Is Total A Better Investment Than Exxon And Chevron?

| About: TOTAL S.A. (TOT)

The case

Total (NYSE:TOT) is a European oil giant with activity in the upstream and the downstream sector all over the world. The company generates about 85% of its earnings from the upstream sector. What is special about Total is its exceptionally low P/E ratio (7.1) and its markedly high dividend yield (6%). This may lead one to believe it will be more profitable to invest in Total than in Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX), which have a higher P/E (9.2 and 8.7, respectively) and about half of Total's dividend yield (2.6% and 3.1%, respectively). The above figures [1] also make one wonder why the majority of the investors prefer the two American giants to Total.


The main reason for the above difference in the valuation of the companies is the fact that Total is largely a cash cow whereas the other two companies have significant growth. To be sure, Total has increased its earnings per share (EPS) only 7% since 2005 whereas Exxon and Chevron have grown their EPS by 64% and 108%, respectively. That's why the stock of Total has lost 23% since the end of 2005 whereas Exxon and Chevron have gained 50% and 96%, respectively.


In reference to the dividend yield, Total may be offering its shareholders double yield now but it does not seem capable of maintaining this difference from its peers in the future. More specifically, Total has increased its dividend by 45% since 2005 whereas the other two companies have doubled their dividend within the same period. Therefore, if the past experience is sustained, a long-term investor who wants to choose now among the three companies should keep in mind that the difference in dividends will be eliminated in about 15 years while the capital gains from Chevron and Exxon will be much greater than the ones from Total.

Share repurchases

Total has stopped purchasing its shares since 2006 whereas Exxon and Chevron repurchase about 5% and 2% of their shares every year, respectively. If one takes into account these share buybacks, then the overall distribution to the shareholders of Exxon and Chevron becomes 7.5% and 5%, respectively, very close to Total's dividend yield.


Total has very low net debt, which is about 4 times its annual earnings. This is only slightly higher than the debt of Exxon and Chevron (3 and 2 times their annual earnings, respectively).

Oil reserves

Total replaced only 93% of its reserves in 2012 [2] whereas Exxon and Chevron replaced 119% and 112% of their reserves, respectively [3]. Moreover, Total has 13 years of proved reserve life, which is comparable to Exxon (15 years) and Chevron (11.5 years).


Of course, the past performance of the companies is a paramount indicator for their future performance. That's why the past performance is the No. 1 criterion of Warren Buffett in his investments. Nevertheless, a company may improve or worsen its performance in the future. For instance, Total has set a goal to increase its daily production from 2.4 to 3.0 M barrels/day in the next 5 years [4]. As the company has already started developing all the projects that will drive growth till 2015 [5] and 90% of the projects with a horizon till 2017, it is very likely that the company will accomplish its goal. As per the sensitivity analysis of Total, every 10% raise in the upstream volume, will raise its earnings by $1.5B [6], which means that the above accomplishment will raise its current earnings by about 25%. This is a significant improvement for Total, though still insufficient to outperform its two competitors.

Conclusively, Chevron and Exxon (in this order) have exhibited a much better performance than Total in terms of growth of earnings and dividends in the past. Therefore, I would recommend these two companies over Total. Only if an investor is particularly interested in the dividend yield of the next few years, Total may be the most appropriate choice for that investor, though the capital gain from the other two companies is likely to exceed the overall return of Total.

As the stock of Total has gone nowhere in the last 4 years (range trading between $42 and $65), if one insists on investing in Total, I would recommend waiting for a temporary correction to the support at $46 in order to enrich the high dividend yield with a significant potential capital gain.

Disclosure: I am long CVX, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.