TotalEnergies SE (TTE) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Total third-quarter results 2006 conference call.

At this time, all participants are in listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) Just to remind you all, this conference is being recorded.

I would now like to hand over to the chairperson, Mr. Robert Castaigne.

Please begin your meeting and I will be standing by.

Okay, hello and thank you for calling in.

As usual, I will comment briefly on the quarterly results, the environment, and our business segments, and then we will move directly to your questions.

Our adjusted net income for the third quarter was $4 billion, which showing an increase of 4% compared to the same quarter last year.

Our adjusted earnings per share increased by 6% to $1.72.

The third-quarter environment remained favorable overall.

Oil and gas prices were stronger.

Refining margins were lower than the very high level reached last year following the hurricanes in the Gulf of Mexico, but they were still good by historical standards.

Marketing and Chemicals benefited from lower refined product prices and robust demand, especially for Chemicals.

For the 12 months ended September 30, our ROACE was 32% at a business segment level, which excludes the retail investment in Sanofi, and 29% at the Group level.

This ranks us among the most profitable of the super majors.

Now, I will comment on each of the segments.

Upstream first.

Our adjusted net operating income expressed in dollars was down by about 3.5% in the third quarter.

This was, [I guess], largely because the increase in our oil and gas prices was more than [first] and offset by two factors -- first, the increase in the UK taxes; and second, the decrease in our production volumes.

The UK tax increase had an impact of about $260 million on the adjusted net operating income, which includes about $80 million for the tax increase related to the third quarter; and because this tax is effective from January 1, there is a charge of $180 million related to the first half of 2006 in the third-quarter accounts.

If we exclude this $180 million charge, then the third-quarter 2006 Upstream net operating income expressed in dollars would have increased by 6%; and the net operating income per barrel would have increased by 12%.

The other factor was production volumes, which were down by 5.5% compared to the third quarter of last year.

Essentially this was due to three main factors.

First, there was a price effect which accounts for 2.5% of the decrease.

Second, the ongoing unrest and shutdowns in Nigeria, which is another 2%.

Third, some assets sales mainly in the U.S., which was about 1%.

As we said in September, we are on the verge of returning to a long period of [strongholds].

We expect the Dalia FPSO to start up next month; and this project alone will represent about a 4% increase in our production.

We also expect the giant Dolphin gas project to start up in mid 2007, which will be another big boost.

And of course there will be several others.

On the subject of production, in August we projected 2006 production of close to 2.4 million barrels of oil equivalent per day, which was based on the assumption that the Brent price would have reached $60 per barrel in 2006, and the situation in Nigeria would remain at about the same level as we saw in the second quarter.

The good news is that we now expect Brent to have reached something more like $65 per barrel for the year.

The bad news is that we are seeing a bit more weakness in our oil production from the Niger Delta.

As I said, the Dalia project should start up in December rather than November.

This is not an issue for such a giant project, but it does have a slight effect on our numbers.

Also since we made the prediction, we are experiencing slightly higher shutdowns on some of our nonoperated fields in the North Sea.

So at this point I would add estimate that our 2006 production will be probably closer to $2.35 million of oil equivalent per day, taking into account both the price effect and these events.

For 2007, now, assuming Brent price of $60 per barrel, we continue to expect around 7% production growth, thanks to the contribution of our major project startups.

Obviously if OPEC uses a quota to support a higher oil price, this could have an effect on some of our production.

For the longer-term, and this is the important point, we have a rich portfolio of large development projects, and they are moving forward globally in line with budget and on schedule.

So we are able to confirm our 2010 production growth targets.

I think that the other point to keep in mind is that the ROACE for the Upstream segment was 39% for the 12 months ended September 30.

As a final point on the Upstream, we have recently negotiated a new contractual framework with the Bolivian authorities.

This should allow us over the long term to profitably unlock our very large resource base there.

At the same time, we have acquired Exxon's 30% interest in the Block 20; and this has helped us to consolidate our leading position in this major gas machine.

So now I would like to say a few words about the Downstream.

Despite a 35% decrease in our TRCV refining margin indicator, our adjusted net operating income expressed in dollars increased by 18% in the third quarter.

The strong third-quarter performance reflects mainly a higher refinery utilization rate, 92% versus 88% last year; improved conditions for our marketing business; and other positive market effects.

With this level of profitability, even with a high level of investments and lower refining margins, we have been able to maintain a very impressive worksheet of 28% in the Downstream.

Cash flow generation continues to be very strong, with the Downstream contributing more than EUR1 billion per quarter to our cash flow from operations, which is more or less equivalent to our buyback program.

For several years, the Downstream story has been focused on efficiency and cash flow generation.

Now, we have added some growth opportunities to this story.

The first of these growth opportunities is a new DHC, distillate hydrocracker, at the Normandy refinery which is starting up now after a series of tests on each of its units during the third quarter.

We will begin to see the positive impact of adding 50,000 barrel per day of light products in the first quarter.

Chemicals now.

Our adjusted net operating income expressed in dollars was sharply higher, showing an increase of 160% in the third quarter.

In addition to solid product demand, the base chemical business was helped by lower naphtha prices.

For the Chemicals segment, I should remind that Arkema is treated as discontinued operations since the spinoff.

By the way, I would like to say that Arkema has done very well in the market, which confirms for us that the spinoff was a very effective way to unlock or create value for our shareholders.

Finally, at the corporate level.

The effective tax rate was 55.5% for the first nine months of 2006, which is an increase of 2% compared to the first nine months of 2005.

This is due in part to the larger contribution of the Upstream to the results.

But the higher rate is mainly the result of the increase in the UK taxes which represents roughly an additional 1% at the Group level.

To keep things in perspective, our retail and equity for the 12 months ended September 30 was 34%.

So clearly, we are benefiting strongly from the environment.

We have announced that our interim dividend will be EUR0.87 per share, which in dollar terms represents approximately a 25% increase from last year.

This increase is about double the rate of dividend increase that we have seen from the other majors.

As the CFO of Total, I believe that steadily increasing the dividend is the strongest signal that we can send to our shareholders, a vote of confidence in continuing to grow profitably over the long term.

In addition, during the third quarter we bought back 20 million shares for about EUR1 billion.

This had the effect of maintaining our net debt to equity ratio within our target range of [35.50%]; and we ended September precisely at 20%, 26% gearing.

I should point out that our buyback program this year has been funded almost entirely by excess cash flow from operations.

We have not launched any major divestment programs or sold any of the $15 billion of Sanofi shares that we own.

When you compare returns to shareholders, looking at the buybacks and the dividend, as well as the spinoff of Arkema in our case, we rank among the best in the industry.

Thanks to our long-term growth profile, I believe that we will be able to maintain this type of performance over the coming years.

Now, before we go to your questions, there are just two points that I would like to cover.

First, I confirm that we are in line with our revised CapEx target of $14.5 billion, excluding acquisitions, for this year.

Secondly, our outlook for long-term growth.

We just announced a large exploration discovery, the Jura West, adjacent to our 100% owned Alwyn Area in the North Sea.

We think that this will represent more than 100 million barrels of oil equivalent net to Total.

This new field should start production in 2008, and it is a very good example of how we are able to add value on our existing mature acreage.

In addition to this discovery, we have had some very good exploration next success.

We presented a lot of this to you in September including discoveries in the Gulf of Mexico, West Africa, and Libya.

There have been more recent successes, notably in Indonesia with the probable extension of two fields, and in Angola with the confirmation of the 4th Pole on Block 17.

In the third quarter, our exploration efforts were complemented by two giant business development deals, Pars LNG in Nigeria and Ichthys LNG in Australia, which represent major additions to our portfolio.

Together, they represent about 1 billion barrels of additional resources net to Total at a cost that is very competitive with our finding costs.

Therefore, we are increasingly confident about our long-term growth prospects going forward.

So with that, I am ready now to take your questions.

(OPERATOR INSTRUCTIONS) Neil McMahon from Sanford Bernstein.

Two questions.

The first one is really just looking at your costs.

The increase in DD&A appears to have something to do with maybe an underlift position in the quarter.

I was wondering if that -- how much of that increase in DD&A we should think about adding to our models going forward in the Upstream division?

Then I have got another question on Bolivia.

Okay, it is true that we have [had] more than the list position with an impact of something like EUR100 million on the operating income for the third quarter.

Concerning DD&A, it is true that we had an increase.

You know, that it is something that we have to review and to analyze every year.

The increase that you may have noted is linked to many things.

The underlift that I have mentioned.

The inflation.

Also the cost of maintenance.

Also, maybe costs related to the starting up of some new productions such as Bonga, [Christine], Forvie, and Glenelg in the UK North Sea.

In the North Sea.

So we should expect at least some of that increase to roll forward into next year, especially as your new fields (multiple speakers)?

Yes, I think that we should have an increase of the DD&A globally in 2006.

But I think it is too early, because we have to measure that as it develops [here] in order to have a better appreciation of the average cost of maintenance to avoid also underlift positions that we could have at the end of certain quarters and so on.

Okay.

The second question was really on Bolivia.

We heard earlier -- I think it was last week -- from BG, who were actually pretty negative in terms of their commentary.

I don't want to speak for them, but in terms of their future investments in Bolivia.

Yet you seem to be nearly bullish in your attitude to that.

Indeed, I think I heard you right, that you had bought Exxon, some of the Exxon position there as well.

Can you tell us [what] -- you signed a different type of agreement to that of BG, or what you see in Bolivia going forward that might be different from some of the other companies?

Yes.

When you say that we were bullish, I would prefer to say pragmatic.

What is true is that we have negotiated -- for all the reserves that we have discovered and that have not been developed yet -- a new contractual framework that enabled us to have satisfactory economics to develop these reserves, given the new context that we have now for the gas prices.

This is why, I think, this has to be considered as a good news.

Now, I think it is a bit too early to say more.

We have now to assess the development, to look what could be the outlets for this gas that we have discovered, that is still waiting for being developed.

After that, we should be in the position to give you a better flavor of these potential developments.

That is all.

So, I think globally, this last move in our negotiation with Bolivia is more positive than we could have imagined before.

I think that we have now to study the best way to develop these reserves.

By the way, the contract that we have signed has to be ratified by the Bolivian Parliament.

Just as a bit of clarification, is it a Company-specific contract or is it a contract on a field by field basis?

Or is this a blanket contract for the entire --?

No, I think it is a contract which is specific to the permit that we have.

Fine.

That's what I thought.

Okay then.

Thank you.

Jonathan Wright from Citigroup in London.

Two questions, please, if I can.

The first is on your production target.

You have kept the 7% volume target for next year.

Is that just a reflection of a cautious view for next year?

Or has anything slipped, given that you've got a lower starting point coming out of this year?

The second question is to do with the Downstream.

You have referred to some other positive market effects benefiting your Downstream result.

I wonder if you could perhaps give us a bit more detail.

Does this sort of represent inventory hedging gains or some trading benefits in that division?

No, I think this is without -- I will answer to the second question.

As you know, we always exclude the stockholding gains or losses.

Clearly, we had some positive effect with our marketing operations.

In our trading, we prefer to speak of good supply optimization, which as understand is a wording that is used by some of our peers to say that the trading activities were not so bad.

So I come back to the first question concerning the production.

Yes, we prefer to maintain 7%, or around 7%, even if the 2006 figure will be lower.

Because I think we have to take into account many things.

So I think you're right to say that we have preferred to be on the safe side.

The idea is to give maybe more information in February after we will have some additional information.

Okay, thank you very much.

Neil Perry from MS in London.

Can you talk about the plant reliability, this 92%?

Is that just a very good quarter which comes around occasionally?

Or is there something that you have been doing in order to kind of consistently improve plant reliability?

Do you think that -- what sort of number are you targeting for the Downstream in terms of plant reliability in the future?

I think first I will answer the first question. 92% is an improved rate of utilization.

I think that this is still lower than the one we had in our budget. [But] just that maybe was a little too optimistic.

What I see is now our plants are more and more [solicited].

I think that we should be able to have more than that.

But probably we should be more cautious than we used to be in our past budgets.

So I think 92% is a good figure; normally, we should be able to do a little more, but not significantly more.

Okay, thank you.

Can I just ask one other thing?

Which is, is there any update on your position vis-a-vis the Sanofi stake, given the tax changes that benefit you?

No, no, no.

I think the idea is still to divest progressively [and] opportunity.

By the way, the share price has decreased by a few percent after their last communique.

I think we are still very, very confident with this company despite the Plavix issue, despite the launch of the Acomplia for the [multi-lee].

I think we are still very positive with the future of this company, and clearly we would expect better time certainly before we decide to sell something.

Okay, thank you very much.

Matthew Lanstone from GS in London.

Two questions on the Upstream, please.

First, on the underlift issue, you mentioned that that hit operating profit by about EUR100 million in the quarter.

Is that underlift effectively offsetting overlift in previous quarters?

Or would you expect a reversal of that, and therefore a positive contribution of about the same size in the fourth quarter?

Then on Nigeria, in terms of your 7% volume growth target for next year, what are you assuming in terms of disruption volumes impact from Nigeria?

Then finally on Sanofi, reiterating part of Neil's question, I guess, in the event that you do go for a material disposal in the tax-free window next year, have you considered mechanisms for utilizing that cash?

Are you likely to consider a special dividend?

Will you accelerate the buyback?

Or will it just go into the general pool of available cash flow for standard use?

Concerning the underlift position, the idea, yes, is that we finish the year with a balanced position, which is not always easy to achieve.

But more or less, this is what we have in mind.

Concerning Nigeria, the 7% assumes same situation in terms of shutdown linked to difficulties with local communities in 2007.

The impact of these shutdowns is something between 40 to 45,000 barrel target.

Concerning Sanofi, you mentioned -- you said something like a tax window.

By the way, (indiscernible) we cannot speak of a tax window.

It is a decision that has been taken without any limit.

Again, what we have in mind is more -- if we think that the share price is good enough to divest progressively, and I would say very progressively, [any] opportunity.

The idea is more to use the proceeds of such a disposal to feed our buyback unless we have an opportunity to make a special investment, which is something that we do not have in mind.

By the way, I think in any case, it would be extremely difficult to try to combine the new acquisition with some disposals of our Sanofi shares.

That's terrific.

Thank you very much.

Irene Himona from BNP in London.

One question on the Joslyn field.

I was wondering if there is any guidance, any comment you can make on the cost structure, whether technical cost or breakeven oil price that a project like that might require?

Then secondly, just guidance on the Group tax rate going forward in the current pricing environment.

Thank you.

Concerning Joslyn, there are a few things that I can say.

Maybe the easiest way to answer your question is to tell you that Joslyn, including development and upgrader, should have a good profitability with an oil price, let's say, something between $30, $35 per barrel. [Gross] of $35 per barrel, this is what we have in mind.

Concerning the tax rate that we may have in mind as [attendance] in the present environment, it is something which is not easy to answer.

Because it depends, of course, on the tax rates of every segment of activity, and also of the weight of the different segments.

So may I suggest that you take something like 60% for the Upstream, and 33% for Downstream and Chemicals?

I think more or less, it should stick with what we have in mind, given the present environment, for the future.

Thanks very much.

[Hugh Williams] from Cazenove in London.

I have got two questions, both on your overseas assets.

Firstly, on Argentina, where it be nice if you could give us some update maybe on how you are seeing the situation changing as prices maybe [tend] to normalize both in the gas area and in the [oil products] business.

Then secondly, on Russia, and if you could just please give us an update on what do you think is going on at [Khariagaz], please?

Khariagaz, first you know that the situation for us in Khariagaz is relatively modest, as our share in the production is about 8,000 barrels per day.

Concerning the environmental issues in Khariagaz, you have to know that in fact all the main decisions are taken under the jurisdiction of a joint committee, which comprises representatives of the government and of the administration of natural resources.

So, I think that we are doing well with the production that we have with Khariagaz.

We are confident that we should continue to operate like we have operated in the recent period.

Concerning Argentina now, I think more globally speaking we continue to have, I would say, good business for our production of oil and gas with some, I would say, good results as well to try to validate our discoveries.

And what we may see is on one side, demand should continue to increase, given especially low price that speaks to for the domestic usage.

And on the other side, the demand production, that should remain at a modest level, given namely the relatively low gas price that we have in Argentina, especially for domestic uses.

So in this context, it is clear that we may have some tensions between production and demand in order to have production sufficient to satisfy the increases of the demand.

But on our side, I think up to now we have always been able to manage our situation.

We will see, as the evolution of the market in the new context that we have [got until] now.

Okay, that's great.

Can I ask you one quick follow-up?

If you could just maybe give us an update on your current approach to Russia, and whether that still remains a potential key target area for you going forward in the Upstream business?

On the current approach to Russia, globally speaking we must admit that we have been disappointed by the decision taken by Gazprom for the development of Shtokman.

Again, Russia is still a country with a lot of oil and gas reserves.

It seems that it is more and more difficult for a foreign company to have access to some of these reserves.

So fundamentally, we cannot ignore this country, given the huge potential.

We will see in the future if we have the possibility to do something with, I would say, an acceptable financial exposure -- why not?

But clearly now we don't see what could be the possibilities that could be offered to companies like Total.

Great, thank you very much.

Jon Rigby from UBS in London.

A couple of questions.

First, can I just ask whether part of your caution for next year in terms of production lies around the sort of surprising level of maintenance interruptions and reliability problems you have had with your existing production portfolio in the Upstream?

Then secondly, can I just go to Chemicals?

There is a small restructuring charge I see in there.

Is that a presage for something more radical to take place within the Chemicals division in terms of restructuring or something else?

Concerning a Chemicals restructuring, we had to take some provision to cover the cost of restructuring, as well as some write-offs and some provisions, especially for environment, which is always the case.

The question that maybe you were asking is that, why you're restructuring as the market is improving?

In fact, we have -- though it is clear that the market is better now, it will be worse tomorrow.

I think that globally speaking -- it is a way, by the way, we manage the Group -- we have to look after all our costs in every segment of activity, and to check that in any case -- (indiscernible) to check that we are always with a good competitive position with our competitors, namely.

(indiscernible) that in Europe, some of our production cost in petrochemicals were a bit too high because some of our plants were becoming relatively old.

I think it was very important for us to improve this situation and to concentrate some production in the more modern plants; and in some cases, by the way, even to increase the production capacity of the better plants.

And in some cases, also, to accept to close the older plants.

So this is why we have decided to implement for our petrochemical business in Europe that was -- that is in some cases relatively weak compared to the competition.

The first question concerned the guidance for 2007 and the reasons to be cautious.

The reasons to be cautious, it is something, by the way, that I have sometimes the opportunities to say in some previous meetings with analysts.

Is that there is something which is relatively new in the North Sea, where it is an area which is rather old, with plants that for some of them are pretty old, 10, 20, maybe 30 years.

It usually also involves productions that are high-tech productions involving some technical challenges.

We are seeing for such productions after three or four years after the starting up, a lot of small difficulties.

It may be a failure in a heat exchanger, in a flare.

I think that usually the consequence is a shutdown of three or four days.

But we must admit that recently we have had a lot of these small difficulties.

This is why we think that maybe we have to be more cautious when we decide to take rate of effective production compared to theoretical production capacity.

In this way, in fact, we were led to be maybe cautious, because I think it is justified.

It was justified to do it.

I would like to adjust a little the figures that I gave a few minutes ago to Irene concerning the Upstream tax rate.

I mentioned 60%; in fact, after the recent tax increase in the UK, 62% should be more appropriate.

So, next question?

Robert Kessler from Simmons in Houston.

Follow-up question if I could on the oil sands economics.

I wanted to see if you could perhaps provide some gross CapEx estimates for the three main components to your oil sands venture for Joslyn, for Surmont (multiple speakers)?

All gross CapEx, we have in mind some $6 per barrel for the CapEx.

So this was a depreciation element for 2P reserves. $6 per barrel.

And the 2P reserves, is that the 2 billion barrel figure quoted in the Joslyn release?

Yes.

This, of course, includes the upgrader.

In addition to that, there will be the operating costs, of course.

Can I confirm that the upgrader plans include a gasifier as well?

This is why we have in mind, but it is a bit too early to say that; and it is under study.

It is clear that one possibility could be at the same time to produce gas that could be used for the production of the oil.

But clearly it is too early to say that.

But I think it is something that we study and that we may have in mind, yes, in order to reduce dependence to the gas price.

Thank you very much.

(OPERATOR INSTRUCTIONS) Neill Morton from Man Group in London.

Just a couple of questions, please.

Firstly, I am just trying to understand better your Upstream result in the third quarter.

If I compare it with Q2, where you essentially got flat production, little change in [tons], little change in realizations.

But yet your Upstream revenues are down sharply; your EBIT is down EUR400 million partly due to underlift, as you mentioned.

But also your post tax cash flow is down close to EUR800 million.

Could you perhaps shed some light on that?

There are a few things that we have to take into account.

First, I would not want to enter into a lot of details.

We have to take into account the underlifting position, which is a part of the explanation.

Something like EUR120 million.

In addition to that, you have the impact of the UK taxes.

The impact of the UK taxes is something like $180 million.

With one-third just due to the third quarter, and two-thirds due to the supplement of UK taxes related to the first part of the year.

Because you know that the change took place at the end of July, but with an effect at January 1, 2006.

In addition to that, as I say, there is of course a little bit of inflation; an increase of the cost of exploration.

It is not because our success rate was lower, but we had more exploration expenses.

Also, the starting up of new fields with higher costs.

So if you want to ask the detail of the contribution of all these elements, may I suggest that you call our IR department and you will be provided with all these elements.

Okay, that's fine.

Just to confirm --.

I have the list with me; but I think by telephone it is a bit difficult to explain every element.

But it is all these factors that explain the differences.

That's right.

Just to clarify the UK tax increase, is that above the EBIT line, or below?

I assumed it was below.

Is it, your question?

The UK tax increase, I assume that was not included in the EBIT line.

(indiscernible) It is below the EBIT line, yes, absolutely.

Just a quick follow-up.

There is also a sharp increase in your net interest payments in the third quarter relative to the second.

That does include product losses, for example?

I have to appreciate, by the way, that you have studied really carefully our figures.

It is true, that in the third quarter there has been a correction of something like EUR50 million, that, in fact, should have attributed to the second quarter due to a pricer.

We have changed in fact the pricer to evaluate the financial swaps.

This is the origin of this correction that we had to introduce in the third quarter.

So therefore (indiscernible) there is a correction of EUR50 million that should have been attributed to the second quarter.

In addition to that, there have been maybe very small increase of interest.

But fundamentally there is a correction of the second quarter that has been attributed to the third quarter.

That's very clear.

Thank you.

Lucas Hermann from Deutsche Bank in London.

Very briefly, Venezuela, your friend Hugo Chavez seems to be at it again.

I just wondered what the position of [Syncor] was as regards OPEC production cuts, in light of the comments that any cuts that are made in Venezuela will be focused on the heavy oil projects?

I would like to tell you that by contract, by the way, Syncor is out of the scope of the OPEC production that could be applied by Venezuela.

But I think that globally speaking, up to now, the production of Venezuela is still significantly under their OPEC quota.

I think it is something that we should check; but by the way, we do not expect any difficulty.

So you don't expect any reduction at all in production from Syncor as a consequence of the -- not quota cuts but production (multiple speakers)?

For the time being, by the way.

For the time being, yes.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) We don't seem to have any more questions at this time, sir.

I will hand the conference back to you.

Okay.

So I just would like to thank you, everybody, for being with us today, this morning or this afternoon.

Again, I think you know that we are organizing an event in November, so maybe we will have some opportunity to see some of you during that time.

So thank you very much.

Goodbye.

Ladies and gentlemen, thank you very much for your participation today.

This concludes today's conference.

You may now disconnect your lines.

Thank you.