Welcome to Total's third quarter 2018 results presentation. Today's presentation is being recorded. At this time, I would like to turn the conference over to Patrick de la Chevardière, CFO. Please go ahead, sir.
Hello. Patrick de la Chevardière here. We presented our strategy and outlook in New York last month. We have met with many of you since then, so I think the story should be well known by now. We are consistently delivering excellent results thanks to production growth, cost reduction, capital discipline. The quarterly results confirm this consistency. We are increasing production faster than our peers through organic investment and counter cyclical acquisitions. We are well positioned to fully capture the benefit of higher commodity prices. The quarterly result confirms that with 8.6% growth. We are on the forefront developing a profitable low-carbon electricity business fueled by natural gas and renewables to strengthen and diversify the company for the long term. The quarterly results reflect this with the acquisitions of Direct Energie and two gas-fired power plants.
Our year-to-date results show the significant progress we have made since last year. The group's adjusted net results for the nine months increased by 35% to $10.4 billion. Notably, the contribution from E&P increased by 85%, fueled in part by production growth of 8% and by accretive barrels. Debt Adjusted Cash Flow or DACF increased by 25% to $20 billion. Organic CapEx was $8 billion. Based on our sensitivity of $2.8 billion per year for a $10 per barrel change in Brent, our post-dividend cash flow breakeven is less than $50 per barrel. Now, looking at the third quarter results compared to the second quarter. Brent was flat quarter to quarter. We increased adjusted net income by more than 11% to $4 billion or $1.47 per share, the highest level we have seen since 2012. DCF increased by 10% to $7.5 billion, also a multi-year high.
Production continued to grow up by more than 3% quarter-over-quarter to a new record high of 2.8 million barrels per day in the third quarter. In the month of September, we reached 2.9 million barrels per day. We are benefiting from higher prices. We are sharing this benefit by delivering on the shareholder return policies announced in February. The 2018 interim dividend has been increased by 3.2%, in line with the 10% increase over three years. We have bought back all of the scrip shares issued this year. On top of bringing back the scrip shares, we bought back $1 billion of stock through the end of September as part of the $5 billion buyback announced in February. We will buy back $1.5 billion this year.
We also announced that a strategic priority is maintaining a strong balance sheet with gearing below 20%, and we are delivering here as well. It was 18.3% at the end of the third quarter, despite cash outlay of EUR 3.6 billion for the net acquisition in the quarter, comprised mainly of Direct Energie and ENGIE LNG, plus a build in working capital that was partially due to integrating this acquisition into our accounts, as well as the high crude oil price at the end of September. Thanks to production growth and low breakeven, we are confident that increasing free cash flow will allow us to reduce the debt and strengthen the balance sheet, and we have indicated that additional cash flow shall be allocated first to de-leveraging and second to share buyback. Now, going back to the 3Q result, I will review the segment and then go to the Q&A.
For E&P, third quarter 2018 adjusted net operating income was very strong at EUR 2.9 billion, an increase of 7% compared to the second quarter, while Brent was basically flat. E&P operating cash flow before working capital changes increased by 9% to EUR 5.6 billion. Operationally, we are continuing to perform well. Production grew to 2.8 million barrels per day, and we are on track to increase production by close to 8% this year and by 6%-7% on average through 2020. Third quarter startups include Kaombo in deepwater Angola, Ichthys LNG in Australia, and Train 2 at Yamal LNG in Russia. Also, during the third quarter, we reported on three successful exploration wells, Glendronach in the west of Shetland area adjacent to our Edradour field, Block A6 in offshore Myanmar, and Sururu in deepwater Brazil.
Added to our recent successes in the Gulf of Mexico, we are confident that we have a solid portfolio of future projects to renew the resource base and grow future production. Moving on to the gas, renewable, and power segment. iGRP contributed EUR 272 million of adjusted net operating income in the third quarter, an increase of 41% over the second quarter, reflecting in large part excellent activity in LNG trading as well as gas and power trading. We closed the ENGIE LNG acquisition in the third quarter, positioning Total as the second largest publicly traded player in the global LNG business. In addition, we completed the Direct Energie acquisition in the third quarter, which is an important part of our strategy to develop a profitable business to satisfy the fast-growing demand for low-carbon electricity.
Our objective is to integrate the low-carbon electricity business with the activities we are developing along the LNG and gas value chain. Starting next year, we will report on the Integrated Gas, Renewables & Power segment, so it will include the entire value chain from the wellhead to the customer. Turning to the downstream. Refining & Chemicals contributed EUR 938 million of adjusted net operating income in the third quarter, a 14% increase over the second quarter, and generated EUR 1.2 billion of operating cash flow before working capital changes, a 15% increase due to the excellent availability and high utilization rates of our units, thanks in part to the completion of a major turnaround at Antwerp. Refining margin in Europe averaged EUR 40 per ton in the third quarter compared to EUR 35 per ton in the second quarter and EUR 48 per ton in third quarter 2017.
Margin has been volatile, rising to more than EUR 50 per ton in August and falling to EUR 25 per ton in September when oil prices rounded and gasoline inventories were high. Petrochemicals has been less volatile, and margins have remained at fairly strong levels. Seasonal weakness is not unusual late in the year. Keeping this in mind, we believe it's mainly volatility in feedstock prices that is moving the margins. In the third quarter, we continued to implement our strategy to expand low-cost feedstock petrochemicals by sanctioning the new polyethylene unit in Bayport on the U.S. Gulf Coast. We also launched the engineering study for a large petrochemical platform with Saudi Aramco to add a cracker to our SATORP refinery. We are continuing to leverage our strengths and existing assets to take advantage of the growing global demand for polymers.
The Marketing & Services segment was stable, contributing EUR 474 million of adjusted net operating income in the third quarter and generating EUR 580 million of operating cash flow before working capital changes. M&S is expanding in growing markets and continues to deliver reliable non-cyclical growth in cash flow of about EUR 100 million per year and return well above 20%. Last week, we announced a 50/50 JV with Adani, a private group in India, to develop a variety of energy offers in the rapidly developing Indian market. First, we plan to develop LNG regas terminals, this JV will benefit our GRP segment. In addition, we will get a license for the JV to build a retail network of 1,500 stations over 10 years. This is consistent with our M&S strategy to focus on large, fast-growing markets.
The future investment needs for this JV are within the CapEx guidance that we have provided. The combined downstream segment, RC plus M&S, generated operating cash flow before working capital changes of EUR 1.8 billion in the third quarter and EUR 4.8 billion year to date, we are well positioned to achieve our objective for the year. In terms of profitability, the downstream continues to be remarkably strong, with a ROACE of more than 25% for the two segments over the past 12 months. At corporate level, the effective tax rate was 39% at the group level and 48% for E&P, basically stable compared to the previous quarter. On a rolling 12-month basis, the group return on equity increased to 12% at the end of the third quarter, up from 11% at the end of the second quarter.
We are continuing to emphasize value over volume, as we high-grade the portfolio, we can expect the group to continue to improve its profitability going forward. Including net acquisitions, capital investment were EUR 6.2 billion in the third quarter and EUR 12.9 billion year-to-date, we are on track to invest around EUR 16 billion for 2018. We confirm our guidance for investment in the EUR 15 billion-EUR 17 billion range for 2019, 2020, in the areas where we are active, we see no signs of cost inflation. As we said in New York last month and during the meetings that we have had over the past few weeks, we have established a track record for consistently delivering on our strategy.
We have moved faster than our peers to increase production, partially through well time acquisition, and decrease the break-even, so we are well positioned to capture the benefit of the current price environment. We will continue, however, to manage the company with a conservative full-cycle perspective on commodity prices and downstream margins. We have a portfolio that is rich with short-cycle opportunities. We have positioned the company to take advantage of the low development cost to lock in high-return production growth for the future. With that, I am ready to start the Q&A.
Thank you, sir. Ladies and gentlemen, if you'd like to ask a question today, please press star one on your telephone keypad now. Our first question today comes from Lydia Rainforth from Barclays. Please go ahead. Your line is open, ma'am.
Thank you, good afternoon, Patrick. Two questions if I could, please. The first one, just on the cash flow in the upstream, is that a number that you were happy with, just in terms of the movement relative to the Brent price? Secondly, sorry, just a tidy up question on the financial charge that looks to be relatively high for the quarter. Any guidance on that going forward would be very helpful. Thank you.
Thank you, Lydia. First question about upstream cash flows. I will try and describe you a short bridge. I will compare second quarter with third quarter this year. Group cash flow from ops, before working cap, was EUR 7.1 billion in third quarter this year, compared to EUR 6.4 billion in second quarter. This is an increase of EUR 0.7 billion. This is a translation of two effects, a slightly better environment and the production growth. I will add the fact that our barrel, the new barrel, are extremely accretive. The environment had an impact of about EUR 130 million a year when applying our sensitivity linked to a Brent increase of EUR 0.8 billion per barrel and an ERMI increase of EUR 5 per ton. The rest comes from good performance, the production growth with startups like Kaombo, Yamal and Train 2, Ichthys.
There was a good performance in Refining & Chemicals and our utilization rate went from 90% to 92% this quarter. We have also the effect of our ongoing cost reduction. I repeat it, that the barrels that we are adding are extremely accretive. Just one slight comment is that cash flow from ops from upstream divisions went from EUR 5.1 billion to EUR 5.6 billion from second quarter to third quarter. With a Brent, which was roughly flat, the production sequentially was only +3%. Obviously, the improvement of the cash flow from ops from second quarter to third quarter comes from somewhere else, which I think is the accretive barrel that we are producing in addition. Your second question about financial charge. It is true that we are facing a higher interest rate, basically 100 basis points higher than a year ago.
The cost of net debt slightly increased from EUR 430 million last quarter to EUR 475. You have to keep in mind that we enter in the perimeter ENGIE, Direct Energie, and that interest rates have increased. There is a lag effect of about three to six months between the interest rate increase and the effect on the debt itself. Third quarter 2017, we had the net debt cost at about EUR 300 million in a lower interest rate environment. That's basically what I can say. There are the perimeter effect, the interest rate rise, and you also have some financial charge coming from the leasing of our FPSOs in Brazil that unfortunately, I'm not able to give you the magnitude of that, but a few tens of million EUR. Thank you, Lydia.
That's perfect. Thank you.
Thank you. Our next question today comes from Jason Gammel from Jefferies. Please go ahead.
Thank you very much. Two on the downstream, if I could, Patrick. First of all, you referenced the very strong availability in the third quarter. I was hoping you could comment on the status of Antwerp over the course of the quarter, and whether that helped to contribute because of the 2Q maintenance. Second is, your expectation that that availability is going to move forward into 4Q, and are you reacting at all, in terms of run rates, to the very low gasoline cracks that we're currently seeing in Europe?
Okay, thank you. It is true that part of the improvement in the third quarter is coming to the fact that the upgrading of Antwerp was completed. A 92% utilization rate is a high rate, which shows the industrial performance of the Refining & Chemicals team. We expect it to continue. There is obviously, as of today, no reason why it should not continue. We may face difficulties, operational trouble, but as of today, nothing happened. In Antwerp, the modernization program has been completed, at the end of 2017. All the new units are in operation. I remind you that this project significantly reduced heavy oil production. We are extremely ready for the global cap changes. We also started refinery of gas and ethane cracking, and we are now in the process of optimizing the operation of those large units.
Together, all those projects in Antwerp are adding about EUR 150 million to EUR 200 million of cash flow per year going forward. That basically is the magnitude of what we are expecting from Antwerp. As I told you, the availability in Q4 should be good also. Thank you.
Thank you.
Thank you. Our next question today comes from Blake Fernandez from Simmons & Co. Please go ahead.
Hi, good afternoon, Patrick. I was hoping to go back. Actually, I had a question on the interest expense as well. Obviously, your net debt is very manageable, but that's really due to the fact that you're carrying such a large cash balance. Seeing how we're going through a kind of tightening of monetary policy, I'm just curious if there's not an intention at some point here to use some of that cash to reduce debt and get that interest expense down to, I guess, back at a normalized level. The second question was on chemicals. I think you briefly mentioned it in your prepared remarks. What we're hearing from some of our U.S. counterparts here is that, I guess it's been a bit weak here due to some increasing feedstock costs.
I just didn't know if you could elaborate a little bit on what you're seeing globally. Typically, that tends to be a bit of an economic leading indicator, and I didn't know if you're witnessing some of the same, I guess sluggishness internally. Thank you.
Yes, the net debt is manageable. Basically, we have long euro, short dollar at the moment. We will continue and use our euro to finance the share buyback and to pay for the dividend. I need to have a certain amount of euro for that important purposes. Basically, this quarter, we will use the cash flow to deleverage the company. I already announced that the share buyback for the year would be $1.5 billion. This is to say $500 million for this fourth quarter. So all in all, you know our sensitivity, the $2.8 billion for $10 per BOE, we will have cash flow to reduce the debt. Don't misinterpret what I said. I need to keep some euro-denominated cash for the purpose of paying dividends and financing the share buyback program.
On the petrochem in Europe, it is true, you can see that at the opposite of the U.S., petrochemical margins in Europe are weaker than at the beginning of the year. I think the level we are facing today is something which we will be facing next year. We don't see any reason at the moment why those European margins could go up. I may be wrong, but as of today, I don't see a good reason. At the end of the day, petchem margins were not so bad in Europe. They were basically at the level of what we had expected in our budget, but they were lower than at the beginning of the year. This is basically because of higher naphtha prices. This is not a surprise. The reason why we invest in Antwerp and Normandy to process gas feedstocks.
We can process up to 60% of ethane, refining of gas and LPG in Normandy and Antwerp. We clearly benefit from this. You cannot make money from everywhere. At the moment, naphtha-based petrochem are slightly suffering because of the naphtha increase and the A view of the overall market. What is sure also is that in the U.S., we don't face that at all because the new cracker will be ethane-based.
Thank you, sir. I appreciate it.
Thank you, Blake.
Thank you. Our next question today comes from Martijn Rats from Morgan Stanley. Please go ahead. Your line is open.
Yeah. Good afternoon. I only have one question. I wanted to ask you about Argentina. Earlier in the year, we were talking about the Fénix project. My understanding is that that now has been canceled. I was hoping whether you could confirm that or not, and also, why that took place. I mean, at the start of the year, that seemed a likely FID for 2018. Also, if there was any read-across from that to the other projects you have in the Vaca Muerta and the Tierra del Fuego. Are they still going ahead?
Martijn, first of all, I'd like to make everybody aware that unfortunately, we will face a fire alarm in 15 minutes. We will switch to mute during the fire alarm for about one minute. Sorry for that. Your question about Fénix. Given the ongoing discussion around gas price and the currency devaluation, we are evaluating the timing for the FID of this project. The development of Fénix consists of one wellhead and three wells with 10 million cubic meter per day design potential. Fénix is similar in size and development concept to Vega Pléyade. Vega Pléyade started March 2016, we try to standardize as much as we can, facing the situation we are facing in Argentina at the moment, we are reevaluating this situation about gas price and devaluation of the currency. About-
Does it-
Vaca Muerta, it is a low-cost conventional project since we produce gas, we feed it from existing infrastructure, which obviously over time will be returned to its full capacity. This project will benefit from strong gas price. The Argentinian authorities formally published the new shale gas pricing framework, which goes from $7.5 per million BTU in 2017 to $6 per million BTU in 2021. As of today, we continue on Vaca Muerta. We will not inject fresh money in Argentina at the moment. We are monitoring the situation because of the economic environment of the country.
Thank you.
Thank you. Our next question today comes from Alastair Syme from Citi. Please go ahead.
Hi, Patrick. Two questions. One, can you just talk about what you see in terms of global demand, particularly in downstream and chemicals in Asia, given there's a lot of market concern around demand slowing? Secondly, I don't know if you can do this briefly, but are you able to help us out a little bit with IFRS 16 and the way we should be thinking about this as you move to the change in the accounts?
Honestly, Alastair, I am not very good in talking about demand in Asia. What I can just tell you is that demand grew by 1.5 million barrels per day last year. We expect another 1.3 million demand growth this year. We might see a bit of elasticity, but I am taking your question about Asia, but you know our downstream exposure to Asia is quite limited. As far as Total is concerned, I see very little. I will take the issue and we will have a look to answer.
Patrick, are you seeing anything on the petrochemical side?
IFRS 16, we are making our first estimate. Our first estimate lead to an increase for our gearing of about 4%. This will be confirmed at our February presentation. There is also a slight effect on the return on equity, which is neglectable, below 1%.
Thank you.
Thank you. Our next question today comes from Irene Himona from SG. Please go ahead.
Thank you. Good afternoon, Patrick. I had a couple of questions, please. Firstly, Tempa Rossa, if you can possibly give us an update as to when you expected to restart. Secondly, I noted you increased the Novatek interest to 19.4. I was wondering if that is now the limit, if you can remind us if that's the limit, and also any particular reason for the timing of this in Q3. My final question on working capital, obviously, there was an outflow again in Q3. If oil stays at around about $75, what can you say? What sort of guidance can you give about working capital in the fourth quarter? Thank you.
Okay. Tempa Rossa is very simple. We are technically ready to start up. Everything is ready. We test everything, and everything is okay. We are waiting for the last authorization from the region. That it may come, I don't know, any time soon, we hope. We are technically ready, and we have applied for all authorization. It's a matter of administrative process in Italy at the moment. Novatek, 14.4% was the contractual limit we had when we increased. That was 19.4%. I don't know what I said, but my people are only telling me that I made a mistake. That was 19.4. That was the limit we had in our agreement with Novatek, and we are at the limit at the moment. This is all I can say at the moment. Guidance on the working capital, that's very difficult.
I was not expecting, to be frank with you, that the integration in our perimeter of Direct Energie and ENGIE LNG had such an effect of about $700 million on our working cap. This is done, I will not expect further deterioration thanks to those two assets. If it remains stable, we will work to reduce the working cap, I don't know, by $1 billion, maybe $2 billion last quarter. I will not promise anything in that respect, because it is a very sensitive and delicate issue. The last five days of third quarter, oil price increased by $5 per barrel. This only five-day increase create an increase of our working cap of $700 million. Answering directly to your question, if everything remains stable, which will never happen, I expect a reduction of our working capital. Thank you, Irene.
Thank you.
Thank you. Our next question today comes from Jon Rigby from UBS. Please go ahead, sir. Your line is open.
Thank you. Hi, Patrick. Quick question on LNG, or two questions. The first is, technically, I think it looks like you're headed to potentially two big sanctions next year on PNG and Arctic. With the completion of the ENGIE acquisition, and so a bulking up of your trading operation. Is it likely that you will be content to move forward with FIDs taking significant portions, at least initially, of equity LNG onto your own books, maybe subsequently then selling them down over the course of the construction period? The second question is linked to that, is that now you've sort of got this enlarged footprint. I think you're probably the second-largest LNG trader in the world. Is there any intention to sort of expand the disclosure on that business going forward so we can get to understand a little bit more what the dynamics are in the quarterly results?
Thanks.
Okay. Thank you, Jon. LNG, is it enough? Never say enough with Total. FID on Arctic-2 and PNG for sure coming. We will have the expansion of Cameroon with two additional trains. I don't know when we will be ready to FID this Cameroon expansion, but maybe next year. On top of that, of those three projects, you have Nigeria LNG, the seventh on-field train that we will build. FEED is in the process at the moment. More important, and we are very interested in, is Qatar LNG with the decision made by the Qataris to increase their capacity with four train, roughly 30 million ton, three zero. We are interested in participating in that. Arctic-2, Cameroon, Papua New Guinea is not enough, and we will be very happy to increase our exposure through Qatar.
As I said in the past, we will be very disappointed if we are not part of this Qatar expansion. What are we going to disclose next year? We will disclose, and we make it clear in our presentation a few weeks ago in New York, we will disclose iGRP, which means all the chain from upstream to downstream of LNG. This means the upstream part, the LNG plant, then the LNG trading and transportation and trading, plus renewable and power. You know that LNG will be a large part of that. I think you will have a good idea of the contribution of our LNG by first quarter next year because you will have both data available for you. Thank you, Jon.
Okay.
Thank you. Our next-
Let me remind you that we have a fire drill in five minutes.
Our next question comes from Thomas Adolff from Credit Suisse. Please go ahead.
Hi, Patrick. Sorry, I have three questions. Firstly, on the production surprises in 2018, I wonder how much of the positive surprise actually comes from your share of Novatek, for which you don't actually see much cash at the moment. Secondly, on the CapEx guidance of EUR 16 billion versus EUR 16 billion-EUR 17 billion previously, how much of the delta is actually driven by further capital efficiency versus perhaps more planned disposals? Finally, as you look to 2018 in terms of new inorganic opportunities, you obviously pay for 10% in Arctic LNG 2 in 1Q 2019. There's potentially the Qatari expansion you could bid for, perhaps comment on when we can get an update on that. Also, the surplus volumes of transfer of rights in Brazil, which you are I'm pretty sure interested in.
Against that, how much in terms of disposals would you be considering next year, so that you kind of stay within that EUR 15 billion-EUR 17 billion CapEx framework? Thank you.
Many questions, Thomas.
Sorry.
Let's start with the CapEx guidance of EUR 16 billion versus EUR 16 billion-EUR 17 billion. How much difference in asset sale? Honestly, there are some asset sale coming for this quarter, and I don't want to tell you which one and how much it will be, because this may be going quickly or being slightly delayed. There will be a difference. We are confident about this CapEx guidance of EUR 16 billion. Basically, I'm sorry, I can't say more at the moment about it because I don't want to say what type of asset I am selling. Production growth for Mexico from Novatek. Last quarter 2018, about 250,000 barrels per day, which is basically 50 from liquid, 200 from gas. In 2017, third quarter, it was only 200 million barrels per day equivalent. LNG expansion, the update on Qatar, we are on it. We are not the only one, we know that.
We are at the disposal of the Qataris who handle this process. I can't say so much about that. It is our intention, strong intention to be part of this process, and it will be part of potentially our new expansion in LNG. Thank you, Thomas.
Our next question comes from Thomas Klein from RBC. Please go ahead.
Thank you. I had a question on La Mède, and just wanted an update on how the biorefinery startup is going, which I believe was planned for this summer. Thank you.
Thomas, we will go to mute in less than one minute. I just answer your question very quickly. The project is progressing and will start first quarter 2019. We will operate one of the largest biorefinery in Europe with 500,000 ton capacity. The unit has been designed to process the most difficult feedstock. All feedstock will be sustainable and certified by the relevant audit scheme. I'm sorry, we switch to mute because we will go to the fire drill.
Ladies and gentlemen, the venue will remain on mute for the duration of the scheduled fire alarm test. The presentation will continue shortly. Thank you.
Okay, the fire drill is off at the moment. We can continue and have your question. I just wanted to add one comment on Qatar, is that we do have secondly within Qatar LNG for the overall expansion at the moment. As you know, the Qatar project are the cheapest producer. They are very well-positioned. That's why we are interested in. Thank you, Thomas.
We have no further questions at this time on the phone. Thank you.
Thank you, Oliver. The third quarter results show that we are continuing to consistently deliver. We are managing our cash flow effectively in the current environment. We are reducing the breakeven, increasing the payout to our shareholder. We have the portfolio we need to continue to profitably grow well into the future. Thank you.
Ladies and gentlemen, that concludes today's conference call. Thank you very much for your participation today. You may now disconnect.