TotalEnergies SE (NYSE:TTE) Q3 2023 Earnings Call Transcript

TotalEnergies SE (NYSE:TTE) Q3 2023 Earnings Call Transcript October 26, 2023

TotalEnergies SE beats earnings expectations. Reported EPS is $2.63, expectations were $2.5.

Operator: Ladies and gentlemen, welcome to the TotalEnergies Third Quarter 2023 Results Conference Call. I will now hand over to Patrick Pouyanne, Chief Executive Officer; and Jean-Pierre Sbraire, CFO, who will lead you through this call. Please go ahead, gentlemen.

Patrick Pouyanne: Hello, everybody, everyone. Good afternoon. So — good morning if you are in the U.S. So today, we will present with Jean-Pierre, our third quarter results, which once again demonstrates the relevance of our strategy. Indeed, our transition strategy is incurred on both pillars, as we explained to you last September. On oil and gas on 1 side, integrated power on the other side. And it allows us to fully leverage upside in supportive energy environments like the 1 we are experiencing today. As explained in our total strategy and outlook presentation end of September, we have stayed the course, and this quarter illustrates all the strategies in motion in all of business segments. Oil and gas first, as you know, we have developed organically a deep portfolio of projects.

But our low cost and low emissions, which will offer a growth production of 2% to 3% per year for the next 5 years. Thanks to this strategy, this quarter, we delivered a 5% increase of production compared to Q3 ’22, as several new projects have been put into production like Mero 1 in Brazil, Absheron in Azerbaijan, Block 10 in Oman and Ratawi in Iraq. And they are more than offsetting our natural decline of 3% per year. The downstream is also contributing to this oil and gas business, in particular, thanks to our capacity to combine an excellent utilization rate of our refineries with very robust refining margins. On the LNG side, the recent price volatility in European gas markets, price spiking as much as 28% in a single day during the quarter is the most obvious example of real-time market intention.

We capture value along the entire value chain and maximize the margins on both our dominant U.S. and European positions. We are the largest U.S. LNG exposures, and we have reinforced this positions this quarter with the sanction of Rio Grande LNG in Texas. And the largest, we are also the largest European oil and gas capacity holders. And there again, we are reinforcing this position this quarter with the commissioning of our second FSRU in France after the 1 in Germany earlier this year. The same integrated strategy extend, as you understood, to our integrated power business since the electricity market in Europe follows the gas market as natural gas plus CO2 sets a marginal power price for many years to come. This market is again once characterized by growing demand and constrained supply, which experience opportunities in the market.

As Jean-Pierre will explain you, Integrated Power achieved a new milestone this quarter with both adjusted net income and cash flow exceeding $500 million. We are well on our way to achieving our $2 billion cash flow target for the year in this business. We have announced this morning an interesting acquisition on the German market, which illustrates our integrated power strategy. Quadra is the second largest segregator of renewable energy in Germany with 9 gigawatt of virtual onshore wind farm and offers a very interesting platform from getting value out of the power market dominated by renewable without capital implied in the asset and so contribute to our profitability in this attractive market. I will write up my introduction by just saying again there’s the relevance of a balanced transition strategy between oil and gas and 1 side integrated power on the other side has never been clearer, more energy, less emission, more cash flows, and this quarter illustrates this relevance with adjusted net income increased to $6.5 billion and CFFO increased to $9.3 billion.

Total generated $4.2 billion of free cash flow after net investments. Based on the strength of these results and the trust in the company’s outlook, our Board approved the third interim dividend up 7.25% year-on-year at EUR 0.74 per share. Having said that, I’ll turn it to Jean-Pierre, who will give you more details through the solid third quarter financial results.

Jean-Pierre Sbraire: Thank you, Patrick. So now we’re moving on to the detailed financial results, starting with our first pillar, Oil and Gas, which is the cash engine of today. Third quarter hydrocarbon production was nearly 2.5 million barrels of oil equivalent per day, which is notably up 5% year-on-year, as already mentioned by Patrick. Thanks to the startup of several oil and gas projects. On oil, production benefited from new production from the first FPSO on Mero in Brazil, EKK in Nigeria and our entry in the Ratawi oil field in mid-August in Iraq. Speaking of projects, Mero 2 should be online by the end of the year. Production also benefited for our entry in January into the [indiscernible] in Abu Dhabi. On the gas side, production benefited from the startup of Block 10 in Oman and Azerbaijan of the Absheron.

Although production was flat quarter-to-quarter, exploration and production posted strong quarterly results with adjusted net income of $3.1 million and CFFO of $5.2 billion. The 34% increase in adjusted net operating income quarter-to-quarter was primarily driven by higher oil price and a lower effective tax rate, which is a result of 2 effects. First, it results from the lower taxation rates on new barrels, Brazil, Azerbaijan, Iraq, compared to declining historic levels, barrels and its results also has a lower weight of North Sea barrels in the segment results for this quarter. Operating costs decreased to $5.5 per barrel this quarter. For the integrated LNG segment, we continue to demonstrate our leadership as a top global LNG player. Integrated LNG production is up 18% year-on-year and stable quarter-to-quarter.

LNG sales were down by 5% quarter-to-quarter due to decrease in spot traded volumes in a less volatile environment, and LNG price sales was down 3% quarter-to-quarter linked to a certain environment. However, after our results have landed last quarter from the historic high exceptional results experienced in ’22, integrated LNG maintained this quarter robust results with adjusted net operating income flat quarter-to-quarter at $1.3 billion and CFFO at $1.6 billion, down 8% compared to previous quarter, in line with sales down by 5% and prices by 3%. Despite entering the winter period with high natural gas inventories in Europe, in a tense market, gas prices remain at good levels and very reactive to production disruption as we have seen over the last several months.

Given the evolution of oil and gas prices in recent months and the lag effect on price formulas, we anticipate that our average LNG selling price should be above $10 per million BTU in the fourth quarter ’23. For the combined Downstream adjusted net operative income and CFFO increased sequentially to $1.8 billion and $2.2 billion, respectively. Despite lower petrochemical results due to the European environment, our results reflect higher refining margins in Europe and a higher utilization rate during the third quarter, which was supported by greater probability of our French refineries to be noticed for once. The utilization rate on processed crudes increase quarter-to-quarter to 84% despite having an unplanned shutdown at the [indiscernible] refinery in the U.S. For the fourth quarter, the acquisition rate should be above 80% and includes the restart of [indiscernible] in mid-November.

Moving now to the second pillar. We continue to develop a profitable and differentiated integrated power model. Building a world-class cost-competitive portfolio that combines renewable assets, solar, offshore wind, onshore wind and flexible assets such as CVTs and storage to deliver clean firm power. As mentioned by Patrick, this quarter, we achieved a milestone in integrated power business segments with adjusted net income and cash flow, both exceeding $500 million, and we are well on our way to achieving our target of generating $2 billion cash flow in ’23, having already generated close to $1.5 billion through the first 3 quarters. All the value chain contributed this quarter to this $500 million results, renewables, flexible assets and heavy supply to customers as well.

During the third quarter, we also acquired 100% of Total Eren, which contributed to the growth of our electricity production and results. Early October, we signed a corporate PPA with Saint-Gobain in the U.S. to supply clean power from our Danish field solar farm in Texas. The agreement is a good illustration of our strategy in integrated power, and it includes an upside sharing mechanism under which both companies share potential upside arising from spot market prices over the contracts or term. We recently achieved another milestone. Earlier this month, our Seagreen offshore wind farm in Scotland became fully operational and is running at the design capacity of more than 1 gigawatt. This project was delivered within budget, only 5% persevere and is TotalEnergies’ biggest offshore wind farm globally.

I’ll wrap up with CapEx and shareholder returns. Year-to-date net investments as of the end of the third quarter totaled $16.1 billion. As a reminder, we expect to receive cash proceeds from the sales of our Canadian assets and from the deal with [indiscernible] in the fourth quarter. Therefore, we reiterate full year guidance of $16 billion to $17 billion of CapEx this year. Our balance sheet is strong. Our gearing slightly increased from 11.1% at the end of the second quarter to 12.3% at the end of the third quarter, that is mainly due to the consolidation in our accounts of Total Eren debt. Proceeds from disposals should bring gearing back below 8% by end of the year. Over the last 12 months, OHA was 20.1% and return on equity was more than 22%.

In September, we raised our annual payout guidance from 35%, 40% of cash flow to more than 40%. We’re on track for ’23, having paid out a cumulative 43% for the third quarter. Our payout is a combination of ordinary dividends and buybacks as we believe our stock despite having reached historical high this quarter is still undervalued by the market. We bought back $6.1 billion of stock through the third quarter. And so we are well underway in executing our $9 billion buyback program for full year ’23 as the Board decided to allocate $1.5 billion of Canadian sale proceeds to this buyback program in ’23. This concludes my comments, and now we can move to the Q&A.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Oswald Clint of Bernstein.

Oswald Clint: Two questions. The first one on the U.S. offshore wind please, attentive energy. It’s — it was a good press release this week, lots of information that’s not normally presented for these types of deals, and it helps us kind of get to the returns, I think. With the 40% tax credit we were getting to something like 13.5% on an equity basis. And I just wondered if that was anywhere close to your own expectation for a project like that. And perhaps at this point, you could say how much of your $20 billion of capital employed in Integrated Power is currently in production? That’s the first one. And secondly, I wanted to ask about geopolitical risk. You always have your finger on the pulse and obviously, I wanted to get a sense of how you’re thinking about the portfolio risk at the moment, especially Middle Eastern exposure. And were there any strategic changes or indeed, M&A moves may be needed or may be considered if things were to worsen?

Jean-Pierre Sbraire: Thank you, Oswald. Thank you for the comments. Yes, we — as you know, the flow in the industry sometimes is questioned. So in fact, this flow in, by the way, in all — in our portfolio, we had 2 good news. In fact, for me, this last week, and so we wanted to share first Seagreen in Scotland, we managed to make that project within 5% only overrun costs, EUR 4 billion. So it’s quite — it demonstrates that — and we have a good CFD on Seagreen who will make money now from this project. So it demonstrates that you can execute a no-showing projects when you are a good team, a good project team within the budget, and I would say, not much delay in fact, in that case, which, of course, are linked. So first comment.

Second comment on — in New York. Yes, that’s true that we — and I think that I said even if we’re not allowed to disclose what is the level of our price, they mentioned an average price of around $145 per megawatt hour nominal. And so you change the range compared to previous ones. And I think it is a lesson I explained you last time but offshore wind, you need to — to have — to be pragmatic about what would be the cost and then you enter into a discussion in the U.S. in particular, this type of price plus the 40% IRA are giving us a good support. And honestly, you are quite good in your math. I would say I would have answered to you 12 to 15. So you are quite good in your math. Congratulations. So we can indeed develop a profitable showing projects based on equity.

And 1 of the key by the way, people might be surprised by the level of price announced by the State of New York, which is much higher than before. I can tell you, 1 of the key has been to have among our partnership as we announced, we have introduced in the partnership, [indiscernible], which is our worldwide partner but also [indiscernible], which is a U.S. company, very well established in New York. And again, for me, there’s a strong lesson. When you have a local partner, well implemented, it helps a lot in these discussions with local authorities. We would have been a low on TotalEnergies in front of New York State. I’m not sure we would have achieved the same results. So that comfort my strong belief, renewable required to identify local partner.

And by the way, [indiscernible] is a very interesting partner for us in the future, including to develop maybe more business in the PGM area. So that’s this one, so for offshore wind. On the geopolitical risk. Our exposure, when you look to our portfolio, we have many countries, but there are 2 countries fundamentally, which are contributing to the cash flow. By the way, yes, to come back on the — and the second question, capital employed out of $20 billion under production in offshore wind, I think it’s less than [indiscernible] probably like $2 billion, probably 10%. 10% of the capital employed are in offshore wind today out of the $20 billion of the integrated power business, just to give you an idea. And more or less, in a perspective to 2030, 10% is more or less what we expect from offshore, more or less.

So geopolitical. 2 countries [indiscernible] Abu Dhabi and Qatar. In fact, when you — reality where the cash flow is coming from today, we have over — you have also Libya, which is out of — to the area. And to be honest, in Abu Dhabi, the things — the geopolitics risk, the risk is limited there. It’s well controlled and it also, I would say. So I’m not so really not — when I think to what situation, which is a dramatic situation, I don’t see too many, I would say, consequence for that. Of course, we need to manage the situation to be far in Iraq, of course, in Lebanon, but it was only exploration. And so in Egypt, I would say, our exposure is very limited in Egypt. So I’m not considering that it’s an issue for TotalEnergies, maybe for others.

So that’s I would say where I’m there. M&A things are worsened. If things are worsening, the price of oil will go up and then we’ll have to see what we’ll do, but there’s no M&A move into that situation for me in that period.

Operator: The next question is from Malek Christyan of JPMorgan.

Malek Christyan: The only question I would like to ask is just around your views around consolidation, Jean-Pierre, in terms of what we’re seeing in the U.S. How would you read 2 parts, one, there sort of opportunistic chasing of growth in terms of volumes through their balance sheet as opposed to building organically? And then two, where does that position to TotalEnergies in the upstream medium-term particularly if based on what they’re doing, it suggests that they are looking for as well as backing the back end of the curve, so to speak. So do you feel like you have a little bit of FOMO? Or are you very comfortable with your upstream growth? And I guess the question I’m asking is, why don’t you feel the need to do consolidation, particularly given you’re building these 2 pillars and building it through scale?

Patrick Pouyanne: To be honest, as you know, we are — we don’t have any — we are not in a position in the U.S. So I think I understand that might be consolidation in the U.S. It is quite a spreaded industry in the shale industry. So I have no comment, but it’s not our case. Historically, you make consolidations when you have low price of the barrel to gain synergies. That’s the history of our industry. You are driven by a low price of barrel, you try to synergize and scale, obviously, generate synergies. And so you are trying to — but the story of our industry. We are not at all in that situation today. Price is brilliant. We are even for most of us at the top of our historical values, I would say that’s not what I would look for, honestly, I don’t say and for TotalEnergies, we will not have diverse synergies in terms of operations or no in terms of cost.

So I think that’s not for us the type of things we are looking. By the way, we have quite a strong and deep — we have a deep portfolio of projects in oil and gas. I think it was what we presented to you end of September. So I don’t feel a necessity to add more on this one. Again, we mentioned that we might have to look to more shale gas in the U.S. for feeding integration to the LNG, which we mentioned in September. That’s all what I mentioned. So I observe this move. It means that my colleagues are thinking that the price of oil will go — will remain high for a moment, so I’m happy. That’s what I can comment to you. But for us, I think we have a clear strategy. We execute the strategy and let’s be consistent.

Operator: The next question is from Lydia Rainforth of Barclays.

Lydia Rainforth: Two questions, if I could. One, just building up on the virtual power plant acquisition from this morning. Can you just walk us through why that idea works in terms of special power plants? And just any indication on price on that? And then secondly, I mean just in the — we’re clearly seeing a lot of volatility on the gas market. Could you just walk through what you think might happen over the winter period for us?