Of all the integrated oil and gas majors, Total may have had the best quarterly results. Its net income per share last quarter was only 3% less than in the year prior. As good as the results were, some of the comments from Total's management about the future were even more promising. Let's look at five quotes from Total CFOPatrick de la Chevardierethat give a peek into what management is thinking about.
1. We're cutting costs ...Total's quarterly earnings were impressive in large part because the company's upstream production generated much stronger earnings than many of its peers. Total's upstream earnings for the quarter were only 50% lower than in the same quarter last year, which is considerably better than the 80% to 90% reductions we saw at other integrated oil and gas companies. Some of that had to with its new production coming online, but as de laChevardiere put it, there were some big operational cost reductions as well:
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Seeing cost savings on the operational side is the best kinds of gain a company can get. Not only does it affect near-term profitability, but it also doesn't come at the expense of reduced future gains. If Total can truly meet its stated $800 million target reduction -- it's currently on track to do better than that -- and still increaseproductionby 8% this year, that would be a great sign for thefuture.
2. ... and we can produce oil and gas at very cheap levelsAgain from the CEO:
Thanks to these operational cost reductions, Total has been able to push its cost per barrel to less than double digits. As de la Chevardiere put it during the call, it's been the little things that all add up. He noted that things such as lowering support boat speeds for offshore operations that lower fuel consumption provided examples of theincrementalthings the company has been looking at to reduce overall costs.
One thing to keep in mind here is that these operational costs are on a per-barrel-of-oil equivalent, which includes natural gas. Gas has historically been a lower-cost resource to extract, but it has also garnered lower realized prices, so take that per-barrel number in context with the company's overall production mix.
3. We're also conserving cash by employing a scrip dividend for the time beingA major challenge for big oil players today is needing to shell out billions in cash payments totheirshareholders through dividends. So to help cut these pay-now cash costs, the company hasallowed its investors to sign up for a scrip dividend. Basically, this type of dividend is paid in additional equity shares in the company rather than in cash, and for their troubles those shares are sold at a 10% discount to market levels. According to de laChevardiere, a majority of shareholders have taken the company up on the offer, which will save Total a ton of cash over the immediate future. As the CEO explains:
Having $3 billion dedicated to its capital program instead of towardcashdividend payments will certainly help bridge the funding gaps it has while it wraps up several development projects between now and2017.
Source: Total investor presentation.
4. We're planning on covering it, even if oil stays cheap for a long timePossibly the most interesting quote of the conference call came when asked how long Total plans on maintaining that scrip dividend. After all, having a scrip dilutes total shares. When de laChevardiere said that Total plans to have the scrip dividend wrapped up in a year or so, he also let slip what type of commodity market the company is planning for:
There's a whole lot to go on in that little statement. Not only does the company plan on seeing oil in the $60-per-barrel range for the next couple of years, but it's also building its development plans such that it can generate enough cash to pay dividends and cover capital expenditures under that price environment. There's no surefire way to know whether that's what oil prices will be a couple of years from now, but the lower the number Total plans on, the better off it will be down the road.
5. Don't let asset sales assume something isn't lucrativeSomething investors may get confused about is that not all asset sales are necessarily done because the company doesn't see the asset as a lucrative investment anymore or that the company needs the cash. For example, this past quarter Total sold a 20% operating stake in the Laggan-Tomore offshore project for $1 billion while increasing its stake in a production contract with the Abu DhabiCompany for Onshore Petroleum Operations Ltd., or ADCO. Says the CEO:
Developing the Laggan field will be a multibillion-dollar project, and just because the company has viewed it as a very lucrative investment doesn't dismiss the fact that there's a lot of risk associated with having an 80% interest in a single project. So to lower its risk in the event that something doesn't go according to plan, it has reduced its operating stake in the project to 60%, which reduces its risk. This is an important lesson for oil and gas investors, because looking at these two deals might give the impression that the company is simultaneouslygoingin different directions.
What a Fool believesTotal put out some impressive results this past quarter, and some of the comments from management this past quarter were just as encouraging. Not only will the company realize some significant cost savings over the next couple of years, but it's also preparing to be a profitable company in a much lower commodity price environment over the long term. That may sound like bearish sentiment regarding the future of the oil market, but it should give Total's shareholders some solace over the long term that the company will be able to thrive during a long down market.
The article The 5 Key Quotes That Reveal What Total SA's Management Is Thinking originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends Total (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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