Developing new resources when oil prices are high seems like an easy choice. Yet returns on investment can still prove disappointing because production costs also tend to go through the roof.
The opposite is also true. While oil prices have halved since the middle of 2014, this isn’t necessarily a bad time for the majors to get out their checkbooks. Offshore drillers are desperate for work and assets are cheap.
Like its rivals, Total SA knows this offers a golden opportunity to lock in cut-price resources and low production expenses. But unlike BP PLC (still paying off its Gulf of Mexico oil disaster costs) and Royal Dutch Shell PLC (still digesting its gargantuan BG Group purchase), Total has earned the right to live a little.
Net income jumped 22 per cent in 2016, a year in which both its upstream and downstream divisions did pretty well under the circumstances. Oil and gas production rose 4.5 percent, while refining and chemicals achieved an impressive 38 percent return on average capital employed. Though cash flow from operations shrank by 17 percent, that's comparatively modest considering the crude price slump. Shell's operating cash flow fell 31 percent.
So CEO Patrick Pouyanne is confident enough to chase growth again. Total has signed a flurry of deals lately, including for Brazilian, Ugandan and US shale gas assets. It's comfortably replacing reserves, which all oil companies need to do if they don't want to gradually disappear. Over the next 18 months it plans to launch 10 upstream projects and to pursue more deals.
Although this bodes well for long-term cash flows, Pouyanne is certainly being bold. Total's gearing (the ratio of net debt to equity) is a still elevated 27 percent. Plus there's no guarantee the Opec deal on production cuts will hold.
Still, Pouyanne is running a tighter ship and he seems to have done a decent job of rejigging Total's portfolio to favor lower-cost reserves. He thinks he can cover investments and cash dividends with crude prices as low as $50 in 2017. BP needs a $60 oil price in 2017 to balance its books. Brent is close to $56 per barrel today.
All that provides confidence that the dividend -- the sine qua non for wary oil investors -- is sustainable. Deutsche Bank analysts call the company the "sleep-at-night" European oil major.
In fairness to its peers, Total's decision to boost the quarterly payout by one euro cent seems symbolic and smacks a little of one-upmanship. In place of cash it's still covering part of the dividend by issuing new shares, which is dilutive. Still, Pouyanne can be forgiven a little joie de vivre.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
If they're not replaced, oil companies' upstream reserves would typically deplete by 4-5 percent a year.
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