Total to start 'soft landing' from years of record capital spending

LONDON/PARIS Mon Sep 23, 2013 1:52pm BST

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LONDON/PARIS (Reuters) - Total will start a "soft landing" next year to scale back heavy capital spending while keeping long-term output targets and generating greater cash flow, the French oil major said, raising investor hopes of higher dividends.

Taking advantage of strong oil prices, now around $109 a barrel, Total has made the highest investments in its history over the past three years, drilling in areas that are hard and costly to explore.

"We've been through the past years developing a strategy based on relaunching an important investment programme. We considered that Total was lacking reserves and production," Chief Executive Christophe de Margerie said on Monday.

He told the group's annual investor day conference in London that this had been reducing Total's free cash flow before divestments and added that the company needed to return to a capital spending policy more in line with its size.

"I call it a soft landing," De Margerie said.

The group's organic capital expenditure between 2015 and 2017 will fall to $24 billion (14 billion pounds) - $25 billion per year, down from around $28 billion in 2013, chief financial officer Patrick de La Chevardiere said.

Societe Generale analysts said in a note that Total's upstream capital spending of $23 billion in 2013 (and total spending of $28 billion) represented an all-time high for the group and compared with exploration and production expenses of $4.7 billion 10 years ago, and $13 billion spent in 2008.

One reason behind the capital spending cut was a decision to pull out of the long-delayed Voyageur Upgrader oil sands projects in Canada, CFO de La Chevardiere added.

Investors were eager to know how the higher net cash flow available, which its CFO said would stand at about $15 billion by 2017, would translate into dividends.

The group did not elaborate on where the dividend could stand, saying the group would stick to a policy of "competitive returns to shareholders".

Its policy has been to distribute half of its net adjusted profits to shareholders, which would suggest higher dividends will be possible as capital spending tapers down.

"In the long-term strategy of Total there is this wish to keep our free cash at a sufficient level, to keep this strategy of competitive dividend for shareholders. At the same time we don't intend to have a negative gearing just to have free cash, we still need to invest," De Margerie said.

Shares in the group, Europe's No. 2 integrated oil and gas company by market value after Royal Dutch Shell, were up 1.2 percent by 1015 GMT, outperforming a slight decline in the European oil & gas sector.

PRODUCTION GROWTH

The group also confirmed an oil and gas production target of 2.6 million barrels of oil equivalent per day (boepd) in 2015, and a potential for 3 million boepd in output in 2017.

Output slid by 2 percent to 2.3 million boepd last year, as Total struggled with a gas leak at the Elgin field in the North Sea, but the group posted its first quarterly rise in production in three years earlier this year.

Total is counting on projects such as the giant Kashagan gas field in Kazakhstan, which started production earlier this month, to meet its production target.

The Ekofisk South project in Norway and Laggan-Tormore off the coast of the Shetland Islands in the North Sea, are also set to start producing next year.

In parallel, its exploration programme continues, with more than 15-high-potential wells planned by the end of 2014, in places such as the Gulf of Mexico, Iraq, Brazil and Angola, the group said.

Its CFO said the group, which has a 2012-2014 asset sale target of $15-20 billion, would be "closer to 20 billion than to 15."

(Additional reporting by Muriel Boselli in Paris; Editing by Sophie Walker and Anthony Barker)

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