TTE Q3-2020 Earnings Call

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Total Third Quarter 2020 Results Conference Call hosted by Jean-Pierre Sbraire. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to Jean-Pierre Sbraire, Chief Financial Officer of Total. Please go ahead, sir.

Jean-Pierre Sbraire

Thank you. Good morning and good afternoon. Let me start by saying I hope that you are all doing well and keeping safe, even more as we have entered the second wave of the COVID-19 pandemic in Europe and are not yet over with the first wave in the United States. So let's move to the results. So Total reported third quarter results that reflects the resilience of the portfolio and demonstrates, again, the group's ability to capture the benefits of improving oil prices and market conditions. Adjusted net income rose to $848 million or $0.29 per share. Debt-adjusted cash flow, DACF, increased to $4.3 billion. Leveraging strict capital discipline, we strengthened the balance sheet and reduced gearing to 22%. And based on the strong fundamentals of the company, we confirm the group's support for the dividend with the announcement of our third interim distribution maintained at EUR 0.66 per share. We saw mixed signs of recoveries in the third quarter, and we note in particular that volatility particularly in oil prices was lower than in the second quarter. Brent rebounded from less than $30 per barrel in the second quarter to more than $40 per barrel in the third quarter, thanks mainly to OPEC+ production discipline. Sales in our European marketing network came back to nearly precrisis levels. However, refining margin collapsed to negative levels during the quarter. Gas prices remained low, but we saw them rebounding to higher levels since September in Europe and Asia and as it is traditionally the case for the winter season. The group is continuing to execute and deliver on the strategy and objectives presented since the start of the COVID crisis. We have kept the organic breakeven below $25 per barrel, reduced OpEx to $5 per barrel equivalent, and we are on track to cut costs this year by more than $1 billion objectively. In this environment, capital discipline is key, and we are limiting CapEx to less than $13 billion this year, $1 billion lower than previous guidance, while still continuing to invest $2 billion for our fast-growing renewable power generation business. Operationally, oil and gas production decreased to 2.7 million barrels of oil equivalent per day in the third quarter. Mainly, this reflects strong compliance with OPEC+ quotas as well as the voluntary reduction in Canada and disruptions in Libya. To a lesser degree, there is also the net effect of seasonal maintenance, natural declines and asset sales, which were partially offset by ramp-ups on new projects. Based on the level of OPEC+ compliance and the return of Libyan production only since October, we now anticipate full year '22 production -- 2020 production will average less than 2.9 million barrels per oil equivalent per day. Turning to the results by segment. iGRP, Integrated Gas, Renewables & Power, segment reported $285 million of adjusted net operating income and close to $700 million of cash flow in the third quarter. This segment includes our integrated LNG business, as you know, where we are the second largest player worldwide and well positioned to participate in the global energy transition. LNG sales volumes were 8.1 million tons in the third quarter, a 9% increase year-on-year, mainly due to growth in our trading activities. LNG prices averaged $3.60 per million BTU, reflecting mainly the 3- to 6-month lag effects on oil-linked contracts. But this effect is beginning to reverse, and we anticipate a rebound in LNG prices to more than $4 per million BTU in the fourth quarter. We'll continue to grow our LNG business from 28 million tons of sales through the first 9 months of this year to 50 million tons per year by 2025 from projects already in our portfolio or under construction. Our integrated electricity business is a fast-growing part of the iGRP segment. Gross installed renewable power generation was 5.1 gigawatts, nearly double compared to a year ago. And worldwide, electricity production increased by more than 40% in the third quarter, and we are continuing to expand the number of gas and power customers in our European network. We are accelerating the growth of our renewable power generation notably with the acquisition of a 3.3-gigawatt portfolio of solar projects in Spain, plus agreements to develop more than 2 gigawatts of floating offshore winds in South Korea and France. We also announced that we have signed a 6 terawatt hour power purchase agreement, the largest corporate PPA to date, to cover all of our electricity needs for the group's industrial sites in Europe by 2025 using solar assets in Spain that we will develop. Consistent with the acceleration of the growth in renewables, we have added disclosures for our renewable business. We now report gross renewables capacities in operation and in development that benefits from long-term power purchase agreements. This should help the market assign value to the business as it becomes more material. As you know, we had the objective to grow renewable power generation to 35 gigawatt of gross installed capacity by 2025. We already have about 24 gigawatts in our portfolio: 5 gigawatts installed, 4 gigawatts in construction and 15 gigawatts under development. Installed capacity of 5.1 gigawatts as at end of September is fully covered by PPAs. And out of the capacity in construction or underdevelopment, I would say 20 gigawatts, 9 gigawatts are already covered by long-term PPAs. We are capital disciplined in our project selection and confident that we can generate long-term double-digit profitability while growing stable cash flows in this business. At our Investor Day last month, we concentrated on the transition of Total into a broad energy company, so I will not go into more details here. Let's turn to E&P. Our conventional oil and gas segment generated adjusted net operating income of $800 million and more importantly, I think, carried the group with cash flow generation of more than $2.6 billion in the third quarter. Average realized liquids price recovered to $40 per barrel, a 70% increase quarter-to-quarter, more than offsetting lower volumes and weaker natural gas realizations. We continue to put pressure on costs with OpEx at $5 per oil equivalent. Cash flow increased by more than 800 million ton (sic) [ $800 million ] quarter-to-quarter thanks to our resilient E&P portfolio and our sensitivity to oil prices. The Downstream faced a more challenging environment in the third quarter, with refining margins in Europe negative on average for the quarter and a less exceptionally favorable environment for trading activity than in the second quarter. Recall, we mentioned that trading generated an exceptional surplus of around $500 million of cash in Q2 due to huge volatility. The third quarter was, in fact, very stable with Brent remaining in the range between $40 and $45 per barrel. Faced with operating losses, we reduced our refinery utilization rate to 50 -- 57%, sorry, in the third quarter from 59% in the second quarter. Petrochemicals resisted well despite weaker margins quarter-to-quarter in Europe and in Asia as well as utilization rates that declined to 75% in the third quarter from 84% in the second quarter. Marketing rebounded from the second quarter low, generating more than $400 million of adjusted net income -- net operating income, well above the pre-COVID third quarter last week -- of last month -- of last year, sorry, as lockdowns were lifted in Europe and in Asia. Downstream as a whole generated $373 million of adjusted net operating income and close to $1 billion of cash flow. With a low level of investment required, Downstream has provided $2.4 billion of free cash flow to the group over the first 9 months of the year. The trailing 12-month ROACE for the Downstream is 14%. Consistent with our outlook for oil product demand in Europe and the strong growth in the renewable diesel market, we announced in July the sale of the Lindsey refinery in the U.K.; and in September, the conversion of the Grandpuits refinery to a 0 oil platform, producing renewable diesel and bioplastics. This further streamlines our refining footprint and builds on the successful conversion of La Mede into a biorefinery. These are steps towards achieving our net zero climate ambitions that have the added benefits of improving the long-term profitability and resilience of our Downstream. And finally, at the group level, in the third quarter, net investments were $1.9 billion, bringing the total for the first 9 months to $8.5 billion. We anticipate that our net investment will be lower than $13 billion this year. And because of uncertainty, we will be prudent for 2021 budget, and CapEx should be limited to less than $12 billion. Despite this difficult environment and mainly due to our capital discipline, Total generated positive net cash flow of $1.9 billion in the third quarter and $2.7 billion in the first 9 months. Although the third quarter was more stable than the second quarter, the overall market environment remains uncertain, and the way forward will depend on the speeds of the recovery in global demand affected by the COVID pandemic. It is clear that heavy inventories of oil and refined products will have to be addressed before sustained rebound can take place. We are prudent about the coming year so we are using a $40 per barrel Brent scenario as our base case. Longer term, we recognize that the growing world population will demand more energy of every type, and the many years of underinvestments have set the stage for a more constructive supply-demand balance. Our priority is to generate a level of cash flow that allow us to continue to invest in profitable projects, support the dividend and maintain a strong balance sheet. And of course, we'll continue to concentrate on the things we control: safety, operational excellence, cost reduction and cash generation. And now I'm ready to go to the Q&A.

Operator

[Operator Instructions] Your first question comes from the line of Irene Himona of Societe General.

I

Irene Himona

Equity Analyst

My questions, well, I had a number of them. First of all, in Refining & Chemicals, Jean-Pierre, there was a $290 million asset impairment. Was it one particular -- one specific asset? Or if you can talk about it, it would be helpful. Secondly, in iGRP, we had lower LNG prices, lower net income, yet I noticed that your equity affiliates profit in that division actually increased between second and third quarter. And I wonder what is driving that. Is it Novatek perhaps? And finally, in M&S, volumes are obviously down quite materially. As you said, profit is higher now than a year ago. Can you talk about the changes to your product mix perhaps which is driving this apparent margin expansion?

Jean-Pierre Sbraire

Okay. So Irene, yes, you're right, the impairment we recorded this quarter are linked to the R&C segment, Refining & Chemicals. And it's 2 assets only, I would say 2 assets. So it's Lindsey refinery -- oil refinery and Grandpuits. So given that we announced that we divest our participation in our oil refinery, we have to write off the assets. And the same for Grandpuits. We have to impair the assets that will be discontinued, that will not be used by the biorefinery that we built in Grandpuits. So that's $290 million you mentioned, so that's impairment on 2 assets. Yes. The lower LNG prices, so you're right, and it's mainly linked to the performance of our Russian LNG assets and particularly Yamal LNG. And on M&S volumes, well, it's clear that demand has dropped during the first quarter and the second quarter massively in road transport, in air transport, of course, as well. It creates -- and of course, we have to -- we suffered from a slowdown in the industrial activities as well. We saw at that time, retail sales down to almost minus 70% in France and between 30% to 40% in Germany and in The Netherlands. And during the lockdown period, of course, customers tried to take advantage of the low fuel price to replenish their fuel tanks at home, and so we witnessed these high sales on our B2B segment. Now moving to the third quarter. So we observed a rebound with sales, particularly in Asia where sales -- we sold rapidly. More or less, the retail sales are back to the precrisis levels in Western Europe, but we are still lagging in Africa. And nonfuel activities are still below expectation. So -- and of course, the aviation will strongly be affected in the Q3 and is anticipated to -- this trend is anticipated to continue in the fourth quarter. So all in all, we are seeing sales stabilize -- more or less stabilized, minus 10% compared to 2019 level. And on top of that, of course, we benefited from higher margins because inventories were built at lower cost. So all in all, it's rationale behind the fact that with a bit less volumes and benefiting from higher margins, we are able to deliver this performance during the third quarter.

Operator

And your next question comes from the line of Jon Rigby of UBS.

J

Jonathon Rigby

It strikes me that -- I was just wondering whether you could just offer your observations on this. You are making 2 statements that on the face of it are slightly contradictory, and you're not the only one actually. It's that CapEx is coming in lower than you're expecting this year and is going down again next year, and yet you are, and I think quite rationally, setting out a case for why markets will tighten and pricing will improve. So isn't this exactly the right time to be kind of focusing on trying to get your projects out the door and through given, let's say, it's a 3- to 4-year time lag? I get that there is clearly liquidity, financing, balance sheet issue, but can you just sort of talk through how you're balancing those 2 objectives or sort of managing the short term and trying to position yourself for the long term? And what takes priority?

Jean-Pierre Sbraire

It's clear that we use the flexibility we have in our portfolio to preserve the cash if possible but without jeopardizing the future. So it's very important. So our main projects are not impacted by this level of CapEx. And on top of that, we are very clear that we will continue to invest more or less $2 billion per year on our renewable and electricity segment. So we play on the flexibility. That's true that now we announced that the CapEx -- the net CapEx, so organic plus the net between acquisitions and divestment, will be below $13 billion this year. As we mentioned during the last Investor Day, we are cautious regarding the prices -- the price deck for next year, and we've built our budget using a $12 billion amount for net CapEx for the next year. But you noticed, Jon, that between 2022 and 2025, assuming a recovery in oil prices, we announced a range between $13 billion to $16 billion. Once again, we have, in our portfolio, 2 main projects under construction, so mainly Arctic 2 and Mozambique LNG. And these projects will not be affected by this level of CapEx. The project that will be affected is short-term CapEx, on which we can play on this flexibility. And given that the prices are not good, it's not necessarily the right time to sanction these projects with a very short plateau in terms of production.

J

Jonathon Rigby

Right. And as you bring -- as and when you bring back CapEx -- and presumably, there is some sort of view and positioning taken on, on the ability to sort of have some flexibility as you bring it back on because, clearly, as everybody has learned, visibility is low. So would we expect you to bring back CapEx fairly cautiously in the initial stages of any recovery?

Jean-Pierre Sbraire

It's a matter of environment. Once again, this $12 billion -- or this $13 billion this year is clearly linked to the current price environment. The $12 billion for next year, we are clear that it's linked to an assumption -- or to a lack of visibility regarding the prices, and we need to be cautious. So $12 billion of CapEx next year, yes, it's the recognition of this -- the fact that we have no visibility on the prices next year. Beyond 2020 -- 2021, once again, prices could rebound. And that's why this rationale behind the fact that at that time, we have in mind a CapEx guidance between $13 billion and $16 billion per year. But that's true that flexible -- CapEx, we are flexible both ways. So you can -- we can be back on the jet rapidly if Brent increased, of course. That's the beauty of these short-cycle projects. And you know that in our portfolio, we have more or less the equivalent of 1 billion barrels of short-cycle projects. So it could be a strong contribution in the future cash flow if, by chance, we benefit from price rebound.

Operator

And your next question comes from the line of Oswald Clint from Bernstein.

O

Oswald C. Clint

Senior Research Analyst

Jean-Pierre, just back on iGRP. Just looking at your earnings down 50% year-over-year but cash flow is only down 5%. You mentioned volumes up 9%, but that's a lot of trading which, I can imagine, was particularly profitable in the third quarter. So can you just say why cash flow was so resilient relative to earnings this quarter? And is there any material power-related cash flow contribution showing up within that number? And then secondly, I think you mentioned underinvestment in supply longer term and how that might set up for a bit of a price recovery. But what I find interesting is your -- just your natural decline rate, 3% -- I think for the last 6 or 7 quarters, it's been pretty stable at minus 3%, which is remarkable in a year like 2020 with pressures on your short-term CapEx and things like logistics. So is that a real measured number? Or is that kind of backed out or an implied number from some of the other moving parts, please?

Jean-Pierre Sbraire

Yes. So regarding the iGRP performance, so the result and the cash flow generation. Yes, so the cash flow -- the CFFO -- the iGRP CFFO from -- for the third quarter was down more or less by 1/3 compared to last quarter. It was, of course, negatively impacted by the prices -- by LNG prices, but also by lower dividends coming from equity affiliates. And on the opposite, if you look at the net operating income, the equity contribution improved in Q3, the answer I made to Irene before, linked to the relatively good performance of the Russian assets and Yamal in particular. And they have no -- this has no impact on dividend. So that's the rationale behind the move you noticed on the CFO (sic) [ CFFO ] compared to the net adjusted income. Underinvestment -- and so the second question -- sorry?

O

Oswald C. Clint

Senior Research Analyst

Your -- I'm sorry. Yes, just your natural decline rates of minus 3%, which is almost unchanged every quarter.

Jean-Pierre Sbraire

Yes, yes, yes, because we benefit from 50%, more or less, of portfolio coming from LNG fields and fields in the Middle East, in particular in Abu Dhabi, in -- yes, in the Middle East. So all in all, if you make the math, you have 50% of our portfolio benefiting from more or less 0 decline and 50% with, I would say, standard or normal decline of 6% to 7%. So all in all, so you made the math, it leads to the 3% global decline for our production. And you're right, it's remarkably stable quarter after quarter.

Operator

And your next question comes from the line of Lydia Rainforth of Barclays.

L

Lydia Rose Emma Rainforth

Director & Equity Analyst

A couple of questions, if I could. The first one, can you just come back to this idea of gearing and the debt levels? We have seen a number of other companies now moving to absolute debt levels as targets. I'm just wondering sort of how you would think still about the Total level of debt.And then the second question was just on the -- I saw recently the idea of carbon-neutral LNG cargoes, I think the first one that you did this quarter. Are you actually getting a premium pricing on that? And just a little bit more detail on how big you think that market can actually be for carbon-neutral LNG.And then very quickly -- just a quick one. Can you just give me what you're thinking about the utilization rates for refining for fourth quarter?

Jean-Pierre Sbraire

Okay. Gearing, yes. So you noticed that we are able to reduce our gearing by almost 2% in the third quarter compared to the second quarter because we are more or less at 24% in the second quarter. We are below -- 22% this quarter. It's the reduction -- the translation of the fact that we are able to generate cash even after the payment of the dividend in Q4. We generated after dividend more than $1 billion of cash. And it's -- and of course, it's lead to this gearing reduction. We -- as we were very consistent in saying that, yes, our objective is to have a gearing below 20%. So you'll remember what we mentioned in September during the Investors Day. The priority, of course, to prepare for the future is to allocate what I mentioned to Jon, between $13 billion and $16 billion of CapEx from 2022 to 2025, $12 billion in 2021. After that, the dividend. So we reaffirm that the dividend is supported at $40 per barrel. And you noticed that we confirm this quarter that, yes, the third interim dividend will be maintained at EUR 0.66 per share. And after that, very clearly, we put as a priority the fact that we want to maintain a very strong balance sheet. And in our mind, a strong balance sheet means gearing below 20%. And so that's why we mentioned that in the event we are able to generate additional cash, if the prices are above $40 per barrel, we will first allocate this additional cash to deleveraging the company. The premium in relation with the carbon-neutral LNG, honestly, I'm not so sure to have this answer. And I will come back to you on the answer later, and the team will give you the answer. The outlook for the refinery utilization in the fourth quarter, honestly, I have no crystal ball. I just noticed that the margins are a bit above $10 per ton since the beginning of the quarter. We'll monitor that very, very precisely. We have utilization rates below 60% in Q3, and so the utilization will improve if margins improve, of course. We'll adjust the utilization rates of our refineries to the level of margin. But honestly, given the level of demand and given the level of inventories, I'm sure that the refineries -- and perhaps I do not have to use this word I'm sure, but it's likely that the margins will become -- will remain volatile and probably at a relatively low level. And so as a consequence, the utilization rate in our refineries will probably not be very different from the figures you -- we have in the Q3.

Operator

And your next question comes from the line of Bertrand Hodee from Kepler Cheuvreux.

B

Bertrand Hodee