Earnings Call Transcript - TTE Q2 2023

Operator, Operator

Ladies and gentlemen, welcome to TotalEnergies Second Quarter and First Half 2023 Results Conference Call. I now hand over to Patrick Pouyanné, Chairman and CEO; and Jean-Pierre Sbraire, CFO, who will lead you through this call. Sir, please go ahead.

Patrick Pouyanné, Chairman and CEO

Good morning, good afternoon, everybody, wherever you are. Patrick Pouyanné speaking. Before Jean-Pierre goes through the details of what could characterize a solid set of numbers, I would like to revisit the significant investments that we announced in this last quarter. These are a good illustration of our oil, gas, and electricity strategy, based on two fundamental growth pillars. On one side, we are growing our hydrocarbon base, mainly driven by LNG, which is, of course, our cash engine today. Secondly, we are developing a profitable and integrated power business, which is key for the company's future cash flow. I would characterize our results as good cash flows and strong distribution through buybacks. Jean-Pierre will elaborate on that later. Regarding the first pillar, I would like to highlight a few important projects. The first one is, of course, our projects in Iraq. You know that the company has been operating in Iraq for ten years, which isn't a matter of emotion; it’s a matter of creating value. The DGIP provides us access to the type of hydrocarbons we are looking for: low cost and low emission oil and gas. Both projects aim to increase production of our tariff while providing a breakthrough with innovative contractual conditions compared to previous contracts signed by others. This contract offers an attractive reward that balances well against the risks involved. Secondly, I would highlight our new projects in LNG in the U.S. The Rio Grande LNG project, which we announced in June and now reached the final investment decision, is an attractive venture because the U.S. possesses a very low-cost source of gas. We believe LNG is experiencing growing demand, making this project competitive at an estimated cost of $850 per ton. The project benefits from a great location outside the Louisiana area and crucially has access to scale forces with limited competition and site preparation. We’ve also decided to integrate this project from different angles, including becoming an equity holder in a Mexican company promoting the project and being direct investors with a 1.15% stake. This integration allows us to negotiate better pricing for U.S. LNG, providing us a competitive advantage. We might also enhance this project's value by further integrating the upstream to protect our gas feedstock costs. Additionally, we're expanding the plant from three to five, which is essential for our strategy. Another significant project is the final award of the contract for the Admiral project in Saudi Arabia, focused on petrochemicals. This leverages the Sator platform, a world-class integrated petrochemical facility supported by the kingdom’s initiatives to secure advantageous feedstock and a competitive project frame. In parallel, we focused on our second growth pillar: building a profitable integrated model in electricity while transitioning. During this past quarter, we fully acquired Total Year End, which has been in the works for quite some time. You can see that it generates $400 million EBITDA and additional cash flow for TotalEnergies next year. The multiple we negotiated five years ago is quite attractive. We aim to industrialize the way we operate our assets to deliver more value in the integrated power business. We also won some maritime projects in Germany, which might seem expensive, but they perfectly fit our integrated power business model. We primarily focus on positioning ourselves as an integrated power merchant, not just as an infrastructure player. The results in integrated power have surprised positively each quarter, and I can assure you they will continue to do so. The Board is confident in the company's cash generation capacity, as demonstrated by the decision to increase the interim dividend by 7.25% year-on-year, alongside maintaining the $2 billion buyback program for the third quarter. This marks the fifth quarter renewal at $2 billion, despite the softening environment. The payout for the first half stands at over 42%, in line with our commitment to distribute more than 40% for 2023. I reiterate our commitment to highlight the transactions and projects that embody our present vision for you on December 27 in New York. I will now hand over to Jean-Pierre for the financial results.

Jean-Pierre Sbraire, CFO

Thank you, Patrick. Let’s move on to the financials. The commodity environment softened in the second quarter but remained at high levels. Quarter-over-quarter, Brent was down 4% to $78 per barrel, and European gas prices dropped by around 35% to $10.5 per million. In this context, TotalEnergies reported a second-quarter adjusted net income of $5 billion, reflecting only a decrease of 24% quarter-over-quarter, while generating $8.5 billion of cash flow. For the first half of '23, adjusted net income was €11.5 billion, and cash flow amounted to $18 billion. We continued to deliver strong profitability, with a 22% return for the 12 months ended June 23, and shared our success with our shareholders. During the second quarter, we paid €1.8 billion in ordinary dividends and executed a $2 billion buyback, consistent with the first quarter distribution despite the softer commodity environment described earlier. As a result, the payout to shareholders exceeded 42% for the first half of '23. Our balance sheet remains strong, with net debt at 11.1% in the second quarter. Operationally, our Oil & Gas production averaged 2.7 million barrels of oil equivalent per day, up 2% year-on-year, benefiting from new project contributions from both group interests and partnerships. Adjusted net operating income for exploration and production was $2.3 billion, down 11% quarter-over-quarter due to lower market prices, while cash flow of $4.4 billion was also down 11% compared to the previous quarter. However, these can still be considered resilient results compared to the prevailing market environment. We are now reporting integrated LNG and integrated power as key segments of our performance results. During the second quarter, LNG sales were stable at 11 million tonnes quarter-on-quarter, benefiting from a range of factors, while also experiencing a year-over-year decrease due to reduced demand in Europe. Integrated LNG generated an adjusted net operating income of $1.3 billion, down 36% quarter-on-quarter. On the other hand, integrated power met our target of double-digit returns, achieving a return on capital employed of 10.1%. The integrated power segment saw adjusted net operating income of $450 million, with cash flow of €491 million, which reflects the good performance of our electricity portfolio. Growth in renewable power generation capacity now stands at 19 gigawatts by the end of the quarter, marking a significant increase. Moving to downstream operations, the segment contributed $1.5 billion of adjusted net operating income, facing headwinds from lower refining margins due to various external pressures. Refinery utilization rates improved to 82% in the second quarter, and since July, refining margins have increased above $17 per ton. Finally, our net investment for the second quarter amounted to $8.6 billion, and our guidance for total net investments remains unchanged for 2023, estimated in the range of $16 billion to $18 billion. The Board remains committed to a shareholder distribution of more than 40% of cash flow through dividend provisions, supported by our efficient asset management across the board. We are now ready for the question-and-answer session.

Patrick Pouyanné, Chairman and CEO

Thank you, Jean-Pierre.

Operator, Operator

We will now begin the question-and-answer session. The first question is from Christian of JPMorgan.

Christian, Analyst

Hi, there. As we go into the strong quarter, I wanted to ask about the two pillars, which you've simplified very well. Maybe that framed a compelling case for wind renewables through optimizing across the value chain. What I'm trying to rationalize is how you generate a return competitive with the oil and gas pillar when you're looking at overall terms for the portfolio. If you're essentially trying to maximize every dollar you pace into your fuels generation, it just doesn't make sense to me as to why you don't double down on the oil reserves while oil is getting firmer over the next few years. So my question is, can we expect a high-growth oil target from you over the coming years? If so, will that take CapEx higher?

Patrick Pouyanné, Chairman and CEO

Thank you, Christian. We will address this question at the core of our presentation in September to all of you and our investors. It's true that we have a significantly large portfolio of oil and gas projects, particularly LNG. We will delve into these projects more deeply with you; currently, we face challenges with the latest wells. However, I want to make clear that the guidance we provided for $16 billion to $18 billion in this environment will remain in place. If we produce more oil, we have room to maneuver in our portfolio. However, don't expect an increased CapEx. Our focus remains on both pillars of our strategy. So while we may produce more oil, we have an integrated approach that will not compromise our profitable projects.

Operator, Operator

The next question is from Oswald Clint of Bernstein.

Oswald Clint, Analyst

Just on LNG and specifically the United States, TotalEnergies is the largest off-taker of U.S. LNG, and with the Rio Grande project, you've increased that further. I wanted to ask about the exposure to U.S. gas feedstock. You touched on potentially integrating further upstream. Is there a percentage or number we should consider in terms of feedstock coverage for these terminals moving forward? Secondly, I noticed you may be planning to drill a well in the South African portion of the Orange Basin next year. Just curious if you've completed any further analysis around the Venus discovery which gives you confidence to extend the exploration campaign.

Patrick Pouyanné, Chairman and CEO

Regarding the second point, we will focus closely on the analysis. We have drilled an upgrade of Venus, which is positive. We await dynamic data, and the first test will start again in August, with results expected in September. On the LNG exposure, yes, we currently have about 10 million tonnes to move to 15 million tonnes; it's a substantial increase. Each of our projects has integration like Gana, Angola, and Iraq. We believe in benefits from contributing to investment that allows us to negotiate pricing better than competitors. We can also generate approximately €500 million per day in U.S. production. We are likely to expand that. However, exact percentages will take time to clarify through strategic planning.

Operator, Operator

The next question is from Irene Himona of Société Générale.

Irene Himona, Analyst

Congratulations on a very busy quarter due to the four new projects that you launched recently. You referred to the competitive advantage of low cost in all those. Can you help us understand how we should think about the return on capital in these different projects? Also, you preannounced the third-quarter buyback. Given your strong cash flow, why wouldn't you announce the fourth-quarter buyback at this point?

Patrick Pouyanné, Chairman and CEO

I’d like to clarify that our Board will be meeting in September to consider the fourth-quarter distribution policy. The decision for the interim buyback reflects ongoing performance, and we remain committed to the $2 billion per quarter plan. While the environment is softening, we want to maintain flexibility. Our previous commitments remain intact, and as we move to the projects in the south, we are open about upstream contractual terms that reflect our risk structure. Our focus is to maintain return on investments while ensuring the underlying metrics remain robust for the longer term.

Operator, Operator

The next question is from Christopher Kuplent of Bank of America.

Christopher Kuplent, Analyst

Just two quick ones, hopefully. Patrick, as you highlight the 40% payout ambition, have you learned anything from last year's special dividend? Is it safe to assume that continuing the €2 billion buyback into Q3 is your preferred way of redistributing the extra proceeds? I wanted to see if the market prefers buybacks over a special dividend. Also, going back to your LNG portfolio, do you think that by the end of the decade, all your pre-FID options will be developed and operating, or is it better to maintain more options to squeeze out better project returns?

Patrick Pouyanné, Chairman and CEO

Regarding the special dividend, we had notable revenues last year, and this year, we are in a different position with lower expected cash flow than last year. The market seems to show favor toward buybacks, reflecting that TotalEnergies is undervalued compared to peers. Our approach considers shareholder value to balance distributions effectively. Our portfolio allows us flexibility as project costs may dictate whether we proceed with developments. Therefore, selections amidst our portfolio allow us to focus where growth opportunities are optimal.

Operator, Operator

The next question is from Lydia Rainforth of Barclays.

Lydia Rainforth, Analyst

Two questions if I could. On the renewables business, the capacity and development have gone up again this quarter to 50 gigawatts. What is your perspective on the potential cost increases related to these projects? Relatedly, with oil prices increasing, can you share what you're seeing in terms of demand?

Patrick Pouyanné, Chairman and CEO

The first part is as expected. We must manage project costs while seeking efficient procurement. We see increasing participation from major companies in this sector, which justifies optimism in terms of our capabilities in project management. While the renewable sector may experience cost increases, our focus allows us to limit these. Regarding oil prices, I see a positive trajectory in both refining margins and gasoline demand, primarily from Europe and the U.S. In the U.S., consumer preferences for products are indicating we expect to have solid performance throughout the quarters.

Operator, Operator

The next question is from Alastair of Citi.

Alastair, Analyst

On Iraq, can you provide context around the maximum capital employed exposure in the country? Also, could you comment on the competitiveness of Germany's power prices versus affordability for consumers?

Patrick Pouyanné, Chairman and CEO

Looking at Iraq, our maximum capital employed will be approximately $3 billion, with around 45% of CapEx coming in at about $1 billion. We expect stable production from the contract while generating cash flow. Now regarding Germany, while it's a concern, we view electricity prices stabilizing around €70-80 per megawatt. A government strategy will significantly determine power prices and competitiveness; thus, contracts with the state and energy-intensive producers will be crucial moving forward.

Jason Gabelman, Analyst

Do you expect the NOVATEK dividend for this quarter? What do you see for the European gas market in the fall, especially regarding your European gas assets?

Patrick Pouyanné, Chairman and CEO

No, we did not receive the NOVATEK dividend this quarter. As for European gas, storage levels are anticipated to fill by October. Currently, we see soft gas prices. Anticipating demand, we remain cautiously optimistic about balancing storage and managing prices. Factors such as weather and overall recovery, particularly in China, will also play pivotal roles in the subsequent market dynamics.

Operator, Operator

The next question is from Henri Car of Berenberg.

Henri Car, Analyst

Could you provide additional context on integrated performance improvements sequentially? And do you have any updates on Mozambique LNG project timelines?

Patrick Pouyanné, Chairman and CEO

We are working diligently on the Mozambique LNG aspects, particularly on contractor agreements, which should finalize in the latter half of this year. On integrated performance, we anticipate continued improvement driven by operational efficiencies and demand conditions. Throughout the first and second quarter, we have seen demand for our flexible generation capacities positively influence performance. However, market seasonality typically leads to more pronounced positives in the first quarter.

Operator, Operator

This concludes the question-and-answer session. Thank you for your participation.