Total Plans Cost Cuts After Record-Low Output Cuts Profit

Total SA is preparing a three-year, companywide plan to cut costs after second-quarter profit fell 12 percent amid record-low production and a slump in refining margins. The shares dropped the most in more than two years.

Profit excluding changes in inventories dropped to $3.2 billion from $3.58 billion a year earlier, the Courbevoie, France-based company said today. The result missed the $3.26 billion average of 12 analyst estimates compiled by Bloomberg. Production slid 10 percent to 2.054 million barrels of oil equivalent a day.

The explorer kept its dividend unchanged from the first quarter, at 61 euro cents a share.

“The cost-cutting program is being finalized and we will give the first numbers in September” for 2015 through 2017, Chief Financial Officer Patrick de la Chevardiere said on a conference call. All divisions will be affected including headquarters.

The plan comes in addition to Chief Executive Officer Christophe de Margerie’s asset sales and a lowering of capital spending. As the biggest refiner in western Europe, where it operates eight plants, Total has been hurt by lower crude-processing margins caused by overcapacity.

“Refining margins are very low,” De la Chevardiere said. During the quarter the company lowered output to a minimum at certain European crude-processing sites because “the more we produced the more we were losing money.”

Refinery Margins

The shares fell 4.9 percent to close at 49.645 euros in Paris, the biggest decline since March 27, 2012.

The stock is down because of the weak earnings figures, Sanford C. Bernstein & Co. analyst Oswald Clint said in a note today. “The new cost-reduction targets will be welcomed by investors” alongside spending discipline.

European refinery margins fell to $10.90 per metric ton of crude processed, from $24.10 a ton a year earlier, though up from $6.60 a ton in the first quarter, Total said earlier this month, citing its European Refining Margin Indicator.

Oil output fell in the second quarter after the loss of concessions in Abu Dhabi, “exceptionally heavy” maintenance on exploration and production installations and strife in Libya, Total said.

“The production in the second quarter was an all-time low,’” De la Chevardiere said on the call. Maintenance in the North Sea, Nigeria and Thailand was partly to blame while Libyan output fell to between 15,000 and 20,000 barrels a day from an expected 65,000 barrels a day.

Kashagan ‘Mess’

Total is counting on new projects to increase its oil production to 2.6 million barrels a day in 2015 and to about 3 million barrels two years later.

One of the projects was the giant Kashagan installation in Kazakhstan. Its shutdown due to a leak “wasn’t good news” for the output targets, De la Chevardiere said.

Kashagan, 16.8 percent held by the French company, was halted after producing its first oil in September. It may remain idled until 2016 as 180 kilometers (112 miles) of pipelines are replaced.

“Kashagan is a failure of the industry, not only of the operator,” De la Chevardiere said. “We and the others are part of this mess.”

The Clov offshore project in Angola has reached production of 80,000 barrels a day and is expected to double this “before the end of the year,” De la Chevardiere said, adding that at full output, it will generate $1.5 billion in cash a year.

Total is also expecting output from Laggan-Tormore in the North Sea and Ofon Phase 2 in Nigeria to start up by the end of 2014, he said. Angola LNG may begin mid-2015.

Asset Sales

Asset sales have reached nearly $17 billion, he said today, within a target of $15 billion to $20 billion from 2012 to 2014.

This quarter, asset sales amounted to $2.5 billion, De la Chevardiere said. They included the sales of Total’s 10 percent stake in Azerbaijan’s Shah Deniz gas project, its liquid petroleum gas distribution business in France and its South African coal unit for $472 million.

The sale of a 20 percent stake in Nigeria’s offshore Usan field to Sinopec was canceled by the Chinese company, and Total has restarted efforts to sell the asset, De la Chevardiere said. The deal was announced in November and was expected to have been completed by the end of last year.

“Their reasons are their own,” he said, valuing the deal at $2 billion.

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