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Morningstar | TOT Updated Forecasts and Estimates from 27 Feb 2019

Total reported fourth-quarter results that fell slightly short of consensus estimates, but nonetheless demonstrated continued execution of its strategic plan. Meanwhile, management updated guidance that fits with our thesis of continued free cash flow growth in the coming years. Our fair value estimate and moat rating remain unchanged, leaving shares undervalued as the market is not fully recognizing this coming uplift in free cash flow generation in our view.

Adjusted net income for the quarter increased to $3.2 billion from $2.9 billion last year as a strong performance by the upstream segment was offset in part by weakness in other segments. Upstream operating income increased to $2.5 billion from $1.8 billion last year on higher commodity prices and a 10% surge in production volumes. For the full year, production grew 8%, outpacing guidance of 6%. Refining and chemical earnings increased slightly to $900 million from $886 million last year. Meanwhile, both gas power and renewables and marketing and services registered year over year declines. Gas and power operating earnings fell to $176 million from $232 million while marketing and services fell to $333 from $436. For the full year, however, gas and power operating earnings were up 56% while marketing and services fell 1%. Operating cash flow before working capital fell to $5.7 billion during the quarter from the $6.0 billion last year but increased 16% for the full year.

Despite the soft performance to the end of the year, we’d rate 2018 as success with Total largely hitting its targets while delivering peer leading production growth and group returns on capital. Furthermore, guidance for 2019 suggests another strong year leaving our long-term expectations intact.

For 2019 management guided to 9% production growth, the highest among the integrated oils, while maintaining capital investment in the $15 billion-$16 billion range and delivering an increase in operating cash flow despite an expected nearly $10/bbl decline in oil prices. Shareholder return targets remain in place with further increases in the dividend planned (total 10% increase 2018-20) and $1.5 billion of repurchases ($5 billion total 2018-20). Although capital spending is expected to increase in 2020 and likely beyond, we don’t expect material increases. Meanwhile, the cash generating capability of the business will continue to improve with volume growth in the E&P and integrated gas business and expansion in the marketing and services, resulting in free cash flow growth. As such, our thesis remains intact.