Total stops buying Novatek shares after MH17 shot down

Q2 net adj profit down 12 pct to $3.15 bln; Yamal development operations continuing, review in August. Total: impact of Russia sanctions on Yamal LNG uncertain.

French oil major Total stopped buying shares in Russia's Novatek (NVTK.ME) when a Malaysian airliner was shot down over Ukraine, but it is still too early to gauge the impact of western sanctions against Russia, Total said.

Total is one of the top foreign investors in Russia but now faces a cloud over its future there since the downing of flight MH17 on July 17 over Ukrainian territory held by pro-Russian rebels worsened the oil-rich country's relations with the West and raised the threat of deeper sanctions.

The oil company had forecast in April that Russia would become its biggest source of oil and gas by 2020 thanks to its partnership with Novatek and their Yamal LNG project in Siberia.

"We stopped buying shares in Novatek the day of the plane accident, considering all the uncertainties that this event could lead to," Chief Financial Officer Patrick de La Chevardiere told reporters in a conference call.

"We have not stopped operations on the Yamal project at this stage. We agreed with our partners to take stock of the situation at the end of August," he said during a presentation of the company's second-quarter results.

Shares in Total fell as much as 3.1 percent, the biggest decliner in an index of European oil and gas companies. Total's net adjusted profit fell to $3.15 billion, less than a $3.27 billion consensus analyst forecast cited by Bernstein.

"Results are one reason, it's true, but let's not forget Russia, to which the group is very exposed," a Paris-based fund manager said of the share price drop that wiped 3.7 billion euros off the market capitalisation of France's biggest company.

Russia accounted for about 9 percent of Total's oil and gas output in 2013.

At the end of June, Total owned 18 percent of Novatek, which has seen one of its shareholders hit by U.S. sanctions. Total bought a 12 percent stake in Russia's second-largest natural gas producer for $4 billion in 2011 with an option to increase its holding to 19.4 percent within three years.

De La Chevardiere said Total was not doing business with people on the U.S. and EU sanction lists, although he said he had yet to see the EU's latest list of measures against Russian oil companies, banks and defence firms over Moscow's support for rebels in eastern Ukraine, unveiled late on Tuesday.

"We need more time to review the consequences of these sanctions. If these sanctions forbid us to work there, we will be forced to stop working, but we can't forget that Russia is a big oil country," he said.

The $27 billion Arctic Yamal peninsula liquefied natural gas (LNG) project, which plans to export 16.5 million tonnes of LNG a year, also caused some headaches at French oil services firm Technip, which last week cut its margin target for its onshore/offshore unit for this year and next.

Total's London-based rival BP, which gets about a third of its crude oil output from Russia, also warned further Western sanctions could harm its business there and its relationship with Russian state oil group Rosneft.

PRODUCTION BOTTOMED OUT

In the second quarter of the year, Total's oil and gas production fell 10 percent compared to the same quarter a year ago, to 2.054 million barrels of oil equivalent per day (boepd).

The main reasons were heavy maintenance, the deterioration of security in Libya and the loss of the ADCO concession in Abu Dhabi, which the emirate took over in January and is expected to re-award in 2015.

"This year all the maintenance was concentrated on the second quarter," the CFO said, citing work in the North Sea, Nigeria and Thailand.

The same reasons affected net adjusted profit, which fell 12 percent year on year, also hit by a very weak refining margin, which was less than half the level of a year ago in the three months to the end of June.

"We went through moments when margins were negative during the second quarter, we cut production to the technical minimum at some refineries because the more we produced the more we lost money," he said, declining to say which ones.

Margins have started to improve in the third quarter, but remain "very volatile", Total said.

"Weak set of numbers from Total and the stock will rightly be weak today," said Bernstein analysts, who have an "outperform" rating on the stock.

"Results seem to be impacted by high levels of maintenance in both the upstream and downstream resulting in lower volumes and higher costs," they wrote.

The CFO said output had hit a bottom and was expected to rise as projects such as Laggan-Tormore in the North Sea and Ofon Phase 2 in Nigeria came on stream in the second half of the year.

De La Chevardiere said he would give an update on the group's long-term production targets - 2.6 million boe/d in 2015 and 3 million boe/d in 2017 - at an annual investor day conference in London in September.

"But it's clear that delays at Kashagan are not good news," he added, saying that the field's operator did not expect any restart of the giant Kazakh field before 2016.

The group will also unveil a new cost-cutting plan in September.

De La Chevardiere also said China's Sinopec had notified Total that it would not buy its Usan field in Nigeria after all, a $2.5 billion deal for a stake in the OML 138 block that the French group had announced in November 2012.

"I don't know their reasons. We have launched the process two days ago to find a bank to relaunch the sale process and find a new buyer," he said.

Total proposed a dividend of 0.61 euro per share for the second quarter. Revenue was up 2 percent to $62.56 billion.

By Michel Rose