“Because it is my first conference call, let me introduce myself,” said a voice on the other end of the line. “You can call me Patrick.” This casual introduction marked a changing of the guard at the top of corporate finance in Europe. Analysts on the August conference were hearing from Patrick de La Chevardière for the first time since he took over two months earlier as CFO of Total, the French oil giant. It was a momentous occasion, as de La Chevardière was stepping into a post held for 14 years by his hugely popular predecessor, Robert Castaigne. Although, like Castaigne, he has spent his entire career at Total, including five years as deputy CFO, it will “obviously” be a challenge to live up to such a “prominent personality,” he told CFO Europe as he approached the psychologically significant milestone of the first 100 days in his new role.
“Internally, when Robert said something, it was like the voice of God,” de La Chevardière chuckles. “I now have to prove that I am like God, which could take some time.”
As well as living up to the legacy of his mentor, the responsibilities that come with the CFO post at Total are formidable. The largest company in terms of market cap in the euro zone, Total employs nearly 100,000 people, pumps more than 2.3m barrels of oil every day and generated €160 billion in sales last year. From one of the thousands of offices in the company’s imposing headquarters — the tallest tower in the La Défense district of Paris, as nothing about Total is small scale — he must wonder about how much influence a single executive can have on a company of this size. (See “Giant Steps” at the end of this article.)
Called to Account
Fortunately for the CFO, soaring oil prices this summer made his first conference call relatively easy. “Our results are straightforward,” he told analysts, with record-high oil prices leading to record-high profits. The group reported adjusted net income of €7 billion in the first half of 2008, a figure that the press couldn’t resist breaking down into a remarkable rate of €1.6m an hour.
But future presentations may be less straightforward. The massive profits reaped by the international “super majors” — a group that includes Total, ExxonMobil, ConocoPhillips, Chevron, BP and Shell — have resulted in a backlash against contracts signed when the price of oil languished around $20 a barrel in the 1990s. “Resource nationalism” is on the rise, with host governments — which control some three-quarters of the world’s oil reserves — keen to renegotiate, or even scrap these agreements.
As a result, state-owned oil players such as Saudi Aramco, Petrobras and China National Petroleum Company — referred to as national oil companies, or NOCs — are growing in confidence and cash flow, challenging the super majors at home and, increasingly, abroad. A recent report by Moody’s Investors Service questioned whether the super majors could “retain a differential advantage based on capital resources and technology” as NOCs enjoy “a combination of foremost access to new resources, increasing technological sophistication, and political and economic agendas that do not necessarily put shareholder return as a first priority.”
What’s more, in the short time de La Chevardière has been CFO, the price of oil has ranged from an all-time high near $150 a barrel in July to around $90 in mid-September. With banking turmoil threatening to dampen the broader economy, thereby crimping demand for oil, the price of a barrel in September hovered around the level that Total executives, in a mid-year strategy update, say represents the breakeven point for marginal production in the Canadian oil sands, where many oil majors plan to ramp up production. Other important projects in development in offshore Angola will break even at $70 a barrel, a level that may be tested if the economic gloom worsens. And like other heavy industries, oil companies have been affected by labour shortages and unprecedented input-cost inflation. (See “Up, Up, Upstream” at the end of this article.)
Powers of Persuasion
The biggest challenges the operators now face are of the “above ground” variety, according to industry lingo. Gaining access to the most potentially lucrative oil and gas fields requires increasingly tricky negotiation with emboldened host governments and NOCs. And after a contract is signed, plenty of risks remain where oil firms operate. As Moody’s explains, “A long list of examples would include tightening state controls over the oil sector in Russia and Brazil; nationalisation and forced sales in Venezuela, Russia, Kazakhstan and Bolivia; and the impact of civil unrest in Nigeria and Iraq.” In July at the World Petroleum Congress in Madrid, Lawrence Eagles of the International Energy Agency, an intergovernmental organisation, said the industry’s key projects had seen initial cost estimates double and deliveries delayed by more than a year, resulting in lost production of 1m barrels a day.
In this environment, “it’s not just about what you know, but who you know,” says Neill Morton, an analyst at MF Global. “More and more, it is about who is at the negotiating table rather than whether your drilling engineers or seismic guys are better than the next company’s.”
In every presentation it makes to the investor community, Total boasts that it has the lowest technical costs among the majors. But bear in mind that all of the super majors, roughly speaking, achieve similar after-tax margins per barrel, notes Irene Himona, an oils analyst at Exane BNP Paribas. Like its competitors, Total is adept at “managing gigantic, sophisticated projects,” she adds, with its primary advantage being the access it enjoys to “prolific hydrocarbon basins” in places such as Africa, where a “less mature asset base provides below-average decline rates.” (See “Charm Offensive” at the end of this article.)
As a result, investor opinion of Total is largely based on the “dynamic qualities associated with Total’s management,” in the words of Jason Kenney, an analyst at ING. In addition to the group’s larger-than-life CEO, Christophe de Margerie, former CFO Castaigne — who retains a clutch of directorships since his retirement — elevated the finance chief’s role above that of most of his peers. Often hosting results presentations on his own, he fielded questions about strategy and financials in a “particularly impressive” way, says Morton of MF Global. At many companies, “you get the impression that the CFO role is a subsidiary one that tends to focus on numbers,” he adds.
De La Chevardière intends to continue the practices of his predecessor. Given the importance of the role, the interest generated by his succession is akin to that which accompanies the turnover of high-profile CEOs.
The 51-year-old reckons that his background in engineering — he joined Total as a drilling engineer in 1982 — helps him appreciate the story behind the financials. When presented with a proposal, “I can see the construction,” he says. “I can visualise an opportunity in order to understand it.” What’s more, “I am not another Robert Castaigne,” he insists. “I will have my own style. I have to do something different.”
With this in mind, analysts and investors are scouring his statements and watching the company closely for hints of a possible change of direction. Thus far they have found little to suggest an imminent shift in financial policy. Many note that de La Chevardière appears blunter about the company’s intention to shed its stake in pharmaceuticals firm Sanofi-Aventis, but that’s about it. More than one analyst describes him as “a safe pair of hands,” a reassuring, if unexciting, assessment.
This stands in stark contrast to CEO de Margerie. With a sobriquet of “Big Moustache,” he joined Total’s finance department in 1974, rising to group treasurer and then CFO for the Middle East, before becoming president of exploration and production in the late 1990s. In that role, “you could imagine him going into meetings around the world and just charming the pants off people,” says an analyst. “He takes control of meetings, with all sorts of bonhomie, jokes and platitudes.” At the end of last year’s mid-year review, a chuckling de Margerie told the audience that “the time has come to move on to more serious matters…whisky is now authorised at our drinks session.”
The CEO’s rapport with his new number-two showed signs of shakiness during a mid-September presentation. When asked whether the company ever considered paying quarterly dividends, the CEO responded that Total followed the “French system.” He asked the CFO whether French companies were even allowed to pay quarterly dividends. “Technically, yes,” replied de La Chevardière, suggesting a possible legal solution. “Okay, you should have said no,” replied de Margerie, managing to laugh.
On more serious matters, de La Chevardière says that he didn’t think specifically about goals for his first 100 days as CFO, or any other formal succession strategy promoted by consultants. In addition to finance, he is now in charge of IT, trading and shipping. To brush up on these unfamiliar areas, the CFO is meeting with department heads, traders, project managers and others to “cross-check and develop my view,” he says.
Maury Peiperl, a professor at business school IMD, reckons that for an inside promotion at a company in good health, the best approach is a slow, deliberate one. Executives in de La Chevardière’s position “need to develop their own initiatives and style, but they don’t have to rush,” he says. When the time comes to make a mark on the firm, he adds, it is usually best to “grow the pie instead of rewriting what’s already written.”
De La Chevardière seems to be taking this advice to heart. In terms of new initiatives, he will assess the viability of a recent deal to build a nuclear plant, with Areva and Suez, in the United Arab Emirates. He also speaks enthusiastically about prospects for the group’s small producers of solar cells and panels. Meanwhile, new interest in Total from sovereign wealth funds — “long-term shareholders for a long-term industry,” the CFO says — will put him in front of investors unfamiliar to his predecessor.
That is not to say that de La Chevardière isn’t also improving finance processes at Total. First, he wants to cut a week from the firm’s one-month close-cycle, “to have more time to study the figures prior to releasing them.” He reckons this will take at least a year to orchestrate and “get the whole company moving towards this target.” Second, he has plans to roll out “more modern tools and instruments” for treasury. Wide-eyed, he describes a day he spent with a young trader who whizzed in and out of multi-million dollar derivatives positions in a matter of minutes. “He makes money, and that’s fine provided that we have very strong controls,” the CFO says.
A personal goal, de La Chevardière says, is to become “the new face of Total for the financial community.” He intends to spend about a quarter of his time as CFO on investor relations, and figures that it will take at least six months to build good working relationships with investors and industry analysts.
One of those investors is former CFO Castaigne, who at the end of his final results presentation in May said that “naturally” he would remain a large shareholder in the company. Since his retirement, Total’s share price, along with its peers, has followed the markets downwards. “I plan to follow the stock price very closely,” he told the audience, ensuring that his shadow remains cast over his successor for at least a little while longer.
Jason Karaian is deputy editor at CFO Europe.
Even after more than ten years in Total’s finance department, Patrick de La Chevardière is amazed by the scale of the numbers he encounters as CFO of the French oil firm. The company owns the rights to develop 40 billion barrels of oil; every $1 rise in the price of a barrel adds $200m to the bottom line; the firm’s market capitalisation often swings by more than €1 billion in a day. It’s no wonder, he muses, that after dealing with such large figures, the prices of bread at the bakery seem strange.
Most major stock indices include a hefty holding in Total, the biggest company in the euro zone. Its first-half results largely met forecasts, apart from a higher than expected hike in the interim dividend. Words such as “safe,” “steady” and “solid” are sprinkled throughout the latest batch of analyst notes.
For this and other reasons, it can be difficult for company executives to convince the market to re-rate its shares. Though most analysts’ price targets range between €60 and €70 per share, trading in September remained between €40 and €45.
As the only non-Anglo-Saxon “super major,” one analyst cites a “French factor” holding back Total’s shares. Such a large company — it accounts for more than 13% of Paris’s CAC 40 index — would be expected to “pay its dues” should the country ever introduce windfall taxes, the analyst notes. The lengthy time that Total has held onto a sizeable stake in beleaguered pharmaceuticals firm Sanofi-Aventis, despite referring to it as “non-core,” could also be a sign of pressure. “There is nervousness among international investors about the potential for government intervention,” the analyst concludes.
De La Chevardière stresses the merits of Total’s French roots, noting that the company benefits from the country’s renowned engineering expertise — using “brains instead of steel” to control costs, he says — and a “very centralised and strict” process when it comes to appraising investment proposals.
For his part, Jason Kenney, an analyst at ING, considers Total “the most attractive flight-to-quality stock in the sector.” But this can be a double-edged sword, as investors pile into the stock and seem unwilling to part with it in great numbers. “You have to wonder who the marginal buyer will be, and who will sell them the shares,” he says. “It’s damned if you do, damned if you don’t.”
“There is very little oil in France, so for many years we have been chasing oil outside it,” says Patrick de La Chevardière, CFO of Total. Indeed, the Paris-based company’s first oil discovery was in Iraq in 1927. Throughout its history, one of the firm’s key strengths has been the “ability to enter into agreements with mostly everyone,” asserts the finance chief.
For example, Total was considered a “rank outsider” among the field of international suitors bidding for two minority stakes in the Shtokman project, a major gas field in Russia’s Barents Sea, recalls Neill Morton, an analyst at MF Global. But last year it emerged as state-controlled Gazprom’s first-choice partner, ending up with a stake marginally larger than StatoilHydro, which operates similar fields in neighbouring Norway. “It goes to show,” Morton says, “that behind the scenes Total can get things done.”
A third of Total’s upstream portfolio — the highest proportion among the majors — is subject to production-sharing agreements with host governments. This means that the operator shoulders the cost and risk of exploration in return for a share of the oil produced. Many say that these contracts are under threat, as governments seek to contract fixed-fee services directly from firms such as Halliburton and Schlumberger.
De La Chevardière insists that licence rights to reserves remain a key requirement for all contracts. “We can agree that the sharing goes down when the price goes up. But we always want a piece of the cake, even at $200 per barrel,” he says. This will test Total’s negotiating skills to the limit.
While few doubt the company’s formidable dealmaking skills, allegations of corruption are never far below the surface. Since taking over as CEO two years ago, Christophe de Margerie has been questioned in police custody as part of probes into alleged bribes in Iraq and Iran. Also, Total’s willingness to maintain business ties in Myanmar and Sudan does not endear it to some investors and activists. The company’s common defence includes assurances that contracts were signed “in accordance to applicable laws” at the time, and it highlights its “integrity guide” that provides workers with “meaningful, concrete” examples of its code of conduct. From the Extractive Industries Transparency Initiative to the United Nations Global Compact, Total is a member of most corruption-fighting campaigns, for what it’s worth. (See “More Than Words.”)
A quarter of Total’s employees work in countries at the bottom of Transparency International’s ranking of corruption perceptions. Oil is rarely found under Club Med resorts, de Margerie sometimes jokes, so the company must face the challenges of operating wherever resources are found.