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What Does Total’s Cash Flow Analysis Suggest?

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Total’s cash flow from operations, investing, and financing

In 1Q16, Total’s (TOT) cash flow from operations stood at $1.9 billion, around 57% lower than 1Q15. TOT’s cash outflow from investing stood at $3.9 billion in 1Q16 compared to $5.9 billion in 1Q15.

Total’s cash flow from financing activities mainly consisted of changing debt levels and dividend payments. TOT focuses on providing returns to shareholders in the form of dividends. TOT’s current dividend yield stands at 5.2%.

Total’s peers Statoil (STO), Suncor (SU), and ENI (E) have dividend yields of 5.2%, 3.2%, and 5.8%, respectively. For exposure to high-dividend stocks, you can consider the Vanguard High Dividend Yield ETF (VYM). This ETF also has an ~11% exposure to energy sector stocks.

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Analyzing Total’s cash flow strategy

In 1Q16, TOT generated $1.9 billion in cash from operations. However, the company had a cash outflow of $4.2 billion in the form of capital expenditure and $1 billion in the form of dividends, amounting to $5.2 billion of cash outflow.

How did the company make up the difference of $3.3 billion in cash flows?

Broadly, due to lower cash flow from operations—hit by lower oil prices—the company had to utilize its cash balance and resort to asset sales. TOT executed $0.9 billion in asset sales in 1Q16. The remaining shortfall was mainly funded by drawing down its cash reserves.

How long can this strategy be maintained?

If oil prices remain subdued for an extended period, Total (TOT) cannot perpetually rely on its finite cash reserves. In such a scenario, TOT will have to either boost its leverage, cut its capex or dividends, or adopt a mix of these strategies. As pointed out in the previous part regarding leverage, ascertaining the right leverage level will be imperative for the company to maintain its financial strength and flexibility.

Going forward, higher production could likely improve cash flow from operations, but the degree of the improvement will mainly depend on the level of oil prices.

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