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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Total Going On The Offensive

Total SA (TOT) is ready to move to the next stage of expansion now that the oil price collapse is showing signs of being finally over. According to Patrick Pouyanne, the CEO of the French oil giant “After two years of being defensive, we are offensive now”.

The company is reportedly planning to begin as many as 10 major new projects in the next 18 months to help buoy its production. That view of aggressive expansion is consistent with industry trends across the U.S. as well. Baker Hughes has reported a long string of increases in drilling rig demand, and said as of last Friday that the rig count was up by more than 200 versus year ago levels.

Total’s new found aggressiveness is built on a greatly improved supply chain which is now leaner than a few years ago. The firm raised its full year dividend recently to $2.62 per share (2.45 euro) after three years of static levels.

The cost control efforts have not only helped boost dividends, but they are enabling operational funding with minimal debt use as well. The firm now says that it can fund operations and the cash portion of its dividend with crude at about $50 per barrel - $5 less than what the firm said in September 2016.

In other words, not only is Total able to survive at $50 a barrel, but the firm is making a healthy profit as well. That should be a warning sign to many of the members of OPEC who reportedly still need prices closer to $80 a barrel or more to cover their own costs and government largesse. The days of wildly profitable oil operations funding lavish state spending in petro states may be over for good.

Total’s recent announcements reinforce that view. The firm plans to increase production by 5 percent per year for the next four years following a 4.5 percent production increase in 2016, which brought total output to 2.45M boe per day.

“We’re going to propose to increase the dividend as we have confidence in the future,” the CEO said in Paris. “My goal is to launch new projects to prepare the future, while remaining disciplined and cutting costs further because crude prices might drift lower.” Related: U.S. Crude Inventories Reach Record High After EIA Reports Significant Build

Not all oil producers are in as strong a shape as Total is. The French firm significantly outperformed peers in the fourth quarter with BP, Royal Dutch Shell, and Exxon Mobil all missing analysts’ profit estimates.

Total’s business has been boosted by very strong performance in its E&P business compared to peers (profits in that segment were up 51 percent for the fourth quarter year on year). Its refining and chemicals division has also done quite well with profits there up 13 percent YoY.

BP is in arguably the weakest shape of the oil majors. Total has amply demonstrated for investors that it is in strong shape, but both Shell and Exxon said recently that their cash flow at current prices covers both spending and dividends. In contrast, BP needs Brent to rise to $60 per barrel this year to hit that threshold.

Total’s robust operations may be particularly good for one OPEC producer – Iran. Total has signed preliminary deals to develop gas in Iran, and oil in Brazil and Uganda. The Iranian South Pars 11 project could get a go-ahead by the summer according to firm execs provided that the U.S. does not impose new sanctions.

For all of the talk about scrappy U.S. upstart producers being the flexible and efficient players in the E&P market, it appears Total is doing just as well. The lessons for the industry might be that it pays to watch project costs closely in good times as well as bad, and keep some powder in reserve for opportunities that come along during the inevitable industry busts that crop up from time to time.

By Michael McDonald of Oilprice.com

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