Total SA to Acquire Maersk Oil & Gas A/S Conference Call
Aug 21, 2017 AM CEST
FP.PA - Total SA
Total SA to Acquire Maersk Oil & Gas A/S Conference Call
Aug 21, 2017 / 12:00PM GMT
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Corporate Participants
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* Patrick Pouyanné
TOTAL S.A. - Chairman, CEO and President
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Conference Call Participants
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* Anish Kapadia
Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD, Integrateds and Upstream Research
* Biraj Borkhataria
RBC Capital Markets, LLC, Research Division - Analyst
* Christopher Kuplent
BofA Merrill Lynch, Research Division - Head of European Energy Equity Research
* Jean-Luc Romain
CM-CIC Market Solutions, Research Division - Analyst
* Lucas Herrmann
Deutsche Bank AG, Research Division - Head of European Oil and Gas
* Matthew Peter Charles Lofting
JP Morgan Chase & Co, Research Division - VP
* Theepan Jothilingam
Exane BNP Paribas, Research Division - Head of Oil and Gas Research and Analyst of Oil & Gas
* Thomas Yoichi Adolff
Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research -- Director
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Presentation
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Operator [1]
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Good day, and welcome to the Total webcast and conference call. (Operator Instructions) Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Patrick Pouyanné, Chairman and CEO of Total. Please go ahead, sir.
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [2]
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Good afternoon, everyone, and thank you for joining us at short notice. This is Patrick Pouyanné, the Chairman and CEO. I'm joined today in Paris, by our CFO Patrick de La Chevardière. This morning we have announced an agreement with Maersk to acquire 100% of the equity of Maersk oil and gas, wholly owned subsidiary of Maersk, in a share and debt transaction under attractive conditions. This is, I would say, a compelling transaction for Total and one which will add significant value for our shareholders. Maersk Oil has a portfolio of growth and quality assets offering high margins, 85% of them -- which are in OECD countries, which is an exceptional fit for Total.
As you know, we have been working hard over the past couple of years to reduce our breakeven and to put the company in a strong position in a lower price environment. We have been delivering on our cost reduction targets, on our production growth, on our cash flow generation. We have seen the benefits of this in the first half 2017 results, notably with an organic free cash flow of more than $3.1 billion. And it will introduce the first slide, as I told you in February 2017, as a result of the success of all these efforts, we're now in a position to be able to take advantage of the low-price environment and the low-cost environment both to launch profitable new projects and also to acquire resources under attractive conditions.
And in this slide, in February, I also told you that we would play on our -- to our strengths when it comes to acquisition. And this is exactly what we're doing here with Maersk Oil acquisition by acquiring mainly conventional, low breakeven assets with an attractive growth profile. And we are acting countercyclically, which is exactly the right strategy for an oil and gas company. This is what I repeated to you for the last 12 months.
So this slide is just to remember you that we want to capitalize on our strength to take advantage of current market conditions, to add attractive resource, while maintaining the discipline in terms of acquisition price. And also with the objective to permanently -- to relentlessly lower our breakeven. And this is what this acquisition will offer us to do for the benefit of creating shareholder value.
So let's enter into this transaction itself. So the main rationale, I would say to -- for Total to acquire Maersk Oil. When we look through the portfolio of assets, its first that its -- and you will have the opportunity to see that for the presentation. It's quite the assets offering growth in some core areas. It's mainly conventional OECD assets with -- which, of course, will help to balance the counter risks of the portfolio of Total. Beyond these North -- these OECD assets, which are mainly located in North Sea, there is a good fit -- good complementary international portfolio. And all that will offer some significant synergies, which will help us to do these assets in our own portfolio more competitive. And last, but not least, this transaction is cash flow and earnings accretive immediately from 2018, which is, of course, benefiting for all shareholders of Total and which will underpin the dividend policy of the company.
So first the fit between Maersk Oil and Total assets. As you can see, it's a portfolio of 1 billion barrels of reserve 2P/2C, production of 160,000 barrels per day in 2018. It's located mainly in OECD countries. 80% of the portfolio is in North Sea between U.K., Norway and Denmark, 5% in the U.S. But for the OECD path and outside of that, the other countries are clearly giving some good complementary fits and we will demonstrate that one by one with our own portfolio, I think, in particular to, Algeria, because most of the value of this portfolio is in these 5 countries: Norway, U.K., Denmark, United States and Algeria.
It's also a portfolio which is 60% operated. But another important quality of this acquisition for us is that Maersk has a very good -- excellent reputation in the industry of being an excellent operator with strong technology core skills. We had the opportunity, by the way, to be -- to appreciate it. As you know, we have just transitioned in Qatar from Maersk to Total, taking over the Algerian operations on July 14. And during the year -- the last year, we had the opportunity to appreciate the high-quality skills of the Maersk teams and the high professionalism. So by the way it was maybe for Maersk Oil disappointment to lose these Algerian assets to Total. It's back in the company again. So let's -- that's the point which is important because when you acquire a company, it's not only a matter of assets, it's also a matter of human resources. And, as you know, also in the last few years, we had the policy of hiring freeze and this 3,000 staff of Maersk who will join Total will give us some opportunity to reinforce our human capacities.
So the deal itself is a share and debt deal. The offer for -- on one side -- I think this slide is quite illustrative, on one side we offer to get 100% of Maersk Oil's equity. We offered $4.95 billion in Total shares, which represents 97.5 million shares. It has been based on the average of the 20 last days of the quotations. And plus we assumed $2.5 billion of Maersk Oil debt. And in front of that, what do we receive? We receive 1 billion barrels of reserves of 2P/2C, 85% in OECD countries. We immediately benefit from a net production of 160,000 barrels per day in 2018, increasing to more than 200,000 barrels per day by early '20, the early -- beginning of in the year -- the early -- first years of '20. This production is mainly liquid production, 70% liquid, 30% gas. And offers, because of its characteristics some quite high margins and free cash flow breakeven, which is under $30 per barrel. So better by the way than our own free cash flow. So it will help to lower the global free cash flow breakeven from the Total group. It's generative in 2018 at $50 per barrel, the cash flow from operation is $1.3 billion, which is more than the CapEx, which we even spend, which is around $1 billion. And this is before synergies. In 2018, the synergy would not be strong, but they will grow, I will come back on that. So this portfolio is cash flow positive, I would say, from year 1, in 2018 it's average, but after that from 2019 it will generate additional free cash flow to the Total group. We also obtained experienced teams with strong approach on skills and we will also obtain a new long-term shareholder. As a group, we are -- the Maersk Group will receive 3.75% of Total shares on the enlarged capital basis. The main shareholder of Maersk will -- is willing to become a long-term shareholder of Total, and this is why we have offered them the possibility to obtain a seat at the Board of Directors of Total. This is with discussion with them and we welcome them if they want to join us. I think it will be a way also to not only make a transaction but to deepen the partnership between Total and the Danish -- and between the Danish base of the new company.
So this transaction, we can qualify it as competitive. And I would like to illustrate that by 2 ratios. The first one is about how much do we pay for the production obtained. So we pay $7.45 billion, we obtain 160,000 barrels per day of production in 2018, which will grow. But if we make that just by ratio, it gives access to this barrel of production for $46,000 per barrel of oil per day. This is very competitive compared to the recent comparable transaction as an average that you are aware, which has been done by other competitors in the recent years.
I would remind you that when we gave you a guidance for our CapEx of $15 billion to $17 billion, we told you that Upstream was about $12 billion to $13 billion and that the implied ratio that we are using to calculate how much we will spend on new projects was $45,000 per barrel per day of capacity, taking into account the decrease of the CapEx of the costs in the industry. So this transaction is in line with this ratio. It's even better in fact because this ratio was used in our calculation for new barrels. Here it's for barrels which are already produced. So you will understand why we consider this transaction is competitive. This is the first ratio. The second one, I told you, is equities on sum of ratio. It's on a net result per share. It is immediately accretive and it is also the case in cash flow from operation per share despite the creation -- the dilution by 4%. It will add on $0.02 per share of cash flow from operations, again at $50 per barrel. So this we consider that by doing this transaction we immediately create additional value for our shareholders.
So in terms of the industrial projects. What we're creating is a North Sea leader. Combining both companies, we will have -- we will add a portfolio of 500,000 barrels per day of operating production in the North Sea. Why is it important? It's -- as you all know, the North Sea is quite -- still a prolific area. There have been big discoveries. One of them, Gina discovering -- has been -- which has been done in the last few years is Johan Sverdrup. And by the way one of the beauty of this transaction is that we have access through it through 8.4% into Johan Sverdrup giant resource field and we're -- we'd very happy to be a partner of this development. But it's also an area where clearly the costs are more -- higher than in other parts of the world because of, in particular, the labor cost. But we have done a lot of efforts to lower our cash flow per barrel -- OpEx per barrel in this region. We have today a lower OpEx per barrel than Maersk in an average. But we think that we need to continue to work and the best way to continue to work after done our own self-help exercise, is of course, to enlarge the production base in order to better amortize our fixed costs. So this is one of the drivers particularly of this transaction is being able to deliver synergies in order to lower the breakeven of our barrels in North Sea. The other driver and that's why this portfolio is of interest is that it offers some growth in the North Sea on 3 big assets in particular that this slide is illustrating. The first one which is under development, is Culzean, in the U.K. North Sea where Maersk is operator, with 50%. This is an HPHT field next to Elgin-Franklin. It will help us, by the way, to create a new hub there. And this is a high quality asset, if I judge that one of my peer has decided to increase its share on Culzean in the recent years. Johan Sverdrup, will come back at it, but I think you know it very well, it's one of the prized -- big prize in the North Sea. And again, it would create 50,000 barrels per day of growing capacity -- of growing production to Total in coming years.
And then we have the Danish North Sea on which we have less experience, to be honest. But, of course, Maersk Oil is the national champion of oil and gas in Denmark. It's mature. It is a very prolific area. There are have some good development projects on which I will come back and we would be happy to invest in these projects.
U.K., our growth portfolio. So U.K., we will have a Total combination. It's really the, I would say, the country where we love, it's the biggest combination, largest combination. The subsidiary of Total has more or less 700 to 800 staff. The one of Maersk's 700 staff. So it's a big amount of teams there, around 1,400. Obviously some synergies will have to be developed. It's -- again -- we created a hub again in Elgin-Franklin and Culzean in the HPHT. There are overall development opportunities in the Maersk portfolio, in particular from gas blowdown around the Gryphon field, in what they call Quad 9. There are also some non-operated assets but we will have to look and maybe it will give opportunity to make some few rationalizations in the future. The significant synergies, on which I will come back later, will come in particular from U.K. But I would say that Total has an experience when we merged Total and Elf in 2000,2001. The country where the merge was the most significant in terms of building synergies was U.K. already. So it's -- we will have to do it again and, Arnaud Breuillac our Upstream President, was by that time one of the leader of this merging in U.K. So I'm sure we will be able to do it again, having in mind that we want vis-a-vis the teams to keep -- to do it on the basis of the priority principle between Total teams and Maersk teams.
Norway. Norway, I think, a lot has been written about the high-quality of Johan Sverdrup, the recoverable reserves are about 2.5 billion barrels, which is of the old giant. It's also a giant which is developed by Statoil today benefiting from a low cost environment and the cost has been driven down by Statoil. So it's a giant low-cost project, capacity about 650,000 barrels per day. A start up coming soon in 2019. So Total, I think, Johan Sverdrup already there, very large portfolio is becoming the largest international company in Norway. You know that we have a large footprint there. But Johan Sverdrup will be a jewel of this crown in Norway, and we're happy to participate in it.
Denmark. Denmark is also important. There will be no synergy on the operations in Denmark. We're not present. But Maersk operates 90% of Danish oil and gas production. They have a big redevelopment project what they call Tyra Future that we looked carefully to it. The Parliament of Denmark has enacted a law, which is a law for -- which gives some fiscal incentives to make some redevelopments in this Danish North Sea and also on marginal fields. So we will benefit from that. We're permitted to raise Tyra Future development. And we think also that we have some competencies in EOR technologies, which could be applied to develop the strong oil potentials. We have a long list of margin oil fields and other additional resources to be developed in Denmark. If we refer to Total through Maersk Oil base -- operational base in Denmark, the opportunity to maintain, I would say, also what I call training school for all the teams of Total not far from the headquarters.
If I move on beyond the North Sea, I'm coming to the other assets. Two major producing assets that we consider are also fitting well. One is a Jack operated by Chevron. Maersk Oil owns 25% of it. It's a Wilcox formation. So it's fitting very well -- for willingness to develop. I mentioned to you in February that Gulf of Mexico was an area where we would like to be able to develop our business in 3 years because it's deepwater. It's fitting well. Partnering with Chevron on such a project, which for us is good. We're already a partner with Chevron on Tahiti, by the way, so it's another partnership. And we've just, by the way, a side comment, made a deal with Chevron to enter into a forward exploration deal in the Gulf of Mexico.
Algeria is another important asset of Maersk. Maersk is a partner of the Anadarko-led consortium on El Merk in Hassi Berkine. It's a big -- very big asset, 400,000 barrels per day, 12.5%. So recently we had a chance and the opportunity to sign the partnership agreement with Sonatrach in good conditions about Timimoun, TFT and other developments. So this asset -- this participation of Maersk Oil in the Berkine Basin will be a positive addition clearly to our position in Algeria. We would become the second largest international partner of Sonatrach in Algeria.
Other upside potential in the portfolio of Maersk Oil to be developed in Africa. Africa being a core area for us. They are a participation interest in Block 16 which is next -- just next to Block 32. So it could be the opportunity for cost block development of deep offshore resources. And also East Africa, we -- because Maersk Oil acquired in 2016 a participation of 25% in the Tullow-led consortium in Kenya. You know that we are a partner with Tullow in Uganda. So these are onshore discoveries. We will have the opportunity to better discover and understand how we can develop these promising onshore discoveries of Kenya in this region where -- which will become a core area for Total.
Other assets. And I will go for all the assets in fact of this portfolio. Some -- they have more marginal production, but a field in Kazakhstan, which is an onshore low-cost oil field, 20,000 barrels per day. They operate this production. Also in Kazakhstan, they are a partner of a small production operated by HKN, an U.S. operator, in Sarsang block. It's marginal. And they have also some participation in 2 crucial discoveries in Brazil, in Itaipu and Wahoo.
These are the only 3 assets where preemption rights could be exercised by the partner. We're clearly not the major assets which -- for Total, but we will be happy to have them in our portfolio. But they are not bearing most of the high value in our -- in the portfolio we acquired.
So then I spoke about one of the rationale beyond the growth which is offered and I described it in the previous slide. The other rationale is synergies and adding value by the combination of Maersk Oil strong operation skills and Total skills, in particular in North Sea. So to clarify what our objective. We think after reviewing that, and I'm fully convinced we will be able to do more. But we want to -- we have a target of more than $400 million per year in 2020. The synergies will start immediately. I will explain you why from 2018. First because when we tried to clarify what is the content of this $400 million per year, we have identified at least $200 million of cost synergies because we merged this portfolio. But we also identified one of the million-dollar [IPCs] for synergies. One of them, for example, which has an immediate effect, is in Norway, the development of Johan Sverdrup. Total has the benefit of having a strong operational base. So we can amortize the development of Johan Sverdrup on our own production base. Maersk Oil was not able to do that because they have very little, very small production base in Norway. So the combination immediately will represent quite a big amount of fiscal synergies. There are others like that in the U.S. as well where we have a large portfolio. We will be able to amortize some fiscal losses. On the top of that, purchasing synergies, because we will be able to exercise the size of Maersk Oil will benefit from the size of Total. And but also in trading, they had, I would say, small trading teams. Obviously, we have a much larger office and we will be able to benefit from being able to extract from these new floors. I'm sure my oil traders in Geneva will like to be able to manage the oil flows and get some added value from it and also commercial. So the $400 million is the minimum that we target. And you know we have demonstrated in the last 3 years that we are very disciplined on the way we manage costs. And we will apply the same methodologies that we have applied in Total with the Maersk Oil teams and the Maersk Oil assets. This -- just to give you an idea, this is quite important obviously in the deal we are proposing. So it's a big rationale. Because if you calculate the net present value of the synergies, which will grow from 2018 to around $100 million to $400 million by 2020, and you actualize that you will find more than $2 billion. So out of the deal we pay $7.5 billion, we can benefit, justify -- at least $2 billion by synergies. So it will help you to derive what is the implied price. But I will let you do your own calculation on it.
So this is a point which is important. But there is also more to do that, which is again, I insist, that it's not only an acquisition of an asset, it's an acquisition of a company, of staff, and highly skilled staff. This is why we want to build on the Danish heritage and the decision we have taken in order to ensure that we will integrate and execute that transaction in the best possible way will move our North Sea Business Unit, which is today based in London -- in Copenhagen -- to Copenhagen in order to be able to drive this integration in the smartest way. We will have a strong operational base in Denmark, the one of Maersk. We will, however, operate this one, operational base in North Sea will be -- where obviously both companies are present. And between these 2 big, we will cover our position in the North Sea. Denmark being a support to the operations and the project for Norway and the Netherlands.
But important bringing the staff into the group, in the base, I repeat what I said. We did not recruit a lot of people in the last 3 years. It was always to manage the lower oil price. So we were intending to start again to recruit some staff to come back to more normal level of recruitment by 2018. So recruitment, for E&P in 2018 will be done. It will be the Maersk Oil staff in Denmark.
There are also -- Maersk Oil, I speak about expertise, has also a strong expertise because of the Danish formation and reservoirs, in the management of chalk reservoirs. This has an interest because this is a type of formation you can't find in the lower Cretaceous. You can't find that in Libya, you can't find that in Iraq, in Iran, at Tamara levels. Also, by the way in Texas, you have some lower Cretaceous. So there is an expertise which is of interest for us. And combining them with our own positions in Middle East and North Africa will help, I'm sure, will generate in the future more added value. Not the synergy, of course, but it's adding value through technology.
This -- all this transaction, and this is a good news I think for all of you, is possible in the framework we already described to you in terms of CapEx guidance. We told you last year in September and repeated in February that the guidance was $15 billion to $17 billion for 2018-2020. But we search the guidance. We will be able to make to continue to develop to grow for the company. This guidance is fully maintained today. In fact, we are taking on board $1 billion per year in 2018, 2019, which more is the CapEx per year of Maersk Oil in 2018-2019. Beyond that, it's under $1 billion. And in this guidance, we add room again to be able to grow the company beyond 2020. So we maintained the guidance. So all the free cash flow, all the cash flow from operations, and this is why one of the reasons of coming from Maersk Oil on the top of Total is really attractive because we use the same amount of CapEx at the end in terms of net cash flow.
The production will be -- the growth of the production will accelerate. So the 5% from 2014 to 2020 where it was given a figure more or less of 2.9 million barrels of oil per day by 2020, we should reach 3 million barrels of oil per day from as soon as 2019. It's not essentially a question of targeting volumes. It's more of a symbol. And I think the teams of Total and Maersk will be proud to participate to the company reaching this 3 million barrel oil per day. It's just an acceleration of the role, but again, I repeated to you since 2015 that value is more important in my eyes. But it's a sort of threshold, which proved that Total, by the way, between 2014 and 2019, in 5 years, will grow its production from 2.1 million barrels of oil per day to 3 million barrels of oil per day. So it's an increasing of production of almost 50% in 5 years, despite the fact that we reduced our CapEx. So we can do more with less, like Patrick de La Chevardière told you in February. And which is what we want to continue to do. And this acquisition is not a change of strategy in terms of financial discipline, I want a sense of that.
So as a conclusion to this presentation. I would say that, again, we consider that it's an attractive transaction. It's in line with the announced strategy. The strategy that we described to you again, it was to -- that we will -- we want to take advantage of the current market conditions and our stronger balance sheet, stronger than others, stronger than before, in order to add new resources at attractive conditions. This transaction fits perfectly with that. We can do it maintaining our financial discipline in terms of CapEx guidance. We acquired mainly conventional OECD assets, which helps to balance the global geopolitical risk of our portfolio. It's offering growth. It's offering high margins -- higher margins than the average margin of the Total portfolio. A free cash flow breakeven under $30 per barrel, which will be even helped further by significant synergies about $400 million. And last, but not least, it's accretive to earnings and cash from 2018.
I would like just to add a word because I recommend, which is not in the presentation, but in the press release about, and I'm sure I will have some questions. So I prefer to comment it immediately, about the dividend policy of Total. As you have read in the press release, at the closing of the transaction, in order that the Total shareholders will benefit also from this accretive impact of the acquisition of Maersk Oil on earnings and cash flow, the Board of Directors will consider removing the discount of a scrip dividend. The declare in French it means that we'll do it. So in English, I don't know what's been considered. But the French, is maybe clearer than the English. But that means that the intent is not only intent, because it's excessive, because also of the results of Total are better as the latest at the end of the closing of the transaction, we will remove the discount on this scrip dividend, which obviously will lower the take up and much lower the dilution linked to the scrip.
So that's all what I wanted to tell you. I'm sure that you have been surprised by Total moving a transaction of this size on the North Sea. But again it's perfectly consistent with what we said. And it's good to say what we do and to do what we are saying. So it's exactly what we want to convince you today for this transaction in this presentation. And now I am open to your Q&A together with Patrick.
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Questions and Answers
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Operator [1]
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(Operator Instructions) We will take an opening question from Biraj Borkhataria of RBC.
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Biraj Borkhataria, RBC Capital Markets, LLC, Research Division - Analyst [2]
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Had a couple. First one was just on Kenya. I was wondering if you could talk about -- it's early days obviously. But your view on that -- those 2 projects and how that has changed with the acquisition of Maersk? And the second one is something you haven't mentioned. But on the decommissioning liabilities, I think it's around $3 billion; could you just give a bit more detail around any cash calls in the near term or the schedule of payments there?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [3]
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I'll take the second question first. $3 billion -- $2.9 billion -- $2.1 billion are located in Denmark out of the $3 billion. And it's in the year 2040. So we have time. And let's be clear, we have taken fully this $3 billion into account in our valuation. So it's a yes, of course, we take all the rights and obligations of this portfolio including the decommissioning liabilities. But it does not afraid us at all. And so in terms of cash flows, it's limited impact on the first years. It's postponed beyond 2035, 2040. There will be, part of it being in fact in Denmark, the Tyra redevelopment what they call Tyra Future, is a redevelopment of this field, which takes partly part of this decommissioning. But it's an active decommissioning where we will stop some production, then we commission some platforms immediately. But it's part of the redevelopment. So it created the opportunity to add some production. So it's fully taken into the current valuation and there is no surprise with that. On Kenya, again, I will not lie to you. We were not -- we studied that in the past. When Maersk Oil acquired this position we considered it was a little expensive. We have focused our views today on Uganda. And on Uganda we have progressed quite a lot on the project we're in agreement, by the way, which has been signed within Uganda and Tanzania in early August in an offshore agreement, an intergovernmental agreement in order to build the pipeline between Uganda and Tanzania. We're committed to that scheme. So the Kenya resources. Maybe there is an idea which will be to link these resources to Uganda and then to Tanzania. We will study that again. But they have their own schemes. So -- by the way it's the same partner, Tullow. So we will become -- we're happy to partner with Tullow, which is our partner in Uganda. We made a transaction last year with them and we are very in line with the development of Uganda. And I'm sure that our Tullow partner will be keen to see Total and will be very happy to listen to their views on the most efficient way to develop Kenya. So I will not -- so let me be clear, is my head it's very clear. It does not impact the development plan that we have on the Uganda resources, for the Tanzania pipeline. It's a priority for us. We want to sanction that project first half 2019 -- 2018 sorry, 2018. And so we will not change our plans on Uganda. But maybe we will see if we can be as efficient and participate in the development of Kenya.
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Operator [4]
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We will take our next question from Theepan Jothilingam of Exane BNP Paribas.
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Theepan Jothilingam, Exane BNP Paribas, Research Division - Head of Oil and Gas Research and Analyst of Oil & Gas [5]
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Two questions, please. Firstly, just coming back to the investment framework. Could you perhaps make any comment around the outlook for -- on investment positions on the suite of projects you outlined in February? I think you mentioned 10 in an 18-month period. I was just wondering whether the Maersk transaction now gives you perhaps greater control in terms of the speed of sanctioning those projects you pushed into the right? And in conjunction with that, just to talk about -- I think previously you've indicated $2 billion in terms of spend for DROs. Again, would it be right to think that, that level of spend may be slower in the next 12, 18 months because -- given this transaction? Secondly, just on the transaction itself, could you perhaps talk a little bit about the timing, how competitive you thought this process was vis-a-vis what your peers could offer in terms of synergies? And did you use an independent adviser?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [6]
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The competitive process. Yes, we had an independent adviser. I can name it, because he was useful. It's a small boutique in London called Lambert Energy Advisory. And I thank them for the help they gave us to better understand the Danish psychology, I would say. In fact, Maersk announced in 2016 their intent to divest their energy business -- the oil and energy business. There are 4 subsidiaries. We were only interested in the [NP]. They work a lot on the -- on an IPO scheme. And we came to them proactively to tell them maybe there is an alternative scheme, which would be worth to study, which is to use Total shares rather than making an IPO. And we convinced them that our proposal was probably efficient in terms of execution compared to making an IPO in the present market. So this is the way it happened. So it was proactive. I don't know if any -- think that I knew -- I understood there was a competitor somewhere, but it was not very clear. We were more in a direct negotiation. It was us, an organized process with a bank from them. It was a direct negotiation. So it gave us the opportunity to be efficient. And also, we say -- we didn't have to increase our price too high. We were in control of our offer. And of course, we did, we had a discussion. But it was -- and only the smart way with our colleagues of -- and the top leaders of Maersk, which have been dedicated. And Patrick and myself, in fact, have led the discussion on all sides. So it was efficient and quite done in a, I would say, in a very confidential way because there were no leaks at all until today. So that was the process itself. But clearly, I think that we are on Total's side, because we have a strong position already in North Sea. We are in a position, in particular, in U.K., but also to extract more synergies maybe than others when we combine both portfolios. So it's really a driver for us when the growth to consider that the North Sea in the company has been, I would say, a cash cow during many years. So I'm happy to be able to combine and to reiterate that cash cow for the cash flows of the company and for the benefit of our shareholders. Coming back to your first questions. I'm not sure if I made -- you want to see -- to tell me -- you're asking me is there an influence on the transaction on what we said about the 10 large projects and the $2 billion per year. First, the transaction is not closed today. I think I will -- we will revert to you on this point in September, because we have the opportunity to update the global strategy of the group. My vision is no, we are adding another development to be sanctioned, like Tyra Future, which would be sanctioned early 2018. So it's another one. And again, I'm happy to work -- the strategy is still there. We want to benefit from this low-cost environment in order to prepare the future growth of the company, and there are element of growth, like Johan Sverdrup, like Tyra Future, like (inaudible) . But on the other projects of Total, we give you an update. Obviously, part of the presentation, we will do in September. And during the field trip, we're willing to update you on where we are with these 10 projects we mentioned. We already sanctioned some of them, in particular, Vaca Muerta, (inaudible) and we had one, which was (inaudible). So few of them are sanctioned. We'll give you an update soon, and that's the point. The $2 billion per year, let me clear -- it's not in my mind the same level of -- there is no competition there. First of all, the $2 billion per year was more what we call DRO. It was more discovered but undeveloped resource. It was on an average cost per barrel of (inaudible) per barrel. So it's more things which are just there. This transaction is another type of transaction. It's already part of the barrels already being developed and even producing. So I classify that in another scope of investments. So of course, this transaction will help to replenish the portfolio of 1P reserve, 2P reserve of Total. It will be taken into account. But I would say the $2 billion per year is more for me, that's why we -- I [do marry that] To our organic CapEx. We told you we spend $15 billion, $17 billion, including $2 billion. Because this $2 billion for me is the annual spending that we need to do. So this $7.5 billion, you could consider that will help, of course. We participate to that. But I would say, it will not diminish, probably, maybe around a little, but the level of 2018 spendings next year. We have some opportunities of DRO on which we were, in particular obviously in Abu Dhabi on the extension of the offshore conversation.
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Operator [7]
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We will take our next question from Anish Kapadia of Tudor, Pickering, Holt.
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Anish Kapadia, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD, Integrateds and Upstream Research [8]
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I had a couple of questions, please. First of all, just interested in your thoughts around the process in terms of doing this acquisition and comparing it to potential other U.S. onshore acquisitions, given substantial fall in the numbers, the equities in the U.S. market this year. So I'm just wondering how you kind of looked at the valuations relative. And then the second question was, maybe thinking kind of a little bit longer term towards the end of the decade, you're adding some further pre-FID assets in Brazil and also Chissonga in Angola, which I think Maersk probably wasn't looking to sanction. Just wondering how you're kind of thinking about those assets. And whether your existing relationships in Brazil and Angola make you more confident that those can actually be pressed forward.
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [9]
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I will not surprise you. I've been consistent on my comments on the U.S. onshore. Yes, I can tell you when we worked on various opportunities and -- but again, I repeat that in all my speeches. When you want to acquire to the U.S. onshore with the cost of acquisition, you have to put $80 per barrel assumption in the model. And I'm not ready at all to spend -- to acquire assets at $80 per barrel. And so the comparison is clear, because this transaction is not at all at $80 per barrel. And when you will make the math, $7.5 billion, you have $2 billion at least of NPV of synergies. You will find something more in the range of $50, $55, but right above $60. So I would say this is a comparison. So again, it would make little sense for me -- it will be out of the strategy we announced. The strategy we announced is want -- we have a stronger financial position than some peers. We can benefit from it, providing we benefit from the current low-price conditions. And so spending -- acquiring resources in the U.S. at $80, it will make some of the owners of the resource very happy. I'm not sure it will make the shareholders of Total very happy. So -- but again, I also know that I have a lot of U.S. equity holders. They prefer the U.S. Here, it's Europe. Europe is not far from the U.S. It's Northern Europe. It's the same type of geopolitical race, I would say. And it's clearly for me, I'm very confident with the transaction. But I'm fully convinced that the Total teams will be able to develop, to deliver the added value added and the synergies from this portfolio. It is in our garden. It's exactly the type of assets on which we are excellent, and on Maersk Oil, excellent. So this is the right combination. It's -- I'm much more confident to create added value for all my shareholders, for all shareholders by doing that transaction. But by spending $5 billion in U.S. onshore, we have little skill internally, except that I will have to rely upon the people we'd acquire. So this is the position. I can only repeat it. Regarding on Angola, on Angola, clearly, they are operator of this Block 16, the Chissonga discovery, which is well known when I joined. It was a discovery which was done in -- before Girassol in 1996, one of the first in a -- and so it's well known. We have the -- Block 32 is just the northwest corner -- the northeast corner of Block 32. It's just next to Chissonga. So we'll study if it helps to unlock these resources on both side. Obviously, we have a strong relationship with Angola. We are the main operator in Angola. We operate 40% of the production of Angola, so we have a long history there. So I think it will help to combine both. We have the assets of Block 32. So we will see if we are able to develop an efficient scheme. We are probably in a better position with the merged company of Total and Maersk to try to deliver value on it, rather than Maersk Oil alone. On Brazil, I know that it's pre-salt discoveries. I know that they -- Maersk Oil acquired at quite a high price. We have been disappointed. Again, we are building the -- a portfolio in Brazil probably with Petrobras for Libra, some exploration also of portfolio. So this will be -- we have to look more carefully if we can develop and extract values on it. Again, it was not the main driver for the transaction. But as I said, it's fitting well, at least in terms of positions that the group is trying to put in place in Brazil, in pre-salt in Brazil.
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Operator [10]
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Next question comes from Thomas Adolff of Credit Suisse.
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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research -- Director [11]
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I've got 3 questions, please. Firstly, since DRO, the $2 billion bolt-ons that you talked about is still part of the toolbox, plus the $1 billion you now need to spend for Maersk Oil's operation and the fact that the FID time lines that you've identified earlier this year potentially is unchanged, is it fair to say that the group CapEx in the next few years, are you likely to be at the upper end of the $15 billion to $17 billion per annum? That's the first question. The second question, just following the completion of the deal with Maersk Oil, say by 1Q '18, does anything within your broader portfolio now become less important and, therefore, potentially up for sale? That could be mostly upstream assets, obviously. And the last question, I guess, is around the distribution policy. You've removed -- or you're going to remove the discount on the scrip. But equally, even prior to the announcement of the deal, you're becoming more confident on the underlying business. And together with this deal, which is also lowering your near-term cash flow breakeven, how do you think about offsetting the dilution from the scrip, both past dilution as well as future dilution?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [12]
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Okay, Thomas. First, no. I mean, let's be clear. Your -- the guidance is the same. Don't consider that we are going in the higher end. It's more in the middle range. Let me -- again, I told you last year that in the $15 billion, $17 billion guidance, there was room for new projects to be developed. And we stick on it. And this transaction, the $1 billion to put in the CapEx, is part of the assumption that we'll develop projects. So now you should maintain, consider $15 billion, $17 billion as a range and the middle assumption is better than -- $15 billion, $16 billion is better than $16 billion, $17 billion, to be clear, if you want to put figures in our model. Then, yes, you are right. And I mentioned that, that after such a transaction, it will -- but again, we are doing that permanently to see if there are some barrels which are -- upstream barrels, which are less of interest for us. But it's clear that I intend to continue that policy. We told you that we want to more or less in terms of a bolt-on acquisition, like you said, the downstream is acquiring more or less 1 billion per year, our gas -- downstream plus gas. We knew it wasn't power, but we want to balance that with sales in order to have a net accretion at 0 on this side. And the upstream, is clear, we'll participate. And very true that we've had -- I mentioned that on the U.K. portfolio, but there are other ideas, which will help, it will help to, I would say, to feed these annual sales of $1 billion per year. And yes, we will contribute to that. The distribution policy. Let's be clear, we stated last year, I stated in February, that we want to remove -- we're willing to remove the discount from the scrip if the price was reaching $60 per barrel. You are right to say that we're improving our profile. We don't improve it today enough to go down to $50. But this transaction will help to improve it, as I told you. So yes, we understand your point. We will come back on that in the coming months. And the transaction will help us, and the strengthening of our reserves is also helping us, but down to go to the quick. The barrel is volatile. I mean, I'm surprised that the barrel, everybody was very optimistic to see it reaching $60. I've seen $45 on the screen during -- 2 months ago. So we are more around $50 than at around $60. You know our portfolio, and you know and we'll come back at that. From 2019, we have no doubt that we can cover the dividend for -- from free cash flow. We have still the year 2018, which is in the middle range. But the Board of Directors, I think, is giving you a positive indication by telling you this transaction is accretive, and we will remove the discount. Then it's a question of what is the take of 1 to discount the 0? And do we buy back the remaining shares? I think clearly, it's a plan on which we work. It will be easy to do by 2019. We have a question about the next year to better -- to manage more carefully. But again, that true. But there is a clear improvement on our reserves, on the generation of cash flow. (inaudible) and expected. And you have seen that we have a gearing, which has reached the level of 20%. That is done -- that is possible because we have the best CFO among the major companies. But it's also because of effort of everybody. But in terms of what it -- what drives us, it's also to maintain discipline on the way we manage the cash. So I understand you are a little impatient. But that is welcome. It's a matter of patience.
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Operator [13]
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Our next question comes from Lucas Herrmann of Deutsche Bank.
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Lucas Herrmann, Deutsche Bank AG, Research Division - Head of European Oil and Gas [14]
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I suspect my side of the fence, we're probably all using the same data to try and value this. And what pops out, relying on what [Matt] suggested is that you just allocated broadly $7.5 billion to this transaction on assumed forward price or something that looks like it's about $60. I understand and see that the benefits to cash flow, the nearer-term benefits to growth. But does this tell me anything about -- or what does this tell me, Patrick, about your opportunity set? That $7.5 billion, you're happy to allocate 10% or so returns. Or should I just be thinking of it, well, that this is a completely separate transaction. That there's something to scale cash flow, and helps us undertake a low risk filling of cash, et cetera, at this time. Is that clear or too cryptic?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [15]
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It's always a little cryptic with you, my dear, to be honest. So I need to think, because you are too smart for me. I need to think before to answer. I think you are a little high with your $60 per barrel assumption and a little low with your 10% return. You forget the capacity to generate the synergies. And I think again, you need to take into account that -- and I think we demonstrated that in the recent years. We will be able, and the $400 million is a minimum for me, we'll be able to deliver value. So there is some added value. And when you acquire a company -- and it's not just an asset, it's a company like that, it's big enough to generate opportunities that even you don't think again. I mentioned this -- management -- better management expertise. It will help us, and we had already a list of projects which are -- on which we think which it will help us to develop new projects. So it's beyond only, I would say, calculating what is implied part of the existing assets. You have more than that to extract as the value of an asset. It's also a way -- and you mentioned the point of it. It's clear that yes, it's low -- you are right. It is a low-risk opportunity. For me, it's a low-risk opportunity. I'm very comfortable with it because it's, again, in our garden. There is an execution to be done to integrate properly the teams. But we have done that in the past, and so it's -- I think I'm fully convinced that this type of opportunity will help us to generate more cash flow for our shareholders, and with help to -- and the team, the dividend growth in the coming years. So I'm very comfortable with it. So it's also the way to look at it, that is either you compare to other opportunities. If we are doing this one, it's because we believe it's better than others that we are selling, other ones (inaudible). I don't bet $7.5 billion just -- it's quite a big amount of money. It's by the way, the largest transaction that the group is doing since the merger with Elf and Petrofina beginning of 2000. So if we've done it, it's because, with Patrick, we've permanently reviewed various opportunities, and this one seems to us -- I like your word, low-risk opportunity in terms of being able to deliver added value to our shareholders.
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Operator [16]
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We will take our next question from Christopher Kuplent of Bank of America.
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Christopher Kuplent, BofA Merrill Lynch, Research Division - Head of European Energy Equity Research [17]
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Just very briefly, I think in the same vein of Lucas's question. As far as I can calculate, this transaction doesn't actually accrete your 2P reserve life. So it looks to me you must have put a significant value on what's beyond 2P, if my calculations are correct. So I would turn around the question that Theepan earlier asked and say, actually, doesn't it make you even more concerned and keen on FID-ing more projects? Because obviously, as you say, you now have 3 million barrels per day in 2019 to replace. So just wanted to see how you would assess that question. And finally, you've told us, and I appreciate this question will be seen a little cynically, you've told of the great overlap between the assets you're acquiring. I wonder which assets you don't think fit into the Total portfolio and that ultimately you wouldn't mind selling.
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [18]
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Well, I think I've been clear in my presentation. I think, frankly, there are few assets that in Kazakhstan, which are very little interest. But even if we will be happy to participate, it's quite small, and there are subscription rights. If the partners want to preempt, I will not be very sad, to be clear. But again, Kazakhstan is an operated asset. So it's an opportunity to be operator in a new country. It's always good to control part of your production by operation and to -- so from that point of view, it's all extracted oil. So there is not much honestly. I like the question, which was previous the proposal of one of your peers, which was the idea that having these assets, it can fit over a few assets in our portfolio in order to -- which have higher breakeven points on which we consider what we should divest. It will add globally the management of the portfolio when you have a larger one. In terms of renewal of resources, I'm -- now clearly, we have considered -- we have spent some time, obviously, to review the various datas. And when I told you that we had 1 billion barrels base of reserves of proved resources, 2P/2C, the 2C are approach -- we will probably (inaudible). So we are confident that we have 1 billion barrel of reserves in the 2C -- 2P reserves or -- and assimilated in this portfolio. This is the basis that we have, and we identified project by project. We have some project we didn't take into account. So the resource base is larger than that. We have made that on a probabilistic approach. But in fact, it probabilistic and deterministic in terms what are the projects which will be value-ized in the base. So what we value-ize is really the 1 billion barrels of -- that we speak in order to give a value to this portfolio. So this is the reserve base on which we base our approach and our calculations. In terms of renewal of resource, it's a permanent quest for an oil and gas company to -- the larger you are, the more you need to find. But I think we have a good track record and -- we are -- we have been able to have -- to be above 100% on several of 5 years' ratios and -- on the company. And this transaction will add, but other transaction we are doing in other parts of the world are also helping us to do that. So I'm -- yes, I know, but the larger you are, the more this renewal becomes a headache. That is why we need to continually -- we are interested to work. And I think that we generate, because we have more people as well, we generate more opportunities in order to do that. So that is force us to accelerate the sanction of the project. I would say, even if I'm -- the CEO decides what timing it takes, at the end, it's a matter of the teams being able to put the right file, investment file. What issue is the driver for us is more to be able to sanction projects with benefits, really from the low-cost environment. So our driver is more the costs of a project, and we think that today is the right time to do it. So we have a plan. We will come back to you on September 20, I think, on -- to update you on all these sanction of projects -- or 25, I don't know, but you have the date. We will come back to you on that in 1 month. So thank you for the question. It help us to present that in the smartest possible way.
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Operator [19]
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We'll take our next question from Matt Lofting of JPMorgan.
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Matthew Peter Charles Lofting, JP Morgan Chase & Co, Research Division - VP [20]
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I had 2 please. First, just coming back to the financing of the transaction and possible implications for Total's M&A strategy. I mean, given the company's undoubted balance sheet strength, could you just talk about the choice of using equity financing as opposed to perhaps a cash component? Does it suggest you're still looking to retain further balance sheet firepower for additional deals to -- sort of for you to supplementary to the $2 billion resource renewal budget as opposed to being part of it? And then secondly, just on CapEx. Is it a base case that we see Total incrementally sell down assets to stay within the $15 billion to $17 billion per annum CapEx budget? Or do you think you've got sufficient headroom for incremental disposals to be optional as opposed to a base case?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [21]
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No, again, the second question is very clear. There is nothing to do to stay in the $15 billion, $17 billion guidance we gave you. What to -- by the way, we will not announce more sales than before. The sales -- the divestment program of $10 billion was on 2015-2017. It will be executed, the $10 billion, by end of 2017. Beyond that, the average sale per year is planned to be $1 billion, and the $1 billion is supposed to net the acquisition, the bolt-on acquisitions, which are done in the downstream or in the gas renewables and power division. So plus $1 billion minus $1 billion makes 0. So there is no -- I mean, we don't need to accelerate any sales in order to stay within the guidance of CapEx. And again, the $15 billion, $17 billion, don't take $17 billion. Take $16 billion. And $15 billion, $16, better than $17 billion. So we don't impact. Then about your first question, just let me be clear. We announced clearly to you that one of the driver was to lower the gearing to 20%. We are quite in advance on this target because we reached 20% by end of June, and we want to stick on the discipline. I'm a strong believer. One of the lesson I drew from the last 3 years is that some of other companies that have entered into this low cycle with a lower gearing than us and probably have done a lot, quite a lot. And so I'm a strong believer that 20% should be -- is a right target and even to stay at 20%. So having said that, using our shares, which is a good asset, our shares, and it was attractive. I think, let me be clear, in this specific deal, I think the idea -- we were competing with the idea of an IPO. So going off shares and putting our shares on the table helped us, I think, to convince Maersk main shareholder to go with Total. So it's also a way to finance it. The impact of the transaction, by the way, will be low in our gearing. So 20% will become, if it would have happened today, something like 22%. So it's 1.5% of the impact on the gearing. So is your question, do we have room for more? Again, I'm not there to make acquisitions. We are there to create value. So sanctioning projects in our portfolio, is a way to make value. If there are opportunities, we say, seize the opportunities. But it's not -- the main driver there was more to maintain the strong balance sheet. And in this specific case, the shares were -- a combination of shares and debt was the right way to convince the seller to -- that our scheme was worth to select it.
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Operator [22]
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We will take our final question from Jean-Luc Romain of CM-CIC Market Solutions.
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Jean-Luc Romain, CM-CIC Market Solutions, Research Division - Analyst [23]
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I was wondering about the proved reserves competent of your acquisition of Maersk. Could you give more substance on that, P1?
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Patrick Pouyanné, TOTAL S.A. - Chairman, CEO and President [24]
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Okay, P1, you will -- we will wait a little to get the P1 figures. There are officials released by Maersk. It's around 350 million barrels of P1 reserve, I think what I read. But it's back to -- all of engineers need to take to be onboard in order to evaluate batches, batches. It will be done. By the way, it will not impact our reserve renewal by end of the year. We don't expect the closing of the transaction before year-end. So it will impact our level of renewal end of 2018. So we have 1 year -- I will have 1.5 year of work to be able to come back to you with the precise figures. And these P1 reserves are controlled and there are a lot of processes. So I don't want to deliver today to you any figure, which is not validated. I think it's early. By the way, I mentioned the closing. So we target the closing by first quarter 2018. Why? Because, in fact, we have to go for some processes, the main ones being that we need to -- there are some change of control regulations in a lot of countries, most of the countries in which Maersk Oil operates, except U.K. and the U.S. The others have some change of control regulations, so we need to go through each of these countries. So we'll work on that. We expect that to take something like 4, 5, to 6 months to -- in order to be able to settle the transaction. I mentioned during my presentation, there were a little preemption rights on the assumption marginal assets, which we have to purchase on the line. So sorry not to be more precise to your question on P1, but think it's -- again, I don't want -- it's a matter which is under control of many regulation, and engineers need to work and to understand what we have before to deliver to you a figure, which will be impacted, by the way, when we sanction Tyra Future, which is not today in the P1 figures because it's not sanction of Maersk Oil. We sanction that in 2018. That means that this P1 figure will be added to the figure I just mentioned. So you will have the answer by end of '18.
So I understand it was the last question. For more -- and thank you to our -- to organize this call. I just would like to conclude this presentation, and thank you to all of you for having attending this call, which was called quite late this morning. But there -- and all the set of interesting question. I hope it has been useful to you to get a good understanding of this acquisition of Maersk Oil by Total. And so I would like just to remind you so that you keep the positive message before to leave us. The key drivers of the transaction, 1 billion barrels of reserves, 2P/2C, mainly in OECD countries, and liquids -- mainly liquids production, which 160,000 barrel per day in '18 growing over 200,000 barrels per day, so growth. Additional cash flow from operation, $1.3 billion by '18 and which will go thereafter -- and before synergies. And this has a -- the Maersk portfolio is fitting well with Total. It's immediately accretive, both to our earnings per share and our cash flow per share. We will be able -- and we are committed to that, to deliver significant synergies, $400 million, with the objective to reach that by 2020 and it will help. By the way, in September, we'll come back to you. It will participate, obviously, to raise our target of cost savings. We have $4 billion by 2018. We'll update that figure and raise it by 2020 to give you another target. And obviously, these -- the cost synergies we mentioned today with this transaction will be taken into account in the new objective. The free cash flow breakeven of the Maersk portfolio is under $30 per barrel. And at the group level, we are able to make that transaction, maintaining our CapEx guidance. And I insist that you don't say think but it's pushed us to $17 billion. We'll come back to you on this figure by September. We are able to absorb the Maersk CapEx within the previous guidance because, in fact, we add some margins to maneuver -- prepare the growth of the company beyond 2020. It was the objective we told you last year. Will (inaudible) position will increase? Yes, it will become a premier model for the company as soon as 2019. So again, it's a huge increase in 5 years. But again, it's not the main driver for the CEO of Total. The main driver is to be able to deliver value. And last, but not least, for our shareholders, again, due to the good performance of Total this year and permanently improving performance, plus the additional cash flow provided by Maersk Oil acquisition, the board will remove the discount on the scrip dividend on the date of the closing of the transaction.
That's all what I want to tell you today, and thank you for the attending the call. And see you soon in London and in Russia, if you participate to the field trip.
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Operator [25]
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Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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