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Abu Dhabi, UAEMonday 25 June 2018

Total earnings beat expectations

French company is balancing the continued weakness in oil prices with its ambitions for growth

Total said it’s ready and able to make acquisitions and pursue growth, shrugging off uncertainties about oil prices as its financial position strengthens.

Europe’s second-largest oil and gas company has the firepower to buy up fields on the cheap and press ahead with new developments, taking advantage of lower levels of debt, rising profit and surging cash flow, according to a statement Thursday.

“Total has a stronger balance sheet,” said the chief executivePatrick Pouyanne as the company reported second-quarter earnings that beat expectations. “The group has the flexibility to take advantage of the low-cost environment by being able to launch profitable projects and acquire resources under attractive conditions.”

The French company is balancing the continued weakness in oil prices with its ambitions for growth. Mr Pouyanne sees an opportunity to tap new resources by exploiting the reduction in costs for drilling rigs and other equipment during the industry downturn, anticipating that the market will swing from glut to shortage by the end of the decade.

At the same time, Opec's struggle to make supply cuts significantly boost prices makes it crucial for companies to keep a lid on spending. While Total’s adjusted net income rose 14 per cent from a year earlier to US$2.47 billion in the second quarter, exceeding estimates of $2.33bn, it was slightly lower than in the first three months of 2017 after crude prices dropped.

“Results are somewhat positive but investors might have wanted to see some more cuts on capex and costs as a buffer against lower oil prices,” said Alexandre Andlauer, an analyst at AlphaValue in Paris. “They are walking a tight line on free cash flow,” and “the scrip dividend can’t last for years because it’s dillutive for shareholders”.

The company has said it’s curbing costs to fund operations and the cash portion of its dividend without borrowing at $50 a barrel this year. It has also said it would remove the discount on the part of its dividend paid in shares when oil rises to $60.

Total’s shares were little changed as of 11:46am in Paris, having dropped more than 11 per cent this year.

Among Total’s new projects are a $1bn contract to lead the development of phase 11 of the giant South Pars gas field in Iran. In April, the company decided to develop resources in Argentina’s Vaca Muerta, one of the most promising shale formations outside the United States. It’s also part of a consortium behind the third phase of the Halfaya oil field in Iraq.

Total reiterated plans to boost production by more than 4 per cent this year, aided by field start-ups in Congo, Brazil, and the United Kingdom, among others.

In exploration and production, Total’s operating cash flow before working capital changes climbed by 47 per cent to $3.25bn. Adjusted net operating income rose 30 per cent to $1.36bn.

Oil and gas output increased by 3 per cent to 2.5 million barrels of oil equivalent a day. Adjusted net operating income in the refining and chemicals division dropped 15 per cent to $861 million. Profit in the marketing and services division, which mainly comprises its filling stations in Europe and Africa, climbed 3 per cent to $433m. Earnings from its gas, renewable and power unit more than doubled to $95m.

Net debt fell to $21.96bn at the end of the second quarter from $29.83bn a year earlier, helped by the $3.2bn sale of Atotech in January.

* Bloomberg