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TOTAL (TOT) Plans to Counter COVID-19 Impact on Oil Prices

TOTAL S.A. TOT has decided to lower its 2020 capital expenditure guidance by nearly 20% to less than $15 billion from the prior expectation of $18 billion, after taking into consideration the ongoing decline in commodity prices.

The unexpected drop in oil prices and decline in global demand due to the novel coronavirus outbreak are taking a toll on oil and energy companies. The companies have been forced to delay expansion plans and lower capital expenditures to preserve liquidity. Year to date, the price of crude oil has dropped 64.7%, which is adversely impacting the performance of the oil and energy sector.

TOTAL aims at generating more savings in 2020 than its prior expectation. The company now targets to generate $800 million of savings in 2020 on operating costs, instead of $300 million announced previously. In order to preserve its liquidity position, the company also suspended the $2-billion share buyback program.

Why are Commodity Prices Declining?

The sharp decline in commodity prices can be attributed to reduction in global demand as novel coronavirus has impacted economic growth. Globally, governments are issuing directives related to travel, asking people to stay at home and avoid mass gatherings, and issuing temporary closure of schools, factories and offices, which are adversely impacting demand for crude.

The coronavirus pandemic continues, with the total count of infected people having touched 349,676, out of which 15,303 have lost their lives. With social awareness among people rising, millions worldwide are self-quarantining, which is a good thing as it controls its spread but at the same time it is lowering the global demand for oil.

On top of it, Saudi Arabia — the world’s top oil exporter — has plans to increase crude oil production to 12.3 million barrels per day in April, after the collapse of its OPEC supply cut agreement with Russia. The decision of Russia and Saudi Arabia to produce more crude volumes could further lower the price of the commodity from the current level due to supply glut. Notably, U.S. shale-based oil and gas companies will find it difficult to sustain themselves for a prolonged period under this scenario.

In addition to TOTAL, companies belonging to the oil and gas sector including Occidental Petroleum Corporation OXY, WPX Energy WPX and Royal Dutch Shell RDS.A are cutting down on capital expenditures to preserve liquidity and slow down expansion plans amid the falling oil prices. If the softness in prices persist, shale-based companies might have to downwardly revise their production as higher production volumes are not going help them amid the falling prices.

Zacks Rank

TOTAL currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Like other oil and gas majors, the decline in prices is also hurting TOTAL’s operations. The company has registered a significant decline in share price in the past 45 days.

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TOTAL S.A. (TOT) : Free Stock Analysis Report
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