," Pouyanne added. By contrast, Chevron announced in December up to $11 billion of asset write-downs, mainly related to its North American shale gas holdings (EIF Dec.18'19). How well will Total's business model cope if crude oil prices settle in the current trading range of $50-$60/bbl? Analysts will have to wait until the end of April -- when the company reports its first-quarter results -- to find out. But with the major's gearing looking like heading back below 20%, further opportunistic acquisitions should not be ruled out. Total's Earnings and Cash Flow Performance ($ million) 2019 2018 %Chg. Revenues $176,249 $184,106 -4.27% Adjusted Net Income 11,828 13,559 -12.77 Operating Cash Flow 26,432 24,529 7.76 Debt-Adjusted Cash Flow $28,501 $26,067 9.34% Source: Total

Topics:
Offshore Oil and Gas, Shale, Earnings, M&A
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