Morningstar | Total's 2Q Results Show Signs of Good Things to Come
Best Idea Total reported a solid second quarter, capitalizing on higher oil and gas prices to deliver strong earnings and cash flow growth. With results largely tracking to our full-year estimates, our fair value and no-moat rating are unchanged, leaving Total as one of the most undervalued global integrateds, in our view.Upstream earnings nearly doubled during the quarter thanks to a 50% increase in oil prices and a 9% increase in production. A 22% increase in liquids production offset a 5% decline in gas volumes thanks to new projects starting and the addition of acquired volumes. With the strong performance, Total increased its full-year growth guidance to 7% from 6% while also increasing its 2014-18 targeted cost savings to $4.2 billion from $4 billion. We expect Total to continue delivering impressive growth relative to peers for years to come, as it is targeting a 5% production CAGR though 2022.
Total’s other segment performed well also, with gas and power earnings doubling, marketing and services increasing 10%, and refining and chemicals slipping only 5% despite a 15% decrease in refining margins. Meanwhile, operating cash flow increased to $6.2 billion from $4.6 billion a year ago.
We expect Total to continue increasing its cash flow generation capability in the coming years, which should lead to increased shareholder returns. It has already committed to dividend growth of 10% and to repurchasing $5 billion of shares through 2020. As part of this program, management repurchased $600 million in shares during the quarter in addition to what was done to offset dilution from the scrip dividend. At current levels, we do not think shares accurately reflect this multiyear improvement, leaving shares undervalued.
Total is an international integrated oil and gas company also active in solar and biomass energy sources. Co. engages all aspects of the petroleum industry, including Upstream operations (oil and gas exploration, development and production, and LNG (Liquefied Natural Gas)) and Downstream operations (refining, petrochemicals, specialty chemicals, marketing and marketing and trading and shipping of crude oil and petroleum products). In addition, Co. is engaged in the coal mining and power generation sectors. Co.'s worldwide operations are conducted through three business segments: Upstream, Refining & Chemicals, and Marketing & Services.
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