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French Oil Giant Total Earning Like It's 2014

Oil Rigs

Profits are finally on the rise again for the oil majors. Big Oil reported its best quarter in years, a sign that the industry is on the upswing even though oil prices have failed to rally much above $50 per barrel.

The first quarter earnings reports from the oil majors are almost uniformly positive compared to a year ago and much better than even analysts had expected. Exxon shocked on the upside, beating estimates by a mile with earnings double the levels of 2016. Exxon’s big jump in cash flow allowed it to pay for capex and even cover its dividend, assuaging concerns about the durability of the ever-increasing shareholder payout. Chevron swung to a large profit of $2.7 billion in the first quarter, compared to a $725 million loss a year earlier.

And the second quarter, so far, is looking good as well. Bloomberg estimates that Exxon is on track for a more than 130 percent increase in earnings per share in the second quarter compared to the same period a year earlier. Chevron too is slated to report its best second quarter since 2014.

But French oil giant Total SA offered some of the more interesting tidbits from the earnings reports. Total saw its quarterly profits jump by 56 percent, which wasn’t all that notable given the broader improvement in the financials for the world’s largest oil companies over the past 12 months. To a certain extent, the rebound in profits is merely a reflection of higher oil prices compared to 2016.

However, it was Total’s free cash flow that stands out – at $1.7 billion in the first quarter of 2017, excluding asset sales and acquisitions, Total’s free cash flow rose to essentially the same levels as in 2013 when oil traded at $100 per barrel. In other words, Total is back to pre-2014 financials despite oil trading at half the price. Related: The Inconvenient Truth About Electric Vehicles

That impressive performance has allowed Total to look towards growth. The French company is set to roll out a series of final investment decisions over the next year and a half. First up is a greenlight on a drilling campaign in Argentina’s Vaca Muerta shale, the first major investment for Total in several years and the first of 10 projects that will move forward. Other projects set for development are Total’s holdings in Azerbaijan, offshore Brazil, Uganda and maybe Iran. Total expects to grow its overall production by 4 percent this year and the start of new drilling projects will likely lead to larger production gains in the years ahead.

Another intriguing development from Total is the company’s strategy to invest in upstream production now to be well-positioned for a tighter oil market tomorrow. Echoing the IEA’s repeated warnings, Total sees oil supply falling short of demand by the end of the decade. Meanwhile, costs are still relatively low right now because of the cyclical market downturn, so development costs can be kept in check. “The costs are low, so it’s the right time to invest,” Pouyanne said last week. “Our strategy is to take advantage of this market, where you have a lot of weak players.”

That approach is a contrast to some of the other oil majors. Most of them are scaling back investments on high-cost production and doubling down on U.S. shale, where drilling costs are lower (on a per well basis, at least) and the turnarounds vastly shorter. Spending on shale is comparatively lower risk in today’s environment; almost a conservative strategy. Chevron, for example, failed to replace the oil it produced last year and is focusing on slimming down, using three-quarters of its 2017 drilling budget on shale. Gone are the days of spending billions on massive LNG export terminals. Royal Dutch Shell, highly indebted because of its $50 billion purchase of BG Group, will also continue to shed assets as it tries to reduce its debt.

To be sure, Total is not the only one looking to step up spending and grow production. ExxonMobil is rolling the dice on a major offshore drilling program in Guyana. However, Total is less than half the size of Exxon. Moreover, Exxon is still playing it cautious, keeping spending relatively conservative. Also its 2016 production actually declined by 4 percent.

In many ways, Total has outpaced its rivals during the three-year oil market downturn and is in a stronger position to grow going forward.

By Nick Cunningham of Oilprice.com

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