Total Earnings: Upstream Disappoints, but Strong Refining Margins Provide Solace

French integrated oil giant Total announced adjusted net income of $2.6 billion, or $1.13 per share for the first quarter of 2015. This is a 22% drop from last year's first quarter as low oil prices continue to stifle growth. However, the company ramped up its production volumes by 10% negating what could have been a steeper drop in earnings.

Revenue falls despite production growthRevenue after excise tax fell 33% from last year's first quarter and clocked in at $36.9 billion. However, this masks the organic growth strategy that Total has adopted through project start-ups in the North Sea and offshore Nigeria in the first quarter. Additionally, the renewing of the company's ADCO license in Abu Dhabi at the start of this year helped boost overall production by 6%.

Specifically, liquids production grew 20% year on year to 1.2 million barrels per day, or bpd. While Africa contributed to the biggest share in the pie with 558,000 bpd, it was the Middle East's 76% growth in the same period that pushed up overall volumes. The Middle East contributed with 358,000 bpd versus 203,000 bpd in the first quarter of 2014. However, this growth might somewhat get muted in the wake of "deteriorating security conditions" in Libya and Yemen. The company announced that it has halted production in onshore Libya in February while its Yemen operations have come to a standstill in April.

Overall natural gas production grew a modest 1%, with Africa and the Middle East cutting down on production. Instead, Europe and Asia-Pacific witnessed a 4% and 8% surge in production volumes, respectively, versus last year's first quarter. Overall, this seems to be a solid strategy to push up revenue per barrel equivalent in the wake of low oil and gas prices.

Strong refining margins -- the silver lining Refining and petrochemical margins have remained strong and Total took advantage by increasing its refinery throughput by 14% to 1.9 million bpd. Europe's largest refiner quadrupled its adjusted operating income to $1.34 billion from just $328 million in Q1 2014. Adjusted cash flow from operations of the refining segment also grew by a massive 123% to $1.4 billion. The company said that strong gasoline demand coupled with a high level of maintenance in U.S. refineries increased margins for European refiners. Also, low Brent crude prices acted as added motivation to increase refining operations. Crude based refinery utilization rates increased ten percentage points to 87% from 77% a year ago.

However, management conceded that this refining boom could be short-lived as overcapacity in European refiners and increasing competition from imports (read: U.S. imports) could act as major "headwinds." Total's marketing and sales division too benefited with the segment's adjusted operating income shooting up 26% despite a 26% drop in revenue.

Internal restructuring -- the key to unlocking value? Net investments increased 45% to $5.8 billion as the company continues to restructure itself as it adjusts to the changing dynamics of global oil supply and demand. Divestments included the company's adhesive business, Bostik, and asset sales in Nigeria. Also, Total is continuing to reduce its European refining capacity targeting a 20% reduction by 2017. New production started from the West Franklin Phase 2 in the U.K. North Sea and the Eldfisk II in the Norwegian North Sea.

For the second quarter, management hinted that production could be affected by heavy seasonal maintenance in Nigeria, the United Kingdom and Norway. However, the Termokarstovoye gas field in Russia is also scheduled to start up this quarter.

Foolish takeawayTotal seemed to have done a decent job under the new CEO Patrick Pouyanne's first full quarter. The integrated model proved to be resilient in the backdrop of low oil prices. Additionally, the company seems to be keen on developing organically and reduce capital spending. However, it's too early to make an investment call since management seems cautious to tread into new expansion projects now.

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