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.

An aerial view of an energy refinery, with massive tanks and piping defining the landscape.

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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