TotalEnergies SE (TTE) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Total second quarter results and first-half 2005 results conference call. (OPERATOR INSTRUCTIONS). Just to remind you all that this conference is being recorded. I would now like to hand the conference over to the Chairperson for today, Mr. Robert Castaigne, the CFO of Total. Please go ahead, sir.

Thank you very much. Thank you everybody for being with us today. As you know, we have taken a major step to increase heavy oil development in Canada by agreeing to acquire the Canadian company Deer Creek for $1.1 billion. This is a pure play and we believe that there will be synergy with our nearby Surmont project. We can cover this topic in the Q&A, but my comments for the moment will be on the results.

I'm pleased to report once again that we had another very good quarter. Our adjusted net income was $3.7 billion in the second quarter, a 39% increase over the second quarter 2004.

Our earnings per share increased to $6.2 per share, which is 43% higher than last year. If you look at it on a half-year basis, the 52% increase in our earnings per share is the best among the majors. Also, our ROACE for the 12 months ended June 30, 2005 was at a record level of more than 26%, which is also amongst the best in the industry. The profitability comes from strong ROACE performance in the segments. Upstream was 36%, downstream 30%, and chemical 13%. So overall we feel this was a good quarter and we were able to profit from this very strong environment.

Now I will comment on the results and highlights from the segments of activities. First with the upstreams, operating income expressed in dollars increased by 39% in the quarter and 44% year-to-date. This was of course due mainly to the high oil and gas price rationalizations, which were up by 36% year-to-date.

Now if you look at the net operating comparables for the second quarter, you can see that it was flat compared to the first quarter despite the increase in prices. To explain this recall in particular that we were overly steep (ph). It is something that I mentioned in the previous conference call. We were overly steep in the first quarter, which is to say that our sales to production ratio was over 100%. That effect, which was about EUR150 million pretax naturally reversed itself during the second quarter. And this of course reduced our profitability comparables for the second quarter.

If you look at the increase for the first-half 2005 net operating income comparables in the last vestige of the first-half 2004, you can see it increased by 37%, which is at the top of the majors in relative terms.

Looking now at the production for the quarter, our volumes showed a decline of 3.7% compared to last year. If we adjust now for the price effect and the remaining impact of Erica and Ivan our volumes were basically flat. Which is to say that growth that we had from Libya, Venezuela, Indonesia, Congo and Trinidad compensated for the decline in the North Sea, which was affected the production by maintenance in Norway.

Now as we get closer to the end of the year, we are very close to starting up several important fields. As I said in our last conference call we have been 12 large fields that should come onstream by the end of 2006. This represents about 300,000 barrels of oil equivalent per day of new production net to total at plateau. So over the next two years we will substantially increase our production.

For the longer term, we have made several press releases recently that shows the progress we are making, notably the $1.1 billion acquisition of Deer Creek in Canada, that I mentioned, to develop our heavy oil position. In Nigeria we have launched the development of the Akpo field, and NNPC made the initial approval for the Usan field development. In the Congo we are very close to launching the Haute Mer C development. In the UK we have already started the development of the Forvie North Field on a fast track basis, as well as Glen Elk (ph). Both of these developments should be on production early -- by early 2006.

The development plans for the Tyrihans Field in Norway has been submitted for approval. In Qatar the new sense (ph) contract was signed for the Dolphin project. That has increased the contracted gas volumes to 1.9 billion cubic feet per day. I should also mentioned that we should have the last approval to launch our (indiscernible) project very, very soon.

In addition to that we have had several significant exploration successes, including the full discovery on the ultra deep Block 32 in Angola, the (indiscernible) gas discovery in the North Sea, and a discovery on the Haute Mer C offshore in Congo.

In addition to that we're waiting for some more good news, particularly from West Africa. We have also acquired some new exploration (indiscernible) in Nigeria and in Cameroon. So if I may say so we have been working very hard. And we believe these projects are setting the stage for a long course cycle.

In the downstream now, operating income expressed in dollars increased by 37% in the quarter and 51% year-to-date. Refining margins have been very strong across the entire accounting base, reaching record levels for the second quarter average. As (indiscernible) during the second quarter throughput volumes were affected by two things. First, large -- larger schedule turnarounds and a strike at the refineries in France during May. These events reduced our throughput by 4 million tons, or on a comparative basis close to 300,000 barrels per day in the second quarter versus the same quarter last year.

In retail marketing, margins were modestly higher in Europe, and we increased our refined product sales volumes. In the second quarter the downstream segment cash flow was affected by a big increase in working capital that was linked to higher prices and also to trading activities.

Refining margins have come down from their highs, but remained relatively strong. We have completed now most of the major turnarounds that we had scheduled for this year. And in the third quarter we should have only a partial turnaround at our Lindsey (ph) refinery in the UK. So we expect that our utilization rates should return to close to normal.

In the chemicals. Operating income was up very strongly compared to last year, but was weaker compared to the first quarter. The decrease from the first quarter to the second quarter was due mainly to a drop in the petrochemical margins, which were squeezed by high (indiscernible) prices and weaker demand in the second quarter. On average the second quarter reflected midcycle conditions, but by the end of the quarter and still today, the petrochemical margins have fallen to near the breakeven. I understood that they should recover. We are seeing signs of recovery. And we have reason to believe that the situation could improve over the coming months.

During the second quarter we completed the debottlenecking of the aromatics unit at the Samsung plans in South Korea. We have increased the capacity by 25%, and it should be fully onstream in the third quarter. Our syn cargo (ph) utilization rate has continued to be good, roughly 90% across the system, which has helped our reserves in the quarter.

Arkema showed some improvement, as you may have seen, mainly because of stronger reserves from the industry held (ph) chemicals. And I show that we are on schedule with our plan for the spinoff in spring of next year.

On the corporate side, the balance sheet is very strong. Our net debt to equity ratio was 30% at the end of June compared to 24% at the end of March. This difference reflects several factors, including changes in working capital, paying the dividend, and buying back shares. Regarding share buyback, through the first-half of this year we bought back almost 2% of our shares, which is the largest proportion of forward buy backs amongst the majors. Since we started the program of share buy back in late 2000, we have bought back on average 3 to 4% of our shares per year. And so far we have reduced the number of shares by about 20%. I think that when we find good opportunities we, of course, are prepared to invest in the business. But otherwise we plan to continue using our free cash flow to buy back shares.

During the first-half of the year our CapEx was about $5.2 billion, which is a 17 increase compared to last year, and in line for the budget for the year. As you know, we will be presenting our mid year review in early September. And we will have more to say about the strategy and the outlook for the coming years when we meet with you then.

For the present I will say that we're pleased with the performance so far this year. Our strategy to grow the Company, while providing one of the best returns to shareholders in the industry, is working well. Related to that, I should remind you that you will pay -- we will pay our interim dividend in November, but the amount has not been set yet.

So this concludes my comments. And keeping in mind that I may ask you to wait until September for certain things, I am ready now to take your questions.

(OPERATOR INSTRUCTIONS). John Wright (ph).

John Wright with Citigroup in London. Two questions please. The first is I see that you have pulled out of the Novatek potential acquisition. Could you give some details on where that leaves you strategically in Russia? And what you're hoping to achieve going forward?

And the second point is on distributions, the balance between dividends and buy backs. We have seen other companies move their dividends higher and rebalance their distributions. Do you expect pursuing that sort of strategy going forward?

So you have seen that we decided to withdraw our application from the monopolies -- the Russian Monopoly Commission -- for the reason that we mentioned in our communiqué. Having said that, it is clear that Russia remains of course a very important oil and gas country. And for the future, if we have some good opportunity to develop our business in this country, of course we will be open to that. Keep it in mind that we will have to be very cautious, and also to limit our financial exposure in this country.

The second question concerning possible rebalancing in favor of the dividend. I just would like to remind you that over the last two years we have been at the top of the oil companies in terms of growth of the dividend, also in terms of growth of the profits. And as a consequence of that we have decided to increase strongly our dividends. And clearly it is our intent to continue to develop an active dividend policy.

Concerning the interim dividend, in fact, it should be fixed later on by the Board that will meet in November. But clearly we will continue to increase significantly our dividends, keeping in mind as the growth of our profits.

Nicole Decker.

It is Niki Decker at Bear Stearns. Would you break down please the effect of pricing and Ivan on second quarter earnings relative to a year ago?

Yes, just -- sorry. Concerning the analysis that we can give of the evolution of the production in second quarter 2005 compared to second quarter of 2004. The price effect was -- we are had a decrease of 3.7%. And the price effect was about -3.1%. In addition to that there is the impact of production shut downs due to hurricane effect and (indiscernible) parameter was something like -1%. So finally at the end of the day we had another positive in dollar growth, something like .5% (indiscernible).

Has production been restored at those platforms that were impacted by Ivan?

Yes. Now it is behind us. Yes. I think that we have recovered the production -- full production in May, something like that. So it is behind us.

May I ask you about the discovery in Congo. Could you elaborate in terms of reserves size, maybe proximity to Moho and Bilondo or the N'Kossa development?

I think it is too early at this stage. And by the way, I don't think that we have issued any communiqué. What I can say is that it should be a significant discovery. And we have in mind to -- we think that it could be developed as a satellite of N'Kossa. So you have to keep in mind that this is something that we think should be developed. But I think it is too early to give you now any figure concerning, with some previous decisions, the magnitude of this discovery.

Matthew Landstrom.

I just wanted to check if you could quantify the financial impact of the strikes and the extended maintenance in the downstream business in terms of a guide to how much profitability was impacted for the quarter?

I think the order of magnitude -- it was a negative impact of something like EUR100 million on the operating income. That is with pretax.

John Rigby.

John Rigby from UBS. Can you then just -- a quick sort of preview of your September segment in terms of obviously you made this investment into Canada. And do you see, or how do you see your CapEx profile looking over the next two or three years? Obviously there is the some specific (ph) CapEx to come with your acquisition. But you don't have to confirm (indiscernible) that your number for this year is 11 billion plus one is fine.

But we said for this year, 2005, that our CapEx budget was 12, remember, $12 billion including Novatek. will not have Novatek, but we have Deer Creek. The amount is about the same. So I think we still have in mind for 2000 CapEx in line with $12 billion. Yes, for the following years I think if I refer to our long-term plan, it should be something between 10 to 11 for the next two or three years.

And you're able to mitigate inflation, and there isn't much new activity coming into your (multiple speakers).

Yes, I think -- this of course takes into account some assumptions concerning inflation at this forward product prices. And we also having made some provisions to cover some new investments, yes.

Neil McMahon.

Neil McMahon with Sanford Bernstein. I have got a number of questions. The first one is really on the buy back trends. Could you say that we could be essentially looking at the same run rate in the second half of the year or higher and the same level next year, if we saw these sort of hydrocarbon prices? That was the first question.

The second one is really, given the new energy policy in the U.S., and you export gasoline over to the U.S. Have you looked at any changes to your mode of export, given the fact that MTBE no longer will be accepted as we go through into the middle of next year.

And then the third question was really around Deer Creek. And I wanted to know how you're going to process, upgrade and process and refine the bitumen from Deer Creek? And are you looking at any refining joint ventures with Midwest refineries to help you as that project develops going towards the end of the decade?

Concerning Deer Creek, in fact, what we have in mind that of course it is very preliminary, and this may change, what we may have in mind is more to build if it is -- it can be justified that we think it should be the case to build an upgrade there. And I would say that should come on stream at the end of the first part of the next decade. It is a type of thing that we have in mind.

Concerning buy back, concerning share buy back, for the first part of the year we bought back about .5% of -- we bought back about 2% of our shares. In the second part of the year we will have to pay interim dividends. We will have to pay the acquisition of Deer Creek. But apparently the oil price remains at a very high level. We should -- we expect a reduction of the working capital. So I think that we should be able to continue to make share buy back -- probably the order of magnitude shouldn't be very different if the environment remains like it is now, it shouldn't be very different from what we're doing the first part of 2005.

Concerning gasoline -- export gasoline in the U.S., I think that we have already made the necessary investments in order to be able to keep exporting gasoline to the U.S. I think in particular to the investment that we may in our Onvert (ph) refinery. And I think that we should be able to continue to export large volumes of gasoline to the U.S. like the years before.

Maybe just a follow-up question on Deer Creek. I was also just wondering what skills or technologies you could leverage from Surmont and Sincor in Venezuela to help you with the development of the Deer Creek mine, which I believe is the main part of the oil fan (ph) development there, which you really haven't had exposure to in the past.

Of course, there is -- if we confirm the root of the upgrading in Canada at least there will be this type of technology in common between Canada and Venezuela. In addition to that, we should have synergies between Deer Creek and our share in the Surmont project for the upgrading.

Concerning the production, it is another story. Deer Creek is -- in fact, a major part of the production should be through mining process, which is new, and minor part for Sagdy (ph). So Sagdy in fact, which is a technology that we don't use now in Venezuela, that we will use for Surmont There will be another type of synergy between Surmont and Deer Creek. And again in Venezuela now we have only what we call cold production, so it is another technique. And at least now there will be nothing in common for the production. Maybe for the future we will have something different in Venezuela, but this is not the case now.

Edward Westlake.

A question on Dolphin and also in on Angola. Obviously Dolphin is quite a key project. When do you actually expect it to come on stream? And then on Angola, obviously some good success in Block 32 and good success in Block 17. When do you expect a third hole for Block 17 and first production on Block 32?

Concerning Dolphin, I think that the completion should take place only by the end of 2006. And we should reach the full capacity -- and the full capacity production should be in the second quarter. Concerning now the first hole in Angola, I think the decision should be taken, if any. Of the first hole I think it is something that we think that the decision to launch the first hole might be taken in 2006, I think.

Concerning the production for the Block 32, I think it is clearly production that will come on stream with significant production at the very beginning of the next decade.

Paul Spedding (ph).

It is Paul Spedding from HSBC. I had two quick questions. Firstly, there have been suggestions that the Nigerian government is asking you to pay some back taxes relating to the failure to apply the sliding scale on offshore production. Have you made any -- A., is it true? B., have you made any provision for it?

The second question was on working capital. Could you give an indication of how much of the second quarter working capital build was special, i.e., not related directly to oil price or inventory effects? I'm only interested in what the trading division perhaps contributed to that.

In Nigeria there is no plan as far as I know to raise the taxes -- clearly. And concerning now the working capital, it is difficult to enter into in a lot of details. We mentioned that part of the working capital increase was due to trading operations. By the way, this should be reduced in the second part of the year. In fact, we tried to take advantage of the situation of (indiscernible) that we have had especially in the second quarter. But this might represent only of course part of the working capital increase.

By the way, in the EUR2.2 billion working capital increase in the second quarter of 2005, as we have to use now the FIFO accounting method, I think in these figure there is about EUR0.4 billion due to price effect on inventories. Without that, in fact the working capital increase is something like 1.7, 1.8. Let's say that about one-third of that might be due to trading activities, and the other part is due to many things. It is a lot of relatively small points that are generally linked to the increase in the oil price.

The Nigerian question related to the existing tax regime, apparently the Nigerian government believes that several of the joint venture partners in Nigeria have not been applying the tax rate correctly, and that therefore there is a relatively small amount (multiple speakers).

Quite frankly, we have regularly in Nigeria tax controls. And as far as I know, I don't think that we shouldn't have any difficulty of this nature in Nigeria.

Thank you.

I don't see any reason for that.

David Klein.

A couple of questions, firstly on Deer Creek. Can you say how the return you expect from the project stacks up versus conventional organic investments in your upstream portfolio at your referenced oil price, and maybe a higher oil prices too?

And secondly, just a clarification on the over lift situation in the upstream in that first quarter. Is what you're saying that the over life in the first quarter caused a corresponding under lift in the second quarter, i.e., the impact in the second quarter was -EUR150 million?

Yes, as in fact we were in a balanced situation at the end of June. So I think it is fair to say that the positive impact of EUR150 million in the operating income had a negative -- had as a consequence a negative impact of the same order of magnitude in the second quarter, clearly.

Concerning Deer Creek, first it is a very long-term project. And we have in mind a plateau of 200,000 barrels per day. But this plateau should be reached at the end of the next decade. And the profitability that we -- it is clear that such a project it is more a project suitable I would say with prices over $25 per barrel. So the profitability that we might expect could be to a certain extent lower than the profitability that we might have with a project that we are launching now, but it is very long-term project. I think it is fair to expect for the longer term that we should have oil prices above $25 per barrel.

In addition to that you know that for a very long-term project profitability is one thing, and the enrichment is also something very important that we have to take into account. But that we should have, I would say, a good profitability assuming an oil price of $25 per barrel.

Irene Emona (ph).

Given the current commodity price levels, I was wondering what tax rate you expect for the rest of the year, and whether you might be contemplating a review of your planning assumptions near term?

And a third question concerns Venezuela. Following the recent demands for extra tax for Sincor, I was wondering is the tax applicable to Sincor 2 clarified as yet and agreed, or is this an ongoing discussion and negotiation?

It is clear that for Sincor 2 it is still an ongoing discussion. I would prefer, by the way, to speak of discussion rather than negotiation at this stage.

Concerning the first question, the tax rate that we anticipate for the second part of the year should be in line with the one that we had for the second quarter. And your second question, in fact, was for the planning assumptions. And I think that it is something that we will cover in September.

Allister Simm (ph).

It is Alister of Merrills. Two questions. Just firstly on the chemicals, in Arkema you have seen pretty good results for first half. Is it is sort of up 6 forward on first-half last year. Can you sort of provide an estimate of how much of that is pricing, how much is currency, and how much of that is self-help?

And then secondly, just on the dividend. On the interim dividend last year you introduced a policy whereby the interim dividend is more or less 50% of the previous year's annual dividend. Should we expect something along those lines when you (multiple speakers)?

Concerning the interim dividend, I confirm this policy. Having said that, this will be of course discussed by the Board in November. And certainly we will have to keep in mind the good environment for this discussion for the basis of this discussion.

Concerning chemicals, and especially the recovery of Farimar (ph), I would say that in fact of course it is a mix of many things. It is clear that we have enjoyed the consequences of all the restructuring that was made before. Also the consequences (indiscernible) of some write-offs that were made in 2004 and 3. Concerning now the situation of the (indiscernible) activities of Arkema, but it is also a mix of many things. It is clear that the situation is extremely good for industrial chemical activities, especially acrylics.

Having said that, it remains bad for chloral (ph) chemical. So globally speaking certainly we have a positive impact due to a better chemical environment for Arkema in 2005 compared to 2004. But we also -- we have also enjoyed the fruits of all what we have done before.

(OPERATOR INSTRUCTIONS). Mark Gilman.

In reaffirming your 3 to 4% per year '04 to 2010 production growth, should we assume that implicit in that is the expectation that Deer Creek production will offset the loss of Novatek, or the absence of Novatek, which I believe was previously included in that forecast?

No, in fact, the 3 to 4% is without Novatek. But the impact of Deer Creek will be extremely limited before 2010. So I think that Deer Creek will not change our production profile between now and 2010. And in fact, Deer Creek will be essentially without significant contribution to the production after (ph) 2010. Where we should have first plateau of something like 100,000 barrels per day, that should take place at the beginning of the next decade. And after that a progressive increase up to 200,000 barrels per day at the end of the next decade. But I think it will not play -- it will not have a significant impact on the production before 2010.

Could I just ask two other production related questions? Could you give us an estimate of the kind of decline rate you would apply to your base North Sea production at this point?

I know that globally speaking the natural decline rate is something between 3 to 4% over the next two years. In this what is a specific situation of the North Sea, I think it shouldn't be very different in fact. But quite frankly it is very difficult for me to be more precise than that. But globally speaking keep in mind 3 to 4% at the level of the Company. But into the North Sea it should be approximately the same.

In response to a prior question, you indicated the impact of entitlements on production. I believe you said something like 3.7% in the second quarter of this year for (multiple speakers) past. I wonder if you might be able to give me a rough split on that in terms of the regional impact, presumably between the Middle East on the one hand and Asia and Africa on the other?

It is more and more difficult. I think where the price effect is the biggest is in the countries where we have production sharing contract of a buy back contract. That is to say essentially in Indonesia and in Africa we have Angola and Nigeria, and in the Middle East we have Eran (ph). And of course the impact is bigger for the countries where we have production sharing contract or buy back contract. But I think it is difficult to give you area by area. Yes, I have here with me all the details, but I think it is very difficult to give you country by country what is the price effects due to production sharing contract.

Jean Lucoment (ph).

CMC (ph) Securities. I was wondering in the E&P results, along with the impact of the end of (indiscernible) was there an increase in some unit costs?

You mean between 2000 -- the second quarter 2004 and 2005?

Yes. First quarter 2005 and second quarter 2005.

Our first and second quarter 2000 -- oh, yes, but it is relatively limited. In fact, there is no significant increase in the cost between the first and second quarter of 2005. I think the two main elements that we have to take into account is the price validations on one side and then, as I have already mentioned, the variation of the ratio sales divided by production. That is all more or less --.

John Rigby.

Sorry, just a couple of follow-ups there. First is, on the trading issue, --.

It is not really an issue. By the way, our trading activities are going very well.

Clearly if it is identifiable in your balance sheet, it is quite a big trade. Can we assume, given that was in your balance sheet at the end of the quarter, that you haven't recognized any profits, or conversely losses, on that trade at that -- the 30th of June or in the period of the 30th of June?

And the second question is just going back to Deer Creek. We have talked about upgrading, but do you have any ambitions, just to clarify, to go further down the chain and perhaps participate in refining as well in the Canadian region?

No, quite frankly I think firstly it is too early to speak of that. It is clear that we do not have any ambition to develop downstream activities in the North of America. But it is clear also that you know when you produce heavy oil in fact the essential (indiscernible) is generated at the level of the upgrading. And it is clear that we have the benefit of this economic trend that is given by the downstream operations. And this is our main concern. We have no ambition to develop as either refining or downstream activities in North of America.

Concerning trading, in fact, we just had an impact on the level of the working capital. Concerning the results, you know that for the trading activities we are always on a mark-to-market. And it is clear that the results of the trading operations decided in the -- every time, but especially in the second quarter, that as a consequence in increase in the working capital we have taken in the results of the second quarter. But quite frankly I can tell you, even if we do not disclose the results of our trading activities, that our trading activities have been very profitable, I would say, month after month. There is no doubt about that.

That's very good to hear. Thank you.

Mahar Tibia (ph).

Mahar Tibia from Scotia Capital. Can you elaborate on the conditions on a lockup agreements in regards to the Deer Creek transaction?

Yes. All lockup agreements I think -- may I suggest that you ask this question to our Investment Relation division. I think it is -- I would qualify that as a relatively hard look lockup agreement. But I wouldn't want to enter into a lot of detail. By the way, this should be disclosed very soon at that time we will hope the takeover, so probably in the coming days. There is I think it is a relative classical condition.

Dave Thomas.

It is Dave Thomas at Standard & Poor's EZ (ph) Research here. I have a couple of questions please. Firstly, on production you have talked about new production for 2006 and 2007. But I wonder if you can give some guidance please on the expectations for the remainder of this year, and the full year out fall? And a second question, is with regards to the dispute with BSCH on the steps. If you could provide an update on the situation there?

Concerning the dispute we with (indiscernible), I would say after we (indiscernible) I would say nothing new. You know that we are in the arbitration process. And the decision to grant of this arbitration is expected I would say for the coming months. So it is clear that we consume our strong position. You know I think the origin of the dispute with the Bank Corp (indiscernible) and it is clear that we will use all means -- I said all means -- to protect our interest. No doubt about that.

Concerning production growth in 2005. I told that we would have some starting ups by the end of -- in the second part of 2005. But I think having said that, the contributions should be relatively limited. And what I can say is that we do not anticipate for 2005 any significant growth of the -- any significant underlying growth in 2005 as a contribution of the starting ups that we will have for the end of 2005. We will have essentially a contribution for 2006 and following years.

(OPERATOR INSTRUCTIONS). You have no further questions at this time. Sir, I hand the conference to you for any final comments.

My last comments will be just to thank everybody for being with us today. And for some of them who haven't had their holidays, good holidays. And thank you again for being with us. Goodbye.

Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect your lines. Thank you.