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Morningstar | Total's Earnings Slip in 1Q, but Underlying Performance is Strong

Total reported a slight dip in earnings during the first quarter from the year before but reported continued strong growth in cash flow and production volumes that demonstrate our thesis remains on track. Our fair value estimate and moat rating remain unchanged, leaving Total one of the most undervalued integrated names in our view.

Adjusted net income slipped slightly to $2.8 billion from $2.9 billion last year largely on higher net cost of debt due to higher U.S. dollar interest rates. Adjusted net operating income, however, actually rose 1% to $3.4 billion despite lower commodity prices, particularly international natural gas, reflecting continued growth and cost reduction in the business. The E&P segment saw net operating income fall to $1.7 billion from $1.8 billion last year on lower commodity prices and higher exploration costs. The newly reformed integrated gas and power segment net operating income increased to $592 million from $481 million last year as an increase in LNG sales was partially offset by lower gas prices. Production grew 9% to 2.9 mmboe/d from 2.7 mmboe/d last year, in line with full-year guidance, as volumes from new projects and the integration of Maersk Oil’s assets more than offset the impact of production quotas, declines in Venezuela, natural decline and maintenance.

Refining and chemicals operating income increased to $756 million from $720 million as an increase in refining margins offset weaker petrochemical margins. Marketing and services operating income fell to $343 million from $367 million due to the sale of Total Erg last year.

Importantly, operating cash flow before working capital increased to $6.0 billion from $5.4 billion last year supporting our view that continued growth and cost containment will result in improve cash flow generation over time. Organic investment was up slightly at 6% but in line with  full-year guidance of $15-16 billion. The net result was an 18% increase in free cash flow.

The company also increased its dividend by 3.1% and bought back $350 million of shares, in line with full year guidance of $1.5 billion.