TotalEnergies : Conference call transcript

JULY 28, 2022 / 12:30AM CEST, Half Year 2022 TotalEnergies SE Earnings Call

CORPORATE PARTICIPANTS

Patrick Pouyanné TotalEnergies SE - Chairman & CEO

Jean-PierreSbraire TotalEnergies SE - CFO

CONFERENCE CALL PARTICIPANTS

Amy Wong Crédit Suisse AG, Research Division - Research Analyst

Bertrand Hodee Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research

Biraj Borkhataria RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst

Christopher Kuplent BofA Securities, Research Division - Head of European Energy Equity Research Christyan Fawzi Malek JPMorgan Chase & Co, Research Division - MD and Head of the EMEA Oil & Gas Equity Research

Henri Jerome Dieudonne Marie Patricot UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

Irene Himona Societe Generale Cross Asset Research - Equity Analyst Kim Anne-LaureFustier HSBC, Research Division - Analyst of Oil and Gas

Lucas Oliver Herrmann BNP Paribas Exane, Research Division - Head of Oil and Gas Research Lydia Rose Emma Rainforth Barclays Bank PLC, Research Division - Director & Equity Analyst Martijn Rats Morgan Stanley, Research Division - MD and Head of Oil Research

Paul Cheng Scotiabank Global Banking and Markets, Research Division - Analyst

PRESENTATION

Operator

Ladies and gentlemen, welcome to the TotalEnergies Second Quarter and First Half 2022 Results Conference Call. I now hand over to Patrick Pouyanné, CEO; and Jean-Pierre Sbraire, CFO, who will lead you through this call. Gentlemen, please go ahead.

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Patrick Pouyanné TotalEnergies SE - Chairman & CEO

Hello, everyone. Patrick Pouyanné here. I'm happy to join you today for this call to comment our results, together with Jean-Pierre, on how TotalEnergies is taking action to take the most out of the very favorable environment for energy companies. I will also comment, of course, the actions we are taking to execute and deliver on our strategy in such an environment. And Jean-Pierre will review the results, and then we'll go to the Q&A.

So of course, the environment is very supportive, the price of oil, the price of European gas, the price of LNG and the refining margins for this quarter. It is the first time in 25 years in the industry that I am observing such an environment where all segments of our Company are benefiting at the same time of strong prices or margin. As Jean-Pierre will show you, our ability to fully leverage the commodity price environment is significantly strengthening our balance sheet and increasing our cash flow to record cash flows for a quarter, and we are performing very well and using this opportunity to accelerate our

JULY 28, 2022 / 12:30AM CEST, Half Year 2022 TotalEnergies SE Earnings Call

transformation and benefit our shareholders.

TotalEnergies is indeed fundamentally a commodity company, and we recognize that we are high in the commodity price cycle. On the supply side, the global system will struggle over the coming year to develop additional spare production capacity for both oil and LNG, and this implies medium-term support for high prices. On the demand side, global demand is increasing as economies continue to reopen, but the threat is a potential slide into recession because of inflation.

The Russia-Ukraine conflict and sanctions have pushed refining margins for this quarter to the sky. They have been falling quite sharply in July, but still remain high. This obviously had a strong impact on gasoline prices at the pump for our customers. And in this context, TotalEnergies extended the fuel price reduction program for its entire network in France through the end of the year. We prefer indeed to share the benefit immediately and directly with our customers rather than to make ourselves a target for additional taxation in this current environment.

Ultimately, energy prices, and we should not forget this, are cyclical. So we do not expect to remain at the top of the cycle for the long term. We have been through this type of cycles before, and we're taking a balanced approach to best execute and deliver on our strategy to profitably grow the Company through our energy transformation.

Our first priority, as you know, is to invest in the Company to prepare the future. And in this period of strong cash flow generation, as explained to you in April, the Board is giving priority to accelerating the transformation, potentially through countercyclical opportunities, and this is what we are doing. In the second quarter, we have announced 3 major new opportunities, which will join our portfolio: our entry into Qatar giant North Field Expansion for LNG; the acquisition of a 50% stake in Clearway, the fifth largest U.S. player in renewable energy; and a new venture in India in partnership with Adani for green hydrogen production. We have managed to have access to these new opportunities in very good conditions because of the relationships and the strong positions we have developed in key growth areas.

We are also acting opportunistically at a more tactical level by, for example, moving to floating LNG regas terminals to France and possibly Germany, where we are already maximizing our position as the largest LNG regas provider in Europe. We also are accelerating development of short-cycle projects, for example and notably, to increase gas deliveries to the European market from the North Sea, but also on the oil side, for example, in Angola, with several infill wells on Block 17, on Girassol, and Rosa.

By the way, Angola will be another showcase of our multi-energy strategy as we are just sanctioning many different projects. Two oil projects, each of 30,000 barrel per day capacity, CLOV 3 on Block 17 and Begonia on Block 17/06. The first non-associated gas projects on the fields of Quiluma and Maboqueiro in order to fill Angola LNG plant and deliver more LNG to Europe and Asia and the first solar plant 45 megawatts in partnership with Sonangol.

As a result of the acceleration of our transition, like we announced in last April, our first half 2022 CapEx

JULY 28, 2022 / 12:30AM CEST, Half Year 2022 TotalEnergies SE Earnings Call

were close to $8 billion. And we now anticipate that the 2022 CapEx will be in the range of $15-$16 billion, probably close to $16 billion rather than $15 billion depending on the timing of acquisition and asset sales. I remind you that in March, we gave a guidance of $13 - $16 billion for the years 2022-25. So close to $16 billion is in the range, as I answered to a question during the last call.

The Qatar LNG deal will contribute obviously to our future LNG growth. And thanks to this new addition to our portfolio, we maintain our growth ambition in the LNG segment despite a decision not to invest anymore in any new project in Russia.

A word on Russia. As you have observed, we implemented our principle of actions announced on March

22. And we are exiting fully from the oil business, both production and trading, with the recently negotiated exit of the Kharyaga oil field during the last quarter. TotalEnergies recorded in its second quarter account a new $3.5 billion impairment related to the potential impact of international sanctions on the value of its stake in Novatek. Russia represents about 5% of our capital employed and cash flow and starting with the Investor Day in September, we will present our strategic plans for TotalEnergies in future without taking Russia into account. Fundamentally, that will change some volume figures, for example, the production of 2022 would be 2.3 million barrels oil per day, but not the global financial performance nor the return to shareholders growth. More details will be given to you at the end of September at the strategic presentation.

Also, a priority at the level of the Board is increasing shareholder return to reflect the current environment and strong cash flow generation. The Board approved the second interim dividend of $0.69 per share, an increase of 5%, supported by the underlying or structural growth in our cash flow. Plus another tranche of share buybacks of $2 billion for the third quarter, which will represent globally between the fourth quarter 2021 to the third quarter 2022, a global amount of 5% of our market cap, which will have been bought back. You can deduct from this guidance of $2 billion for the third quarter, the same rate but in the second quarter but doubling the rate of the first quarter buyback, that the buyback should reach at least $7 billion for the year 2022, and I can come back on that.

On a relative valuation basis, frankly, on any reasonable basis, by the way, the TotalEnergies share price is compelling particularly in light of the dividends we are paying, and that we never cut.

Now I will leave Jean-Pierre presenting, and he is quite happy, a strong set of results. It will be an easy exercise for him today. But let me just summarize what I just told you. Yes, we are in a clearly very positive and dynamic environment marked by elevated commodity prices. This may persist for the medium term in our view. The Company is demonstrating its capacity to leverage such a positive environment in all the indicators, in particular in terms of cash flow generation, and we will act accordingly to maximize performance with our strategic objectives and financial discipline to allocate capital to energy transformation, to return value to shareholders and of course, to maintain a strong balance sheet for the future.

Jean-Pierre, the floor is yours.

JULY 28, 2022 / 12:30AM CEST, Half Year 2022 TotalEnergies SE Earnings Call

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Jean-PierreSbraire TotalEnergies SE - CFO

Thank you, Patrick. So reported IFRS net income for the second quarter of '22 was $5.7 billion, which takes into account the $3.5 billion impairment that Patrick mentioned. Adjusted net results were $9.8 billion, up 9% from the first quarter. Earnings per share were $3.75, up by more than 10% with the benefits of buybacks. The second quarter and first half results reflect the dramatic increase in oil, gas and LNG prices as well as record refining margins over the second quarter.

Debt adjusted cash flow was $13.6 billion, an increase of 14% from the first quarter and double the level of the same quarter last year. For the first half, cash flow was $25.6 billion, again doubling the same period last year and strong enough to cover the full year '22 CapEx plus dividends. This illustrates the leverage that TotalEnergies as a low-cost producer has to the strong commodity price environment in terms of free cash flow generation.

Operationally, upstream oil and gas production decreased by 100,000 barrels of oil equivalent per day to

2.7 million in the second quarter from 2.8 million in the first quarter. This is mainly due to higher planned maintenance and production cuts in Nigeria and Libya that were partially offset by the entry into Sepia and Atapu fields in Brazil. We expect planned turnarounds to be about 40,000 barrels per day higher in the third quarter than in the second quarter and production to be stable at the level of the second quarter, thanks to ramp-ups from the new projects. In the downstream oil business, refinery throughput was 1.6 million barrels per day in the second quarter, and the utilization rate increased to 88%. We target the same high utilization rates for the third quarter.

Looking now at the results by segments. iGRP, Integrated Gas, Renewables & Power is the growth engine of the Company. Adjusted net operating income was $2.6 billion in the second quarter, 3x the level of the same quarter last year. Excellent performance but down $500 million quarter-to-quarter mainly due to decrease from the exceptional high contribution from gas, LNG and electricity trading in the first quarter. iGRP cash flow was $2.4 billion in the second quarter compared to $2.6 billion in the first quarter.

Important to point out that cash flow from operation in the second quarter was $4 billion, reflecting a reversal of the margin calls and working capital changes in the first quarter. LNG sales were 11.7 million tonnes in the second quarter, down from 13.3 million tonnes in the first quarter due to lower spot sales, but the 1Q was a record spot sales quarter. The average LNG selling price increased to $14 per MBtu in the second quarter, in line with our guidance ,and is expected to increase to more than $15 per MBtu in the third quarter, given the evolution of oil and gas prices and the lag effect on price formulas.

Gross installed renewable power generation capacity grew to 11.6 gigawatts at the end of the second quarter, up 0.9 gigawatts in the quarter, including 0.4 gigawatts related to the start-up of the first phase of the Al Kharsaah solar project in Qatar. Including the pipeline of development projects, our renewable portfolio has grown to more than 50 gigawatts of gross power generation. So we are very confident that we can achieve our 2025 growth target of 35 gigawatts.

JULY 28, 2022 / 12:30AM CEST, Half Year 2022 TotalEnergies SE Earnings Call

E&P is performing well in this environment and contributed $4.7 billion of adjusted net operating income in the second quarter, which corresponds to return on average capital employed of more than 20% over the past 12 months. This quarter is a bit lower, down 6% from the first quarter, mainly due to the lower production and the impact of sanctions on the result of Russian assets. Cash flow was $7.4 billion in the second quarter, slightly above the very strong performance of the first quarter, and reflecting the higher liquids price, which was partially offset by lower gas price realization and lower production volumes.

Downstream performed impressively as well, a reminder of the importance of the integrated model, generated $3.2 billion of adjusted net operating income and $3.5 billion of cash flow in the second quarter as it increased refined product volumes to fully capture record high margins in the context of reduced imports of Russian products, plus the exceptional result of trading 2 quarters in a row, $500 million.

At the Company level, adjusted net operating income was $18.8 billion for the first half, which represents an annualized return on capital employed of more than 25%. Operating cash flow before working cap changes was $24.9 billion in the first half '22 or more than twice what we generated in the first half of last year.

Our net investment in the first half were $7.8 billion. We are able to reduce net debt by $4.1 billion to $13 billion at the end of June, so our gearing is below 10%. And in addition to paying the dividends, we bought back, as Patrick mentioned already, $2 billion of our shares during the second quarter as announced.

The Company is financially stronger and operationally performing better than anyone here can ever recall. While we do not expect this environment to last for a long run, the reality is that we are using this time to fortify the balance sheet, accelerate the transformation and return value to our shareholders.

And on that point, I think we are ready for the Q&A.

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Patrick Pouyanné TotalEnergies SE - Chairman & CEO

So the floor is yours.

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QUESTIONS AND ANSWERS

Operator

(Operator Instructions) We have a first question from Christyan Malek from JPMorgan.

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Christyan Fawzi Malek JPMorgan Chase & Co, Research Division - MD and Head of the EMEA Oil & Gas Equity Research

First question I have is just around your CapEx guide. It seems to be sort of a long-term target, which you've clearly reached the top of. Could you provide any guidance around how you're going to think about capital allocation in the medium term, particularly as it pertains to your CapEx profile both in terms of the absolute level given your absolute right to take advantage of countercyclical investments, but that could come at