The Shareholders' Newsletter #68 - Summer 2022

Analysis & outlook : By Jean-Pierre Sbraire Chief Financial Officer

ANALYSIS & OUTLOOK

© Lutt Julien - Capa - TotalEnergies

Given the strong cash flow generation and solid balance sheet, the Board of Directors decided to give priority to countercyclical opportunities to accelerate the Company's transformation.
By Jean-Pierre Sbraire, 
Chief Financial Officer

The rebound in energy prices seen since the 2nd half of 2021 amplified after Russia’s military aggression against Ukraine in the first quarter of 2022, sending oil prices to more than $100 per barrel and gas prices in Europe and Asia to historic highs above $30/Mbtu during the quarter.

In this context of strong geopolitical tensions, the Company outlined clear principles of conduct for managing its Russian activities: beyond ensuring strict compliance with current and future European sanctions, TotalEnergies SE decided to provide no further capital for the development of projects in Russia and initiated the gradual suspension of its activities, including the planned end of its activities related to Russian oil and petroleum products. Taking into account notably the impact of new sanctions prohibiting the export of LNG technologies benefiting a Russian company on the execution ability of the Arctic LNG 2 project, TotalEnergies took an impairment of $4.1 billion in its accounts as of March 31.

In the first quarter of 2022, the Company reported adjusted net income of $9 billion and IFRS net income of $4.9 billion. It generated cash flow of $11.6 billion (including $0.3 billion from Russian Upstream assets) and free cash flow of $5.8 billion. Its gearing ratio decreased to 12.5% and its return on average capital employed is 18%.

The iGRP (integrated Gas, Renewables & Power) segment posted adjusted net operating income of $3.1 billion, up 11% over the previous quarter, and cash flow of $2.6 billion in the first quarter of 2022. Notably, TotalEnergies leveraged its integrated midstream LNG to saturate its European regasification capacity thanks to record spot LNG purchases (4.7 Mt) and posted a very good performance in gas, LNG and electricity trading activities. TotalEnergies launched with its partners the Cameron LNG expansion project that will contribute to Europe's security of supply. Investments in Renewables & Electricity amounted to $0.9 billion, in line with the annual target of $3.5 billion. In particular, TotalEnergies strengthened its offshore wind portfolio by obtaining concessions to develop 3 GW in the United States and 2 GW in Scotland.

Exploration and Production benefited from stable production and high oil and gas prices to post adjusted net operating income of $5 billion and cash flow of $7.3 billion in the first quarter of 2022. TotalEnergies has announced a promising discovery in deep-offshore Namibia.

Downstream benefited from high distillate margins in Europe despite higher energy costs and outperformance by its oil trading activities to post adjusted net operating income of $1.4 billion and cash flow of $1.9 billion. TotalEnergies launched feasibility studies for two sustainable aviation fuel (SAF) projects in China with Sinopec and in Japan with Eneos.

Given the strong cash flow generation and solid balance sheet, the Board of Directors decided to give priority to countercyclical opportunities to accelerate the Company's transformation. It confirmed the 5% increase of the first 2022 interim dividend to €0.69 per share and authorized the Company to buy back up to $3 billion of its shares in the first half of 2022.

The Natural Gas prices

Natural gas is traditionally traded by means of medium- or long-term (term of over 1 year) or short-term (term of less than a year) contracts, commonly known as spot contracts.

These transactions are usually done on organized markets, often referred to as “hubs”. Major hubs include the North American hub, the European hub and, for several years now with the strong growth in Liquefied Natural Gas (LNG) demand in Asia, the Asian hub. They are characterized by a range of spot prices that reflect the balance between gas supply and demand on the different maturities.

TotalEnergies uses the Brent price as an index for its gas transactions. It is an historic spot price, crucial for medium- and long-transactions, in addition to the following major three indexes, used mainly for spot transactions, but which can also be used for long-term contracts:

  • “Henry Hub” which is the reference spot price for gas in the United States and by extension, for the North American hub.
  • The “Title Transfer Facility” (TTF), the virtual trading point in the Netherlands which, by its depth and liquidity, is the current reference spot price for the European hub.
  • The “Japan Korean Marker” (JKM) which is the reference spot price for Liquefied Natural Gas (LNG) trading in Asia.