Good day, and 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 Chavardiere, CFO. Please go ahead, sir.
Hello, Patrick de la Cheuvreux here. We presented our strategy and outlook in New York last month and 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 countercyclical acquisitions. So we are well positioned to fully capture the benefit of higher commodity prices. The quarterly result confirms that with 8.6% growth. And 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. And the quarterly results reflect this with the acquisitions of Direct Energy and 2 gas fired power plants.
Our year to date results show the significant progress we have made since last year. The group's adjusted net result for the 9 months increased by 35 percent to $10,400,000,000 Notably, the contribution from E and P increased by 85%, fueled in part by production growth of 8% and by accretive barrels. Debt adjusted cash flow or DRCF increased by 25 percent to $20,000,000,000 Organic CapEx was $8,000,000,000 So based on our sensitivity of $2,800,000,000 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 Q3 results compared to the Q2. Brent was flat quarter to quarter, but we increased adjusted net income by more than 11% to $4,000,000,000 or 1.47 dollars per share, the highest level we have seen since 2012.
This year increased by 10% to 7 point $5,000,000,000 also a multiyear high. And prediction continued to grow, up by more than 3% quarter over quarter to a new record high of 2,800,000 barrels per day in the 3rd quarter. And in the month of September, we reached 2,900,000 barrels per day. We are benefiting from higher prices, and 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 3 years.
We have bought back all of the scrip share issue this year. And on top of bringing back the scrip share, we bought back $1,000,000,000 of stock through the end of September as part of the $5,000,000,000 buyback announced in February, and we will buy back $1,500,000,000 this year. We also announced that the strategic priority is maintaining the strong balance sheet with getting below 20%, and we are delivering here as well. Gearing was 18.3% at the end of the 3rd quarter despite cash outlay of $3,600,000,000 for the net acquisition in the quarter comprised mainly of Direct Energy and build in working capital that was partially due to integrating this acquisition into our accounts as well as 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 1st to deleveraging and second to share buyback. Now going back to the 3Q results, I will review the segment and then go to the Q and A. For E and P, Q3 2018 adjusted net operating income was very strong at $2,900,000,000 an increase of 7% compared to the 2nd quarter, while Brent was basically flat. E and P operating cash flow before working capital changes increased by 9% to $5,600,000,000 Operationally, we are continuing to perform well. Production grew to 2,800,000 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.
3rd quarter start up include Kaombo in Deepwater, Angola, Ichthys LNG in Australia and Train 2 at Yamal LNG in Russia. Also during the Q3, we reported on 3 successful exploration wells, Glendronach in the West of Shetland area adjacent to our Edvardou field, Block A6 in offshore Myanmar and Tsuru in deepwater Brazil. Add 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. GRP contributed $272,000,000 of adjusted net operating income in the 3rd quarter, an increase of 41% over the 2nd quarter, reflecting in large part excellent activity in LNG trading as well as gas and power trading.
We closed the EMG LNG acquisition in the 3rd quarter, positioning Total as the 2nd largest publicly traded player in the global LNG business. In addition, we completed the Direct Energy acquisition in the Q3, 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 GaN value chain. Starting next year, we will report on the integrated gas, renewable and power segment. So it will include the entire value chain from the wellhead to the customer.
Turning to the Down Stream. Refining and Chemicals contributed $938,000,000 of adjusted net operating income in the Q3, a 14% increase over the 2nd quarter and generated $1,200,000,000 of operating cash flow before working capital changes, a 15% increase due to the excellent availability and high utilization rates of our units, some impact to the completion of a major turnaround at Antwerp. Refining margin in Europe averaged $40 per tonne in the 3rd quarter compared to $35 per tonne in the 2nd quarter and forty $8 per ton in Q3 2017. Margin has been volatile rising to more than $50 per ton in August and falling to $25 per ton in September when oil prices ramped up and gasoline inventories were high. Petrochemicals has been less volatile and margins have remained at fairly strong level.
Seasonal weakness is not unusual late in the year. So keeping this in mind, we believe it's mainly volatility in feedstock prices that is moving the margins. In 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 factory refinery. So we are continuing to leverage our strength and existing assets to take advantage of the growing global demand for polymers. The Marketing and Services segment was stable, contributing $474,000,000 of adjusted net operating income in the 3rd quarter and generating $580,000,000 of operating cash flow before working capital changes. MMS is expanding in growing markets and continues to deliver reliable non cyclical growth in cash flow of about $100,000,000 per year and return well above 20%. Last week, we announced a fifty-fifty GV 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, so this JV will benefit our GRP segment. In addition, we will get a license from the JV to build a retail network of 1,500 station over 10 years. So this is consistent with our L and A strategy to focus on large fast growing markets. The future investment needs for this GV are within the CapEx guidance that we have provided. The combined Downstream segment, L and C plus M and S, generated operating cash flow before working capital changes of $1,800,000,000 in the 3rd quarter and $4,800,000,000 year to date.
So we are well positioned to achieve our objective for the year. In terms of profitability, the downstream continues to be remarkably strong with the ROACE of more than 25% for the segments over the past 12 months. At corporate level, the effective tax rate was 39% of the group level and 48% for E and 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 3rd quarter, up from 11% at the end of the second quarter. We are continuing to emphasize value over volume.
And as we high grade the portfolio, we can expect the group to continue to improve its profitability going forward. Including net acquisitions, capital investments were €6,200,000,000 in the 3rd quarter and €12,900,000,000 year to date. So we are on track to invest around $16,000,000,000 for 2018. We confirm our guidance for investment in the $15,000,000,000 $17,000,000,000 range for 2019 2020. And 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 meeting 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, 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, and we have positioned the company to take advantage of the low development cost to lock in high return
Thank you, sir. Our first question today comes from Lydia Rainforth from Barclays. Please go ahead. Your line is open, ma'am.
Thank you and 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? And secondly, I'm sorry, just a tidy up question. On the financial charge that looks to be relatively high for the quarter.
So any guidance on that going forward would be very helpful. Thank you.
Thank you, Lydia. So first question about the outstanding cash flows. I will try and describe you a short bridge, and I will compare 2nd quarter with 3rd quarter year, group cash flow from ops before working cap was $7,100,000,000 in Q3 this year compared to $6,400,000,000 in Q2. So this is an increase of $700,000,000 This is a translation of 2 effects, a slightly better environment and the production growth. And I will add the fact that our barrel, the new barrel are extremely sensitivity linked to a Brent increase of $800,000,000 per barrel and an earnings increase of $5 per tonne.
The rest comes from good performance. The production growth with startups like Kaombo, Yamalen and Jetrain II, Texas. There was a good performance in refining and chemical and our utilization rate went from 90% to 92% this quarter. We have also the effect of our ongoing cost reduction. And I repeat it that barrels that we are adding are extremely accretive.
Just one slight comment is that cash flow from upstream divisions went from $5,100,000,000 to $5,600,000,000 with from the Q2 to Q3 with a brand which was roughly flat. The production sequentially was only plus 3%. So obviously, the improvement of the cash flow from 2nd quarter to 3rd quarter comes from somewhere else, which I think is the accretive barrel that we are producing in addition. So your second question about financial charge. It is true that we are facing higher interest rate basically 100 basis points higher than a year ago.
The cost of net debt slightly increased from $430,000,000 last quarter to $475 And you have to keep in mind that we enter in the perimeter ENGIE and Direct Energy and that interest rate has increased. There is a lag effect of about 3 to 6 months between the interest rate increase and the effect on the debt itself. 3rd quarter 27, we had interest sorry, the net debt cost at about $300,000,000 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 $10,000,000 Thank you, Lydia.
That's perfect. Thank you.
Thank you. Our next question today comes from Jaeson Gannon from Jefferies. Please go ahead.
Thank you very much. 2 on the Downstream, if I could, Patrick. First of all, you referenced the very strong availability in Q3. I was hoping you could comment on the status of Antwerp over the course of the quarter and whether that helped to contribute because it was because of the 2Q maintenance. 2nd is your expectation 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 the part of the improvement in the Q3 is coming to the fact that the upgrading of Antwerp was completed. But 92% utilization rate is a high rate, which shows the performance, the industrial performance of the refining and chemical team. And we expect it to continue.
There is obviously as of today no reason why it should not continue. We may face difficulties, trouble, operational trouble, but as of today, nothing happened. In Antwerp, the modernization program has been completed at the end of 2017. Then all the new units are in operation. And I remind you that this project significantly reduced heavy oil production.
So we are very extremely ready for the global cap changes. We also started refining refinery of gas and ethane cracking and we are now in the process of optimizing the operation of those large units. To gather all those projects in Antwerp are adding about 150 to $200,000,000 of cash flow per year going forward. And that basically is the magnitude of what we are expecting from Antwerp. And 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 and 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. And so 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 to 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. And 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 economic leading indicator and I didn't know if you're witnessing some of the same, I guess, sluggishness internally. Thank you.
Yes, the NASH test is manageable. I like basically, we have long euro short solar at the moment. We will continue and use our euro to finance the share buyback. So I need and to pay for the dividend. So 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 $1,500,000,000 This is to say $500,000,000 for this 4th quarter. So all in all, you know our sensitivity, the $2,800,000,000 for $10 per BOE. So we will have cash flow to reduce the debt. But don't misinterpret what I said.
I need to keep some euro denominated cash for the purpose of paying dividend. Financing the share buyback program. On the petrochem in Europe, it is true and you can see that as the opposite of the U. S, petrochemical margin in Europe are weaker than at the beginning of the year. And 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 margin could go up. I may be wrong, but as of today, I don't see good reason. But at the end of the day, petchem margin 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 the year. And this is basically because of higher NAFTA prices.
And this is not a surprise. The reason why we invest in Antwerp and then normally to process gas fee stock. We can process up to 60% of ethane, refining of gas and LPG in Normandy and Antwerp. And we clearly benefit from this. So you cannot make money from everywhere.
At the moment, NAFTA based Petrochem are slightly severing because of the naphtha increase and the ABU of the overall market. What is true also is that in the U. S, we don't face that at all because the new cracker will be a pain base.
Thank you, sir. I appreciate it.
Thank you, Blake.
Thank you. Our next question today comes from Martin Ratz from Morgan Stanley. Please go ahead. Your line is open.
Yes. Good afternoon. I only have one question. I wanted to ask you about Argentina. Because earlier in the year, we were talking about the Phoenix project.
And my understanding is that, that now has been canceled. And I was hoping if whether you could confirm that or not. And also, why that took place? I mean, at the start of the year, that seemed likely FID for 2018. And 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?
Martin, first of all, I'd like to make everybody aware that unfortunately we will face a fire alarm in 15 minutes. So we will switch to mute during the fire alarm for about 1 minute. Sorry for that. Your question about Phoenix. Given the ongoing discussion around gas price and the currency devaluation, we are evaluating the timing for the FEED of this project.
The development of Fenix consists of 1 wellhead and 3 wells with 10,000,000 cubic meter per day design potential. Phoenix is similar in size and development concept to Vega Playa. And Vega Playa started March 2016 and we try to standardize as much as we can. But 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 the it's a low cost and conventional project.
This is produced gas, and we see it from existing infrastructure, which obviously, over time, will be returned to its full capacity. This project will benefit from strong gas price and the Argentinian authorities firmly published the new shale gas pricing framework, which goes from 7,500,000 dollars 7.5 dollars per million BTU in 2017 to $6 per 1,000,000 BTU in 2021. So as of today, we continue on Vaca Muerta. We will not inject cash money in Argentina at the moment. And we are monitoring the situation because of the economical 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? And 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 changing the accounts?
Honestly, Alastair, I'm not very good in talking about demand in Asia. What I can just tell you is that demand grew by 1,500,000 barrels per day last year. We expect another $1,300,000 demand growth this year. We might see a bit of elasticity, but I'm taking your question about Asia, but our downstream exposure to Asia is quite limited. So as far as total is concerned, we I see very little.
So take the question and
we will have a look
to So Patrick, are you seeing anything on the petrochemical side? Christine,
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,
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. So firstly, Temparose, if you can possibly give an update as to when you expect it 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 that's the limit. And also any particular reason for the timing of this in Q3? And my final question on working capital. We see there was an outflow again in Q3. If all these days are around about $75 what can you say what sort of guidance can you give about working capital in the Q4?
Thank you.
Okay. Talta Rosa, it's 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 for the region. And that it may come, I don't know, anytime soon, we hope. But 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 say telling me that I made a mistake. So 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 Energy and NGLNG had such an effect of about $700,000,000 on our working cap. This is done, so I will not expect further deterioration, thanks to those 2 assets. If it remains stable, we will work to reduce the working cap, I don't know, by 1,000,000,000, maybe $2,000,000,000 last quarter. But I will not comment anything in that respect because it is a very sensitive and delicate issue.
The last 5 days of Q3, oil price increased by $5 per barrel. And this only 5 day increase create an increase of our working cap of $700,000,000 So answering directly to your question, if everything remains stable, which will never happen, I expect a reduction of our working
Hi, Patrick. Quick question on LNG or two questions. The first is technically, I think, I mean, it looks like you're headed to potentially 2 big sanctions next year on PNG and Arctic. And with the completion of the Angie acquisition and so a bulking up your trading operations. 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?
And then second question is linked to that is that now you've sort of got this enlarged footprint. I think you're probably the 2nd largest LNG trader in the world. Is there any intention to sort of expand the disclosure of that on that business going forward so we can get to understand a little bit more what the dynamics quarterly results?
Thanks. Okay. Thank you, John. LNG, is it enough? Never say enough with Total.
FID on Arctic 2 and PNG for sure coming. Then we will have the expansion of Cameron with 2 additional trains. I don't know when we would be ready to find this Cameron expansion, but maybe next year. There coming, there is the on top of that, of those 3 projects, Then you have Nigeria LNG, the 7th brownfield train that we will build. FEED is under process at the moment.
And more important and we are very interested in is Qatar LNG with the decision made by the Qataris to increase their capacity with 4 train roughly 30,000,000 ton, three-zero. And we are interested in participating in that. So Arctic 2, Cameron, Papua New Guinea is not enough and we will be very happy to increase our exposure through Qatar. And as I said in the past, we will be very disappointed if we are not part of this 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 eGRP, which means all the change 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. And you know that LNG will be a large part of that. So I think you will have a good idea of the contribution of our LNG by Q1 next year because you have you will have both data available for you. Thank you, Jim.
Okay.
Thank you. I'll remind you that we have a fire drill in 5 minutes.
Our next question
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 €16,000,000,000 versus €16,000,000,000 to €17,000,000,000 previously, How much of the delta is actually driven by further capital deficiency versus perhaps more planned disposals? And finally, as you look to 2018 in terms of new inorganic opportunities, You obviously pay for 10% in Arctic LNG 2 in 1Q 'nineteen as potentially the Qatari expansion you could bid for, perhaps comment on when can get an update on that? And also the surplus volumes of transfer of rights in Brazil, which you are 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 $15,000,000,000 $17,000,000,000 CapEx framework? Thank you.
So many questions, Thomas. Let's start with the CapEx guidance of 16 versus 16 point 17. 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 it may be going quickly or being slightly delayed. But there will be a difference.
And we are confident about this CapEx guidance of $16,000,000,000 Basically, I'm sorry, I can't say more at the moment about it because I don't want to say what type of assets I am selling. Production growth, how much come from Novatek? Last quarter 2018, about 250,000 barrels per day, which is basically 50,000,000 from liquid, 200,000 from gas. In 2017, Q3, it was only 200 1,000,000 barrels per day equivalent. LNG expansion, the update on Qatar, we are on it.
We are not the only one. We know that. And we are at the disposal of the Qataris who handle this process. I can't say so much about that. It is our intention and 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 Kline from RBC. Please go ahead.
Thank you. I had a question on Lamad and just wanted an update on how the biorefinery startup is going, which I believe is planned for this summer. Thank you.
Thomas, we will go to mute in less than 1 minute. I just answered your question very quickly. The project is progressing and will start Q1 2019. Then we will operate 1 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 in line with so I'm sorry we go to we switch to mute because we will go to the fire drill.
Ladies and gentlemen, the venue will remain on
Okay. The fire drill is off at the moment. So we can continue and have your question. I just wanted to add one comment on Qatar is that we do add secondary within Qatar LNG for the overall expansion at the moment. And as you know, the Qatar project are the cheapest producer.
So they are very well positioned.
We have no further questions at this time on the phone. Thank you.
Thank you, Oliver. The Q3 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 shareholders, and 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.