Total Q3 profits top forecasts, says $40 oil can work

By Francois de Beaupuy on 10/30/2020

PARIS (Bloomberg) - Total continued to ride out tough times for the oil industry by posting third-quarter profit that exceeded the highest analyst estimate, paying down debt and maintaining a generous dividend.

The French energy giant, which has fared better than its rivals through the severe downturn caused by the coronavirus, still offered some cause for concern. The company boasted of its resilience to oil at $40 in a week when prices slumped below that level as the second wave of the pandemic took hold.

The oil market remains uncertain and dependent on the speed of the global recovery, Total said in a statement Friday. Still, the company’s results were a bright spot in a gloomy industry. Third-quarter adjusted net income was $848 million, down 72% from a year earlier but well above the average analyst estimate of $478 million.

“Total is not immune to sector headwinds, and has similar exposures to peers, however the balance sheet remains stronger,” RBC analyst Biraj Borkhataria wrote in a note. “Total has managed to find the balance between growing its low-carbon business, sustaining its core business and maintaining its dividend.”

So far this week, Total’s European peers Repsol SA and BP Plc eked out small profits, while Italy’s Eni SpA and Austria’s OMV AG said they lost money in the quarter. On Thursday, U.S. oil giant Exxon Mobil Corp. said it will slash its global workforce by 15% to adjust to low prices.

While Royal Dutch Shell Plc also reported better-than-expected earnings, the Anglo-Dutch company is struggling to match its French rival’s appeal to investors after slashing its dividend in April. Total is the only European major to leave its payout unscathed this year.

Total shares rose 2.1% to 25.65 euros at 9:43 a.m. on Friday in Paris, while the country’s benchmark index dropped slightly.

Low Costs

The company is benefiting from spending cuts initiated since the previous oil-industry downturn five years ago and investments in low-cost barrels. Its upstream operating expenditure has dropped by half since 2014 to $5 a barrel, which Total says is the lowest among the five supermajors.

Total’s gearing, the ratio of net debt to capital, was 22% on Sept. 30, down from 23.6% three months earlier and well below the level of many of its peers. Debt-adjusted cash flow was $4.3 billion, down 41% from a year earlier.

To weather the continuing downturn, Total cut its net capital expenditure forecast for this year by $1 billion to less than $13 billion. It also said it will surpass its $1 billion savings target for operating expenses.

LNG Rebound

Most of the company’s profit in the third quarter came from oil and gas production and gasoline sales at service stations. Total’s liquefied natural gas business was hit by plunging prices and its refineries posted a loss because of weak demand, especially for jet fuel.

“The group benefited during the third quarter from a more favorable environment, with oil prices above $40 a barrel thanks to strong OPEC+ discipline as well as the demand recovery for petroleum products for road transportation,” Total Chief Executive Officer Patrick Pouyanne said in the statement.

The company expects that the increase in oil prices over the second and third quarters will have a positive impact on its average LNG selling price in the fourth quarter. Refining margins have rebounded since the start of the fourth quarter, though remain fragile given the low demand for jet fuel, Total said.

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