Financial Times

Total chief promises spending discipline as profits flow

by Andrew Ward and David Keohane in London, FT

February 13, 2018 | 1:50 pm
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Oil companies are making money again — and lots of it. The world’s five largest oil and gas groups generated over $57bn of profit last year, more than twice as much as in 2016.

That is welcome news for shareholders as recovery gathers pace from a long downturn. But the head of one of those companies says the industry must now prove it can make better use of surplus cash than it did during the last growth cycle.

Patrick Pouyanné, chief executive of Total, says investors need convincing that, with oil trading back above $60 per barrel, producers will not return to the reckless spending and cost inflation of the boom years before crude prices crashed in 2014.

“This is a burden on the oil and gas sector because there are investors who remember when we were at $100 per barrel and capital expenditure was going from $15bn a year to $30bn without any increase in dividend or returns,” he says.

“So we want to give an answer; at Total, if we have price upside, part of it will go back to the shareholders. We will not have a huge capex programme. We will keep discipline.”

Similar rhetoric has come from other oil majors but none have given as firm a commitment as Total, which last week promised to increase its dividend by 10 per cent in the next three years and buy back up to $5bn of shares.

Biraj Borkhataria, analyst at RBC Capital Markets, says the French group’s fourth-quarter results were the “clear winner” among majors, rivalling Royal Dutch Shell for shareholder return but with stronger upstream production growth.

Total was more resilient than most rivals throughout the downturn because it had already started cutting costs before crude prices collapsed. “Christophe de Margerie saw that costs had got out of control,” says Iain Reid, analyst at Macquarie, referring to the former Total chief executive who was killed in a Moscow plane crash in 2014.

Mr Pouyanné continued the efficiency drive when he took over and production costs are now 45 per cent lower than three years ago. At the same time, oil and gas output has risen by a fifth as new developments have come on stream.

Production is forecast to keep growing at an average 5 per cent per year until 2022 aided by the $7.45bn acquisition of mostly North Sea assets from AP Moller-Maersk of Denmark, due to be completed in the next few weeks.

The deal took the industry by surprise when announced last August because other majors have been reducing their presence in the mature North Sea basin but Mr Pouyanné says the combination with existing Total assets in the UK and Norway will create economies of scale.

“It is better to play to our strengths rather than to fill the gaps,” he says, drawing a contrast with past, unsuccessful forays by Total into US shale gas and Canadian oil sands. “The North Sea is our garden so we know it very well . . . Onshore US is not a nice garden for Total. I will let other people do that.”

In addition to the North Sea, Mr Pouyanné identifies Total’s strongholds as deepwater Brazil, the Middle East, Africa and liquefied natural gas. This latter business was bolstered in November by a $1.5bn acquisition of LNG assets from Engie, the French utility. The deal will elevate Total to number two in the global LNG market behind Shell.

The presence of the French state as a shareholder in Engie spurred rumours of political involvement to keep the LNG assets in domestic hands. “Absolutely not,” says Mr Pouyanné, though he admits to informing President Emmanuel Macron shortly before the deal was announced in an indication of its strategic importance.

He says he negotiated directly with his Engie counterpart, Isabelle Kocher, and moved quickly to head off competition from BP. The UK group has not confirmed that it was interested. The Maersk deal unfolded in similar fashion, with Mr Pouyanné keeping talks in a tight circle of top lieutenants and reaching agreement within weeks.

The hands-on negotiating style is typical of Mr Pouyanné. “The way we work, it is a big machine but at the top of the company we are able to mobilise as a small team,” he says. “If you want to keep things secret you have to move quickly.”

There is capacity for Total to do more deals with the group’s debt-to-equity ratio of 14 per cent the lowest among the majors. A budget of up to $2bn was allocated for net acquisitions in the financial plan set out last week and Mr Pouyanné says the kitty will be swelled by divesting less competitive assets.

Further refreshment of the portfolio is coming from Total’s own exploration. The group last month announced a “major discovery” in the Ballymore prospect of the US Gulf of Mexico. Mr Pouyanné says new resources will be developed in a phased manner to avoid the delays and cost overruns that have blighted recent megaprojects.

“That’s a big lesson that we draw,” he says, citing Total’s involvement in the $50bn Kashagan oilfield in Kazakhstan, which finally came on stream years late in 2016. “I would be surprised to see again these huge projects because we have problems executing them and we burn money.”

Total’s capital expenditure has been capped at $13bn-$15bn for the next three years. That is roughly half the $28bn peak in 2013 but, according to Mr Pouyanné, more than enough to deliver growth in an era of lower supply chain costs and increased efficiency.

“We know our teams want to grow and invest,” he says. “Young engineers come to our companies to be involved in projects. It is part of the adventure of the oil and gas industry. So it is a matter of identifying the right projects to invest in.”

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by Andrew Ward and David Keohane in London, FT

February 13, 2018 | 1:50 pm
12893  |   93   |   0  |   Start Conversation

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