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Morningstar | Total Continues to Deliver in 3Q; Shares Remain Undervalued and Among Most Attractive in Group

Total reported a solid third quarter with robust volume growth leading to earnings growth outpacing increases in commodity prices. The quarterly results demonstrate the strong production growth, cash generation, and capital discipline that supports our thesis of growing free cash flow. Our fair value estimate and moat rating remain unchanged, leaving Total as one of our best ideas among integrated oils as we see its strong outlook still under appreciated by the market.

Adjusted earnings increased to $4.0 billion from $2.7 billion as a doubling of upstream operating earnings offset weaknesses in the downstream segments. Upstream earnings increased to $2.9 billion from $1.4 billion a year ago on higher oil and gas prices and a 9% increase in production. Full-year guidance was increased to 8%. The robust production growth continues to set Total apart from its peers.  Last month at its analyst day, Total reiterated its production target of a 5% CAGR 2017-22, with 6%-7% average growth through 2020 and 2%-3% thereafter, representing one the greatest rates of the group.

Strong LNG and gas/power trading lifted the gas, renewables and power segment earnings to $272 million from $97 million a year ago. Refining and chemical earnings slipped to $938 million from $1.0 billion last year on weaker European refining and chemical margins. Marketing and services fell to $474 million from $506 million last year.

Operating cash excluding working capital increased 37% to $7.1 billion from $5.2 billion last year. Capital spending guidance remains unchanged at $16 billion expected for 2018 with $15 billion-$17 billion for the next two years. The capital return policies for 2018-20 of 10% dividend growth and $5 billion in repurchase with $1.5 billion this year are unchanged as well.