Big Oil stock Total SA (NYSE: TOT) has struggled mightily this year, right alongside the rest of the energy sector. Shares of Total currently exchange hands at $48 apiece. The stock is down approximately 24% over the past 52 weeks.
Of course, Total’s stock price decline is due to the collapse in Brent crude oil and natural gas prices. Total, like its brethren in Big Oil, operates a large exploration and production business that is highly reliant on supportive commodity prices.
Nevertheless, Total SA earnings beat expectations when the company released second-quarter results on Wednesday. Here are the secrets to its strong quarterly results in such a tough operating climate.
Benefits of the Integrated Model
Total has a big advantage over the exploration and production companies because it is an integrated company. That means it operates a huge downstream business in addition to its upstream activities. This helps the company stay afloat when oil prices decline, because refining profits actually increase when this happens.
When oil prices drop, refining feedstock costs go down as well. This boosts refining margins and profits.
Downstream business was once again a major boost to Total in the recent quarter. Profits on the downstream side more than tripled year over year, to $1.3 billion.
Another big boost to Total was that it aggressively increased production last quarter. Production rose 12%, to nearly 2.3 million barrels of oil equivalent per day. Some of the company’s major projects achieved significant progress last quarter, including the Termokarstovoye project in Russia and the Dalia Phase 1A project in Angola starting up first production.
Lastly, Total cut costs significantly last quarter, which also helped earnings. It stated it would trim about $1.2 billion off its full-year cost-cutting objectives.
In all, net profit fell just 2% year-over-year, to $3.08 billion. This handily beat analyst expectations, which called for $2.61 billion, according to estimates compiled by Reuters. Clearly, Total’s aggressive production and cost-cutting initiatives helped the company’s profits greatly last quarter, even though revenue declined 29% year over year due to the approximately 40% decline in Brent crude prices in that period.
Dividend Remains Intact
Importantly, Total declared its regular dividend of 61 euros per share, payable in January next year. This is a critical announcement, since Total is a high-yield dividend stock that yields more than 5% right now. Investors clearly care deeply about the dividend, especially during such a difficult business environment as oil prices collapse.
Total has taken a number of measures to protect its dividend, including cutting costs, and divesting assets that are not critical to future growth. Divestments totaled $1.8 billion last quarter, which was more than triple the level in the same quarter last year. Total has unloaded $4.8 billion of assets over the first half of the year.
Along with the strong results in the downstream business, these actions should help keep Total’s dividend intact. Management stated on last quarter’s conference call that the company expects to completely cover its dividend with free cash flow by 2017.
As a result, while France-based Total often gets lost in the shuffle behind its U.S.-based Big Oil peers, it deserves some more attention from income investors for its very high dividend yield.
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