09-19-2015, 03:33 AM
What to expect from Total's Investor Day
Total will hold its annual Investor Day on Sep 23. In this report, we
highlight our expectations ahead of that event. We believe that the
key message from management will be constructive on a long-term
basis and supportive to our OW thesis.
Previewing Total's Investor Day: We believe Total will roll out additional
measures to support the dividend in an era of low oil prices. Positive data
points could include 1) capex cut to $18bn by 2017, 2) cost savings target
increase, 3) disposal program expansion and 4) positive revision of refining
and chemicals ROACE target. On the flip side, the company can also lower
2017 production targets and announce potential delays to some 2016-17
startups. Whether this event will be a positive or negative catalyst in the short
term is difficult to call. However, our OW thesis on Total rests on the
expectation that strong FCF growth will drive meaningful contraction to Total's
5.9% dividend yield. We believe the event could be constructive from the
perspective of a longer-term investment horizon. Total remains one of our top
picks in European energy.
Key forecasting agencies point to a tightening oil market in 2016: Over the
last week, the three key forecasting agencies (EIA, IEA and OPEC) have updated
their 2016 global oil market supply-demand estimates. While there were
revisions on both sides, they in aggregate see a higher 'call on OPEC' in 2016
at +1.2 mb/d y/y or ~30.5 mb/d. Crucially, the IEA's estimate of the 2H16 'call
on OPEC' is ~1.3 mb/d higher than 1H16 at ~32 mb/d, which is above current
OPEC output. The market for the time being however is oversupplied and it
will take some time to run the overhang down. Consequently, Adam Longson,
MS US commodity analyst, thinks prices will remain range-bound over the
next year. However, we are meaningfully more positive beyond that, and our
house view is that prices will need to rise $75 in 2017 and $85 in 2018 to
incentivise US production growth.
Previewing Total's Investor Day
Total will hold its annual Investor Day on September 23. Below we summarise our expectations ahead of that
event. We believe that management will continue to focus on dividend sustainability and will roll out additional
measures to support the dividend in an era of low oil prices.Whether this event will be a positive or negative
catalyst in the short term is difficult to call. Yet, for the next 6-12 months Total remains one of our top picks in
European energy.
Focus will remain on dividend sustainability: Since last year's Investor Day, there has been a material shift
in Total's key message to investors, as the company continued to adapt to the sharp fall in oil prices. With Brent
crude prices touching new lows during the course of this year, investors had increasingly become wary on
whether the company's dividend was sustainable in an era of prolonged low oil prices.
Total's management tried to address these concerns
during full year results in February and guided that the
dividend will be covered with free cash flow, which
includes net asset sales, in 2017 in a $70/bbl oil price
scenario. More recently, during the 2Q15 conference
call, CFO Patrick de la Chevardiere , modified this
guidance by stating that the 2017 dividend would be
covered even if oil prices stayed at $60/bbl.
We believe that management's focus will continue to be
on dividend sustainability. We expect the company to
provide more data points to reassure investors that free
cash flow will improve even when oil prices continue to
stay at depressed levels for a prolonged period of time ,
providing safety to the dividend.
Below we elaborate on our expectations ahead of the Investor Day:
1) Capex cut to $18bn by 2017: Reduction of capex remains a key component to improve free cash flow,
especially in the present environment where oil prices are not conducive to significant improvements in cash
flow from operations. Total was the first of the European majors in 2013 to alter the direction of capex and the
company has already guided for a ~10-15% y/y cut in capex for 2015.
During the 2Q15 conference call, CFO Patrick de la Chevardiere reiterated that Total's organic capex will remain
on a downward trend going forward. He highlighted that capex should decrease to less than $20bn per year by
2017, although he did not disclose the absolute level for 2017. This compares with previous guidance of $25bn
for 2017 capex , which was provided on last year's Investor Day before the sharp decline in oil prices.
We think there is potential for the company to reduce capex to $18bn by 2017 and argue that such a reduction
should be sufficient for the company to cover 2017 dividend by organic free cash flow, even at the current
forward curve. Consensus expectations for 2017 capex are ~$21bn, and hence, if the company were to reduce
capex to ~$18bn, we believe the market will take this announcement positively.
2) Cost savings target increased: As a direct response to falling oil prices, Total highlighted last year during its
Investor Day that it targeted opex savings of ~$0.8bn in 2015, ~$1.2bn in 2016 and $2bn in 2017, with opex
savings of $4bn cumulative over 3 years. With oil prices further falling sharply since then, it revised its 2015
target with a 50% increase opex savings from $0.8bn to $1.2bn. More recently, management indicated that the
cost-cutting program was on track to exceed increased savings targeted for 2015. We believe all these data
points indicate that the opex savings target for 2016/17 will likely be increased next week. If this were to
happen, this would be taken positively by the market, we believe.
3) Asset disposal programme expanded: The current disposal programme targets $10bn over three years
during 2015-17. However, the company has already announced asset sales worth ~$6.6 bn. The disposal of
stakes in Bostik and Laggan-Tormore contributed to the bulk of the sales so far. In addition, the company has
also been able to sell several other non-upstream assets such as its stake in Géosel, Turkey retail network assets
and its stake in Totalgaz.
With more than 60% of its 3-year target already announced in the first nine months, we see potential for this
target to be expanded. We assume asset sales of $14bn during 2015-17 in our financial model.
So far, Total's disposals have taken place at prices close to the asset's NAV. With Total's shares trading below
NAV, there is some value creation. Also, it has removed some assets from Total's portfolio that had few
synergies with the rest of the company, or for which Total was not the optimal owner. Therefore, we expect that
the market will generally welcome some further disposals.
4) Project pipeline altered to account for any delays: We believe this has potential to be one of the key
downside risks for Total's FCF growth story. In the February strategy update, management listed 21 startups
that were scheduled to come onstream during 2015-17. These 2015-17 startups remain the key contributors for
operating cash flow and free cash flow growth, even in the current low oil price environment. So far, project
startups have broadly remained on schedule, with 5 of the 8 projects scheduled for 2015 already onstream,
leaving 16 startups expected by end-2017.
Given the large number of startups, we highlight there is a high probability that some of these projects might be
delayed. For e.g., there have been recent press reports indicating that the Ichthys LNG project in Australia, where
Total has a 30% stake, has been facing delays of ~9 months and will likely start in 3Q17 instead of 4Q16. These
potential delays, if any, contribute to the downside risks to FCF growth.
During the Investor Day, the company will update the project startup timeline, and we believe this has potential
to be more negative than positive.
"And maybe someday we will find , that it wasn't really wasted time"
