French oil giant Total SA has laid out a vision to expand in renewables and power. The challenge is to turn this business into a consistent profit machine.
The company's new gas, renewables and power segment earnings were down 49% in the third quarter compared with a year earlier, the company said Friday. Tough times in the solar-power sector, where Total is a big player in the U.S., made the division the company's worst-performing business unit in the period. The quarterly comparison was made more stark because results last year were boosted by the sale of a solar farm stake.
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Total's power section remains a relatively small part of its business, generating $97 million in operating income in the third quarter compared with over $1.4 billion from its oil-and-gas exploration and production business. Overall, Total reported a sharp increase in net profit in the period to $2.7 billion, up 39% from a year earlier.
Earnings were boosted by higher oil and gas production, higher crude prices, a strong refinery business, and cost cuts. Total executives said the company remains an oil-and-gas business first.
However, Total has moved more aggressively than many of its peers into the renewables and power sectors, making many acquisitions. In 2016, it paid $1 billion for a French maker of industrial batteries and it owns a majority stake in California-based solar panel maker SunPower Corp.
Total Chief Executive Patrick Pouyanné has said 20% of Total's energy output will be from low-carbon sources such as wind and solar by 2035.
"In energy, if you want to make a cash machine you invest for 10 or 15 years," Mr. Pouyanne said. "This segment is will bring value, but let's be patient."
Despite its results this quarter, Total's gas, renewables and power division remains profitable and delivered a return on capital of nearly 7% in the third quarter, more than the exploration and production unit.
Some of Total's rivals have been more cautious about new energy technologies, after getting burned in the past. This month, Bob Dudley, the CEO of BP PLC, said that while uncertainty remains over which technologies will become most successful, his company is avoiding "large speculative investments" in renewables.
Total remains committed to its bigger ambitions for producing electricity and is seeking to build a presence across the supply chain, but the lackluster performance of that segment this year highlights the challenge big oil companies face in developing new energy businesses.
The company acknowledges the difficulties the division has faced, largely because of the depressed market for solar panels. The value of Total's stake in SunPower has fallen since it acquired a majority holding in 2011, amid a sharp decline in the price of panels.
But Total's bet on power doesn't just depend on solar and storage. The same unit includes its liquefied natural gas business. LNG is a superchilled fuel that can be shipped around the world. Rivals such as Exxon Mobil Corp. and Royal Dutch Shell PLC have made similar bets on LNG.
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(END) Dow Jones Newswires
October 27, 2017 10:32 ET (14:32 GMT)