Management provided guidance that demonstrated continued progress in capturing industry cost deflation and improving operating efficiency.
By Allen Good, CFA | 09-23-16 | 03:00 AM | Email Article

 Total's annual investor day revealed little new information about the company that meaningfully changed our view, as is usually the case with these events. However, management did provide updated guidance items that demonstrated continued progress in capturing industry cost deflation and improving operating efficiency. Most notable were the company's revised capital spending guidance, which was reduced by about $2 billion per year for 2017-20 to $15 billion-$17 billion per year, and an increase in annual cost savings to $4 billion from $3 billion by 2018. However, production growth targets are largely unchanged. The upstream segment will do the heavy lifting to achieve that cost savings target, including driving production costs to $5 per barrel of oil equivalent in 2018, an impressive 50% decrease from 2014 levels. The culmination of its efforts will be to bring its cash break-even level to $55/barrel in 2017, including the scrip dividend, positioning it to pay a full cash dividend at $60/bbl. While improved, these prices are still well above what our forecast and strip prices imply for next year. However, Total anticipates break-evens continuing to fall during the next several years, reaching $45 by 2020. We plan to incorporate the updated guidance into our model and expect a modest increase in our fair value estimate. Our moat rating remains unchanged.

Allen Good, CFA, is an energy strategist for Morningstar.

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