We continue to like TOTAL S.A. (TOT) for its positive production growth profile, attractive returns and strong balance sheet.
However, we remain Neutral on TOTAL shares due to the present constrained commodity environment that will continue to weigh on its earnings, at least in the near term. Thus, we believe the stock will perform in line with its peers.
TOTAL’s expertise spans the industry value chain from oil and gas E&P to the marketing, trading and shipping of gas midstream, refining and petroleum products. The French company is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. Additionally, TOTAL’s ongoing alternative energy projects add to its already positive profile.
Furthermore, TOTAL has shown continued success in effectively implementing its strategy to revitalize its exploration program and leverage partnerships to grow its Upstream business, while investing in strong value-creating projects.
We believe the company’s decade long investments in the Upstream division should result in a 2% CAGR volume growth well into the next decade. In sharp contrast to its peers and to its advantage, TOTAL has minimal production exposure to the Gulf of Mexico, where production continues to suffer following the oil spill incident at BP Plc’s (BP) well.
TOTAL is also well-positioned in the downstream and chemicals businesses. Being the largest European refiner, we expect TOTAL to capitalize on the robust refining environment in the U.S. through exports.
Also, TOTAL has emerged as the largest player, in the marketing business, across six major markets in Europe (France, United Kingdom, Germany, Benelux, Italy and Spain), and is the second largest in the growing African market.
In the most recent quarter, TOTAL underperformed the Zacks numbers by posting operating earnings of $1.54 per share (€1.14 per share) versus the Zacks Consensus Estimate of $1.58 per share. TOTAL’s full-year 2010 earnings also missed the Zacks Estimate by 35 cents coming in at $6.08 per share (€4.58 per share).
Although the company’s earnings dipped, its revenues outperformed the year-ago numbers driven by strong hydrocarbon sales and favorable commodity prices, offset by lower throughput volumes at its refineries.
Moreover, we believe TOTAL’s strong balance sheet gives it the flexibility to continue returning capital to shareholders through increased dividend payouts and share buybacks, while maintaining a strong capital expenditure program.
At year-end 2010, the company generated adjusted operating cash flows of $23.9 billion and reduced its net debt-to-equity ratio to 22.2%. Net investments for the year decreased 7.6% to $15.8 billion (€11.9 billion), including acquisitions and divestments.
Looking into 2011, TOTAL has announced an investment budget of $20 billion, of which 80% is earmarked for its upstream segment. The company also remains committed to the cause of continuous research and development and has budgeted a billion dollars for this purpose in 2011.
TOTAL raised its exploration budget to $2.1 billion, and is pursuing a more diversified approach to make larger discoveries. Additionally, TOTAL’s proposal to pay quarterly dividends in 2011 should attract investor attention, in our view.
Despite these positives, TOTAL’s results, like all other energy companies, are directly exposed to the inherently volatile oil and gas prices. We believe a sustained decline in oil prices and European refining margins may impact the company’s performance.
TOTAL conducts operations in more than 130 countries across five continents. As such, the company is exposed to risks associated with doing business abroad, such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil action, etc.
Also, with a significant portion of the company’s oil reserves and production located in Africa, socio-political issues in those areas may impact operations.
In summary, we believe that the prospects for dividend growth and continued share buybacks add to the company’s attractiveness. However, TOTAL’s fortunes in the near-term seem to be losing steam, mainly due to the lackluster commodity environment. TOTAL currently retains a short term Zacks #3 Rank (Hold).
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