Earnings Call Transcript - TTE Q4 2023

Operator, Operator

Good morning. Welcome to TotalEnergies 2023 Results and 2024 Objectives Presentation. We are in London at the Tate Modern Art Museum. Thank you for coming, and I hope you enjoy the view of the city. You can also follow us live on our website, totalenergies.com. We will start with a safety sequence led by Bernard Pinatel, our President of Refining & Chemicals, followed by a presentation from Jean-Pierre and Patrick lasting about an hour. After that, we will have a Q&A session, and we expect to finish around 11:30 or 11:45. Now, without further delay, I invite Bernard to take the stage and begin the safety sequence. Bernard?

Bernard Pinatel, President Refining & Chemicals

Thank you, Renaud. Good morning. Last year, I had to report two fatalities. As you know, these two tragic events remind us that our first duty, of course, is to make sure that everyone returns home safe every day. One fatality occurred in France at a retail station, where a contractor unfortunately passed away while performing some acceleration work. The safety moment I’ve chosen this morning is about the second fatality, which occurred at the Silane refinery in the Netherlands. The purpose is not just to describe what happened, but to share with you what we learned from this tragic event to improve our operations. On February 3, a contractor passed away while performing a catalyst loading operation inside the reactor. His name was Torsten. He was 50 years old. Changing a catalyst is a very sensitive operation, as the catalyst is flammable in the presence of oxygen. You must first inert the reactor with nitrogen before the intervention. The catalyst loading operation is performed by a team of three people led by a supervisor. First, there is a diver who enters the reactor, fully equipped, including with a lifeline to pull him out in case of emergency. The second is a backup diver ready to dive in case of emergency, and there is also a controller who monitors the nitrogen level and maintains constant contact via radio and video. Before entering the reactor, there is a video inspection to ensure that the situation is safe. At 11:15 that day, we were alerted by personnel that the diver was trapped by the collapse of some catalysts. The risk team, reinforced with additional members, tried to pull him out of the reactor. Tragically, when the body was retrieved, the diver had already passed away. It’s clear that we couldn’t keep operating this way with human entry into an inert atmosphere, even if it is industry standard practice. So immediately, we took three actions: firstly, we stopped all similar operations worldwide; secondly, we reviewed alternative operating methods with our contractors, HSE specialists, and technical experts to avoid any human entry inside reactors for such operations; and finally, we identified and selected an alternative operating mode involving water flooding to change the catalyst, which means filling the reactor with water and then emptying it together with the catalyst. This method, although more costly because we can't recover the catalyst for recycling and we have to dispose of the wastewater, is a necessary change. Since February 2023, all replacements have been performed without any injury. We carried out 21 replacements using water in 2023 and will perform 14 more in the first year of 2024. We continue to work on further improvements in vessel modifications to support the additional weight of water and are looking into utilizing robots. Naturally, we have shared these new operating modes with our peers. Now let me switch to the overall company safety performance. At TotalEnergies, we keep repeating that safety is more than a priority; it is a core value. It is a matter of culture, leadership, and permanent improvement. We measure various leading indicators in terms of occupational safety and prevention of technological risks. On the left side, the total recordable injury rate has been reduced to 0.63 over the last five years, representing a reduction of close to 30%. Maintaining an injury rate below 1 is not guaranteed, especially when considering the industry trend since 2020. Our key initiatives, including engaging our contractors and teams to promote safety, have aided in this. In 2023, we recorded 10,000 joint safety tool interactions across the company. On the right side, we have made progress in preventing major accidents and pollution. Over the last five years, we have reduced primary losses by 50%. We focused on managing technical integrity through our maintenance inspection program and implementing digital tools to prevent equipment failures. We are dedicated to protecting our people, the environment, and our assets.

Jean-Pierre Sbraire, CFO

Thank you, Bernard. Good morning, everyone. This year is special for TotalEnergies as we celebrate our 100-year anniversary in 2024. The company was founded 100 years ago in Iraq, and over time, it has diversified to adapt to the environment and market changes. With the same pioneering spirit we had back then, we are building the energy system of the future. Over the past few years, we have engaged in a balanced energy transition strategy based on two pillars: oil and gas, mainly LNG, and integrated power. For the oil and gas business, TotalEnergies plans to responsibly grow its oil and gas production by 2% to 3% per year, predominantly from LNG, thanks to our rich low-cost, low-emission portfolio. In the LNG segment, we aim to leverage our top three global LNG integrated portfolio with leading positions in Regas in Europe and U.S. exports. Patrick will elaborate later on this. In the integrated power business, we are building a world-class, cost-competitive portfolio that combines renewable energy, such as solar and offshore wind, with flexible assets like CCGT and storage to deliver clean, firm power to our customers, with the goal of generating positive net cash flow by 2028 and ROCE at 12%. This two-pillar strategy has delivered strong results in 2023, despite a softer price environment compared to 2022. Adjusted net income attributable to TotalEnergies shareholders was above $23 billion, and IFRS net income exceeded $21 billion. We achieved a return on capital employed (ROCE) of 19% and a return on equity of 20%, reaffirming that TotalEnergies was the most profitable major in 2023. Our cash flow reached $36 billion, with a robust contribution from various business segments, including over $18 billion from E&P and $2.2 billion from integrated power. Additionally, we benefited from a strong working capital release of approximately $5 billion, though part of this was due to exceptional fiscal debt that will not be repeated in 2024. In terms of cash flow usage, we dedicated $16.8 billion to capital investment and returned $16.5 billion to shareholders, with payouts above 40%. Payouts increased from 37% in 2022 to 46% in 2023, including a 7.1% rise in the ordinary dividend and $9 billion in buybacks related to Canadian asset disposals. Our net debt stands at $6 billion, resulting in a gearing ratio of 5%. This year, we have increased oil and gas production to 2.48 million barrels per oil equivalent per day, with LNG production growing by 9%. Refining operated slightly above guidance at 81% utilization. Our renewable capacity grew by nearly 6 gigawatts over the year, resulting in an electricity production increase of over 80%, totalling 19 terawatt hours. On the emissions front, we reduced Scope 1 and 2 emissions from our operated facilities to 34.6 million tons, with methane emissions decreasing by 47% compared to 2022, surpassing our reduction targets.

Patrick Pouyanné, CEO

Good morning, everybody, and thank you for joining us today. I would first like to underline our commitment and performance, which enable us to implement our energy transition strategy while remaining at the top in profitability. TotalEnergies aims for a disciplined approach and the ability to increase cash flows through a balanced portfolio of oil and gas projects along with investments in low-carbon energies, such as electricity. Our strategy allows us to maintain stable and exceptional shareholder returns, including a 7% growth in dividends for the last three consecutive years, while supporting our projects and creating a sustainable portfolio. On the oil market outlook, I would like to highlight our perspective in 2024. We anticipate a gradual recovery in demand led primarily by aviation as China exits its COVID policies. Additional non-OECD countries are expected to contribute to the growth, providing support to the markets. Our robust portfolio allows us to maintain strong profitability in a potentially volatile environment. We also have plans in place for 2024 that include upstream production of between 2.4 and 2.5 million barrels per day, capital expenditures between $17 billion and $18 billion, and a continued focus on emissions reductions while growing our renewable capacity.

Irene Himona, Analyst

Thank you very much. Patrick, you’ve built the integrated power portfolio through M&A. You’ve been very active on that. Your targets are for gross capacity. Would you contemplate something a little bit more radical or different like bringing in a partner, selling down part of that portfolio like some of your peers have done? And then secondly, on the buyback, the $2 billion quarterly buyback, your balance sheet is very ungeared now. If the environment were to deteriorate, and we’ve had tremendous volatility in recent years, how far would you lean into the balance sheet to sustain that buyback? Thank you.

Patrick Pouyanné, CEO

Okay. First question. We are still considering the integrated model. We believe in organic growth, but we are open to partnerships for specific assets. We aim for effective portfolio management. On the buyback, we are committed to maintaining a sustainable distribution policy, focusing on shareholder returns while ensuring balance sheet strength. I can affirm that we will only leverage our capacity if it aligns with our strategic objectives and market conditions. The priority remains to balance investment with shareholder returns.

Oswald Clint, Analyst

Thank you very much, everyone. I wanted to ask on LNG, and I wanted to ask about appetite into your portfolio from new demand from Biden’s policy recently from the Red Sea disruption. I think you answered that already by saying China is having some discussions with you, etcetera. So perhaps I’ll change it to, are you, I mean, really leveraging – and I know Stephane is behind me, but leveraging the LNG trading and optimization piece?

Patrick Pouyanné, CEO

I'm very happy with what we do. In fact, we believe that our trading policies are robust and profitable, as demonstrated by our consistent cash flow performance. We have built strong relationships with our partners and are always exploring avenues for improving our trading portfolio and leveraging opportunities.

Henri Patricot, Analyst

The first question is on the dividend growth you mentioned earlier. We’ve done $2 billion buyback per quarter. You have this 5%, 6% base growth, and then an additional 1%. Could that additional 1% become larger in the future as you get more underlying cash flow growth, integrated power, integrated LNG?

Patrick Pouyanné, CEO

It will be possible if we see growth in cash flows, increasing shareholder returns. Our focus is on a steady policy that ensures long-term sustainability and attractiveness for our shareholders.

Giacomo Romeo, Analyst

I wanted to follow-up on hydrogen. I was wondering in which parts of the world you are seeing the most attractive bids on your 500,000 ton green hydrogen tender. And I seem to remember your comments in New York a few months ago were a lot less positive on hydrogen back then.

Patrick Pouyanné, CEO

Today, Europe is the primary focus, as there is strong demand and favorable regulatory structures in place. We are continuously updating our strategy based on market signals and developments.

Operator, Operator

We can go there, Henri.

Bernard Pinatel, President Refining & Chemicals

No, we are on the same way. We want to keep the control of the – we had the difficulty to be – the oil part we want to exit.

Patrick Pouyanné, CEO

I think we are clear, we want to manage our assets responsibly. TotalEnergies will focus on maximizing value in areas where we have established strength, including LNG, our refining operations, and energy transition projects. Our plan is to create a sustainable energy business model that appeals to shareholders while contributing to the energy needs of our customers.

Operator, Operator

Okay. I think we covered everything. Thank you for your call.