Integrated oil and gas company TOTAL S.A. TOT announced its intention to invest €600 million ($637.8 million) to upgrade the Donges refinery in western France and transform the La Mède refinery in southern France. Both these refineries are incurring losses due to the ongoing softness in commodity prices.
The objective of the investment is simply to return these two French refineries to profitability. TOTAL has decided to invest €200 million ($212.6 million) to transform its La Mède refinery and to create France’s first biorefinery, which will be one of the biggest in Europe, to meet the growing demand for biofuel.
TOTAL will invest €400 million ($425.2 million) to upgrade the Donges refinery. This will then cater to profitable new markets with low-sulfur fuels that meet the evolutions of European Union specifications. TOTAL’s aim is to make these two profitable like its three other French refineries, Gonfreville in Normandy, Grandpuits in the Paris region and Feyzin near Lyon that have withstood the buffetings of the oil markets this past year.
TOTAL had hinted about this restructuring plan at its fourth quarter 2014 earnings release. Overcapacity of the fossil fuel in Europe was creating headwinds for the oil refining business. So, as a part of the restructuring process, the company also decided to lower refining volumes at its Lindsey refinery in the UK.
The softness in oil prices is expected to prevail over the major part of 2015, which would continue to put margins under pressure for most oil and gas companies. Apart from restructuring their existing operations, the oil and gas majors are also reducing capital expenditure for 2015.
TOTAL has trimmed its 2015 organic budget by 10% year over year to a range of $23 billion to $24 billion. Among other operators in the space, Anadarko Petroleum Corporation APC lowered its 2015 investment to the range of $5.4–$5.8 billion from $9.3 billion spent in 2014. ConocoPhillips COP cut its 2015 capital budget by 20% to $13.5 billion and WPX Energy WPX announced a capital plan of $725 million for 2015, less than half of last year’s capital expenditure of $1,807 million.
TOTAL currently has a Zacks Rank #3(Hold).
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