Total Reports 28% Profit Fall in Q4 as Downstream, Chemical Segments Weigh on Result

French supermajor Total this morning revealed its results for the fourth quarter and the full year 2009, presenting a profit of 2.081 billion euro (US$3.076 billion) compared to 2.873 billion (US$3.787 billion) in the fourth quarter of 2008—a fall of 28% counted in euro and 19% counted in U.S. dollars. A significant number of upstream projects were completed, leading to a drop in capital expenditure (capex) by about 7%, although Total raised its research and development (R&D) spending by 6% during the year.

Upstream Joy

Total's upstream output grew by 6% in the fourth quarter alone compared to the previous quarter, on the back of a host of projects—some of which had been delayed—coming onstream at roughly the same time. Total hydrocarbon production stood at 2.377 million b/d during the fourth quarter, although compared with the fourth quarter 2008, when production came in at 2.354 million b/d, the increase was only about 1%. The full-year production for 2009 came in at 2.281 million b/d, compared to a full-year production of 2.341 million b/d, an overall decline of 2.6%, as lower OPEC production quotas implemented in very late 2008 and early 2009 led to lower output at many of Total's assets in the cartel's member states. Excluding OPEC production cuts, Total's output would have come in 2.5% higher in 2009 compared to 2008.

As global crude prices rebounded from their record lows but still stayed under average 2008 levels, Total experienced a positive price effect on its output, meaning that its production entitlements under certain production-sharing agreements (PSAs) were higher than the preceding year, as the price was lower than some individual contractual benchmark levels at which Total's production share would have been reduced. Upstream output over the year added 2% compared to 2008 from ramp-ups and start-ups, while the price effect added about 1.5% to the year-on-year (y/y) output. OPEC production reductions gave a -3% result on its overall output, while continued security-related disruptions in Nigeria cost Total another 1% and portfolio changes in especially Libya and Venezuela cost the company another 2% of its total output.

Despite a healthy overall realised liquids price of US$70.6/b for the fourth quarter—higher than the previous quarter's US$65.1/b, and 43% higher than the fourth-quarter 2008 price of US$49.4/b—the full-year average, at US$58.1/b, came in 36% lower than that seen in full-year 2008 of US$91.1/b. This was obviously reflected in Total's y/y result, but remained on trend with the results presented by its peers. The improved quarterly situation by the end of 2009 in the upstream sector was, however, muted by a historically low gas price, where the average realised gas price during the fourth quarter of 2009 decreased by 33% compared to the fourth quarter of 2008. The y/y performance came in close to that result, with Total's gas on average fetching US$5.17/mmBtu during 2009, compared to US$7.38/mmBtu in 2008, a 30% drop. This was a particular disappointment—although expected—as Total's gas production increase made up a significant part of its overall upstream increase. Gas output rose to 5.320 bcf/d during the fourth quarter, 4% higher than the 5.127 bcf/d recorded in the fourth quarter of 2008 and 12.5% higher than the 4.726 bcf/d produced in the third quarter last year. Y/y, gas output grew 2% from 4.837 bcf/d in 2008 to 4.923 bcf/d in 2009. Total's reserve replacement ratio came in at 103% during 2009 including acquisitions, although the figure stood at only 93% excluding acquisitions.

Continued Downstream Headaches

Total's downstream sector continued to weigh on its overall result, given continued low refining margins and a weak demand for chemicals amid the global economic downturn. Its downstream segment saw the adjusted net operating income decrease by 93%, from US$1.015 billion in the fourth quarter of 2008 to US$75 million in the fourth quarter of 2009; this was also a drop from the US$209 million in the third quarter of 2009. On a full-year basis, the operating income came in at US$1.329 billion for 2009, compared to US$3.778 billion during 2008—a decline of 65%. In chemicals Total's fortunes fared little better, recording a 61% drop between 2008 and 2009 from US$982 million to US$379 million. On a quarterly basis the chemicals operating income came in at US$106 million during the fourth quarter, compared to US$233 million during the same quarter in 2008—a drop of 55%. The third-quarter 2009 result ended up at a US$230-million adjusted net operating income for Total.

Refinery throughput rates decreased by 13% between the fourth quarter of 2008 and the same quarter in 2009, and by 4% compared to the third quarter last year, as most of the refineries used voluntary throughput reductions given the weak demand conditions, said Total in its statement. The 2009 full-year crude utilisation rate fell to 78% compared to 88% in 2008, and Total has kept its Flanders (Dunkirk) refinery offline since mid-September 2009, a move it has now decided to make permanent. Total also used the harsh market conditions last year as an opportunity to schedule refinery turnarounds and maintenance stops. This has put it in a position where it should have very little down-time scheduled for its downstream facilities during 2010, and to some extent also 2011. The European Refining Margin indicator (ERMI) came in at an average of US$11.7/tonne during the fourth quarter of 2009, 71% lower than the same quarter in 2008, while the 2009 full-year US$17.8/t margin came in 65% lower compared to 2008. In the chemicals segment, Total's traditional exposure to the Organisation for Economic Co-operation and Development (OECD) markets led to its suffering heavily from their weak demand situation, while making it hard for the company to benefit substantially from the demand rebound noticed especially during the latter part of 2009 in China.

Outlook and Implications

Total, like all of its peers, is suffering from extraordinarily weak downstream demand and margins, given their large exposure in the developed markets where demand has weakened the most and is also likely, to some extent, to have been permanently damaged by the high fuel prices in 2007–08. A relatively large chemical industry business is also a further drag on Total's result, given continued weak industrial demand in the OECD markets.

Upstream, however, the picture looks relatively good, save for the fact that low gas prices could potentially be undermining some of the projects' profitability. Nevertheless, Total's LNG involvement is in most cases thought to be on a sound financial footing, with its Yemeni venture, for instance, benefiting from very low production and development costs due to its utilisation of captured associated gas. Still, project delays in 2008 and 2009 seem now to have given way to a significant number of project completions, allowing Total to raise its production and production capacity, while the company maintains a healthy capex and R&D budget and keeps its debt-to-equity ratio in line with its objectives.

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