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Morningstar | Strong Production Growth and Lower Costs Should Drive Total's Cash Flow Generating Power Higher

Total stands to meaningfully improve its cash flow generating power in the next several years through peer-leading production growth and operating cost cuts, while already displaying one of the lowest gearing ratios among its peers. Production growth should prove to be a major driver of cash flow growth during the next five years, with Total anticipating averaging volume of growth of about 5% per year through 2022, the highest among its peers, and expected production growth of 9% for 2019. That rate of growth from a major integrated should generally be viewed with skepticism, but given that Total has over 10 projects under construction and a large project queue awaiting final investment decisions, it’s feasible, albeit with elevated execution risks, given the size and complexity of those projects. Meanwhile, margins should improve as Total takes an ax to its operating costs. Already one of the lower-cost operators, Total aims to reduce operating costs to $5.50 per barrel of oil equivalent in 2019, a nearly 50% cut from 2014 levels. The magnitude of the cost reduction should help Total, which lags peers in upstream margins due to a higher tax burden, make up some ground. Combined with reduction in operating costs in the downstream segment, annualized savings should exceed $5 billion by year-end 2020. Capital spending will fall to $13 billion-$15 billion (excluding about 1 billion net in resource acquisition) in 2017-20 from $19 billion in 2016 and an average of $30 billion during the peak in 2013-14. Total’s ability to reduce spending to this degree is due to the completion of major projects and the cost improvement it’s been able to achieve in new projects. In some cases, it’s reduced costs by 50% through design simplification, reduced equipment cost, and renegotiation of fiscal terms, allowing it to dramatically reduce spending yet maintain growth.