France's Total now touts itself as the most profitable of the world's biggest integrated oil companies, and its results over the past year certainly seem to support that claim. At $8.3 billion, Total's adjusted profits in 2016 were just $1.5 billion short of Exxon Mobil's, even though the US supermajor generated $76.4 billion more in revenue from its substantially larger global asset portfolio. Total's cash flow still isn't high enough to cover its capital expenditures and dividends, but its earnings haven't deteriorated as drastically under low oil prices as at its rivals.
Exxon has long been the industry's profitability leader, with Total fighting to simply get a seat at the table. But in 2016, Total posted a higher profit margin (5.5%) and return on equity (9%) while reporting the slightest decline in cash flow from operations (CFFO) among the five leading majors. Total's $16.5 billion in CFFO last year was down 17% from 2015, compared to a 27% decline for Exxon -- to $22.1 billion -- and steeper drops for Royal Dutch Shell, BP and Chevron. While all of these companies have implemented aggressive cost-cutting programs over the past two years, Total's belt-tightening has noticeably impacted its bottom line. It has benefited particularly from the restructuring of its downstream businesses that began in 2012, ahead of the price collapse.
Total Tops Majors in Profitability in 2016
The downstream, which was formerly run by current Chief Executive Patrick Pouyanne, delivered $7 billion in CFFO in 2016 and a 34% return on average capital employed (ROACE), the highest among the majors. Total first took the axe to its underperforming downstream unit five years ago, eliminating more than 300,000 barrels per day of loss-making refining capacity while investing heavily in three large refinery and petrochemicals projects in Saudi Arabia, Qatar and South Korea, where ROACE was above 30% last year. With expansion opportunities at all three projects and the modernization of its Antwerp refinery, which will be complete this year, Total reckons it can sustain roughly $7 billion in annual downstream CFFO even if margins fall by $10 per ton.
Refining has provided the bulk of cash flow for the majors since oil prices began to plunge in mid-2014, but it's Total's upstream resilience that has set it apart from its peers. Efficiency gains and robust production growth -- up 14% since 2014 -- have helped it slash upstream operating expenses by 40% to an industry-leading $5.90 per barrel of oil equivalent.
Total has faced questions about recent "low-margin" deals signed in the Middle East, namely its decision to sign on to Abu Dhabi's tough terms for its new onshore concession, and its acquisition of an operating stake in Qatar's largest oil field, Al-Shaheen. But management now feels a sense of vindication. "I remember we were quite criticized by some of our peers and I'm happy to see one of them joining here," Pouyanne said recently in reference to Abu Dhabi, where BP also signed on last year under a deal that also improved Total's fiscal terms for the onshore Adco concession.
If sanctions don't interfere, Total reckons it will also have first mover advantage in Iran, where it has agreed to operate phase 11 of the giant South Pars development. Together, the three projects could give Total access to 3 billion boe in resources and more than 300,000 boe/d in production, while generating more than $1 billion in CFFO and a ROACE of 15% in a $50-$60/bbl price environment.
For all the stellar metrics, however, Total hasn't dramatically outperformed its peers in the equity market over the past two years. One headwind has been its "scrip" dividend policy, which allows Total to conserve cash by paying dividends in discounted shares, but which also creates significant shareholder dilution. This policy will remain in place until oil prices reach $60/bbl, which makes some investors fear the company may not have their best interests in mind -- especially as it eyes a host of new counter-cyclical investments amid volatile prices.
Some investors would prefer to see Total move away from the scrip rather than keep increasing the dividend, which it upped by 1.6% earlier this month. But with service costs low, Total believes now is the time to invest in new projects to ensure future growth, targeting schemes in its core areas -- deepwater, LNG, Africa and the Middle East.
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