Oil price surge lifts TotalEnergies in Q2, but 2021 production poised to fall

France's TotalEnergies posted a strong showing in the second quarter of 2021, aided by the "progressive recovery" of global oil demand, but its hydrocarbons production fell because of major maintenance shutdowns, it said July 29.

The company also said it will be looking closely at reducing the carbon intensity of its hydrocarbon projects as it looks to relaunch some short-cycle projects in 2022.

The sharp boost in oil and gas prices helped generate more cash flow for the French energy major, as it plans share buybacks and hopes to broaden its energy base by expanding its renewables and electricity business.

Speaking on a conference call, TotalEnergies CEO and Chairman Patrick Pouyanne said the company had managed to capture the benefits of a positive economic outlook and a higher oil price environment.

"I am confident that we are back stronger than we were before the crisis, thanks to the action plans implemented in the last year," Pouyanne said. "Given our stronger financial position, we are ready to move on the right path. ... [We will continue] investing to maintain the powerful cash flow machine of today and to develop the profitable energies of tomorrow."

But despite higher oil prices, TotalEnergies expects its oil and gas production to be below 2020 levels. Production in 2021 was expected to average 2.85 million b/d of oil equivalent, down from 2.87 million boe/d in 2020.

Production in the second quarter slid to 2.747 million boe/d due to planned maintenance work, according to its Q2 results statement.

This was down 3% from Q2 2020 and 4% lower quarter on quarter. However, the company expects production to rise in the second half of the year because of the startup and ramp-up of new projects, including Zinia phase 2 in Angola, North Russkoye in Russia and Iara in Brazil.

Lowering carbon intensity

Pouyanne also said the company will be looking closely at the carbon intensity of its assets while deciding on capital allocation as part of its ambitious decarbonization plans.

He revealed that the company's board of directors decided July 28 to include carbon intensity as its new criterion while sanctioning new greenfield hydrocarbon projects.

The other two criteria, which have been in place since 2015, include projects with low technical costs (typically under $20/b) and low breakeven costs with better fiscal terms (under $30/b).

"We consider that each new greenfield project must improve our average carbon intensity today," he said. "To be clear, the average CO2 intensity of our whole portfolio today is around 20 kg of CO2 equivalent (CO2e) per barrel. So each new project should be lower than that."

As part of this strategy, TotalEnergies divested its 30.32% stakes in Venezuela's Petrocedeño joint venture due to the high carbon intensity of the oil project.

Pouyanne said this project is not consistent with its new agenda as it may have a low technical cost, but it has a very high carbon intensity.

The Petrocedeño project includes the Juni oil field in the Orinoco Belt and an upgrader that blends extra-heavy crude oil into lighter crude, and has a carbon intensity of over 20 kg of CO2e/b, according to Pouyanne.

The French energy major has recently undertaken a major pivot to cleaner energy while maintaining a previous target of growing its oil and gas production in the near term to fund its green investment drive.

Pouyanne said this deal shows that the company is putting its energy transition road map into action.

"The project would indeed in the near future require significant amount of capex to restore the production with new wells and to rejuvenate the upgrader," Pouyanne added. "Clearly, allocating capex for the development of extra heavy oil projects in the Orinoco Belt would not be consistent with our hydrocarbon strategy in terms of CO2 intensity of new hydrocarbon projects."

Short-cycle projects

Pouyanne conceded that the climate debate was putting pressure on many oil and gas companies, and investments in this sector had taken a huge hit.

He said that TotalEnergies was looking to relaunch some short-cycle oil projects next year, especially in some countries like Angola, Nigeria and Republic of Congo.

"[On the] larger projects I am still more cautious," he said. "We have suffered quite a lot of volatility, and it is also true that when you have underinvestment, you give support to higher prices."

Pouyanne said he expects capex to increase to $13-14 billion in 2022, which will enable it to relaunch short cycle capex projects.

Net investments or capex in 2021 are expected to between $12 billion-$13 billion, with 50% of that dedicated to renewables and electricity.

TotalEnergies said it expected a cash flow generation of more than $25 billion in 2021 if hydrocarbons prices and refining margins stay around levels seen in the first half of 2021.

Given the strong Q2 results, the company said it would allocate 40% of the additional cash flow generated above $60/b to share buybacks.

Adjusted net income in Q2 2021 was at $3.5 billion, up 15% from Q1 2021, and "above the level of the pre-crisis second quarter 2019 which had a comparable oil price environment notably thanks to the action plans implemented during the crisis," said Pouyanne in its Q2 statement.

The swift increase in oil and gas prices led to an increase in net profits and cash flow generation, which bodes well for the company's plant to invest in "profitable projects to implement its transformational strategy to a broad energy company," it said.

Downstream bright spots

The company's downstream segment, which has struggled in the past year, finally presented some bright spots.

Pouyanne said this was thanks to the strength of the integrated model, which allowed it to benefit from very high margins in petrochemicals and the rebound of its Marketing and Services division to pre-crisis levels despite depressed European refining margins.

However, the company's French refinery throughput continued to fall, averaging 148,000 b/d in the second quarter, down 28% year on year, whereas across the world its refineries processed 1.070 million b/d, 14% down year on year. The drop was attributed to the prolonged voluntary economic shutdown of the Donges refinery given the low European margins.