Total: Still A Solid Buy At These Levels?

| About: TOTAL S.A. (TOT)

The increase in population and income growth are the main drivers in the consumption of oil and natural gas. Growing economies around the world also boost fuel consumption. This gives major oil companies like Total (TOT) an immense opportunity to increase their existing base of fuel production. Total is focusing on the production of crude oil and natural gas. In the second quarter ending in June of this year, the company produced around 2.29 million barrels of oil equivalent per day, or boepd, and it plans to increase it to 2.6 million boepd by 2015. Here we have taken two of Total's projects and discussed their impact on the company's growth potential.

Oil fueling Kazakhstan

According to OPEC, the consumption of oil is going to rise by 1 million barrels of oil per day next year, reaching to around 90.8 million a day. This gives the energy players an incentive to open more oil producing fields.

Kazakhstan's Kashagan oil field will help the country reduce its oil import. A consortium of companies manages the oil field, which started production in September this year. The consortium comprises companies including Eni, Exxon Mobil (XOM), Royal Dutch Shell (RDS.A) (RDS.B), and Total. Each of these companies holds a share of 16.81% in the venture. KazMunaiGas (OTC:KZMNY), China National Petroleum, and Inpex (OTCPK:IPXHY) hold the remaining 32.76% of the project. The project took around $40 billion to build over a span of 13 years. Looking at Total's share of 16.81%, we estimate the project cost the company approximately $6.72 billion. With the project beginning production this year, it should enhance the company's cash flow by reducing its capital expenditure required for the development for this field.

Additionally the Kashagan oil fields will provide multi-year growth to the company. According to Eni, the production is forecasted to be around 180,000 boepd by the end of this year, and its first phase of production will reach around 370,000 boepd by next year. This field has a total reserve of 35 billion barrels out of which around 9 billion - 13 billion barrels are recoverable.

With its huge production capacity, Kashagan can supply oil to Kazakhstan to reduce the country's ballooning oil imports. The following table shows the amount of oil imported by Kazakhstan.






Import ($ billions)





Source: IMF

The production from the Kashagan fields will thus find a domestic market in Kazakhstan. According to the Kazakhstan oil and gas minister, "Kazakhstan will minimize oil imports and meet the domestic demand by 2020."

Another company that has a strong foothold in Kazakhstan is Chevron (CVX). With its holding in one of the country's largest oil fields, Tengiz, Chevron is one of the main producers of oil in Kazakhstan. Chevron has a 50% interest in the operations of the field. It plans to increase the production from this oil field through the "Future Growth Project" program, which tries to increase the current oil production by 12 million tons per annum, or MTPA, to around 36 MTPA by 2016. Chevron realized a per barrel margin of $4 more than its peer group in oil production. This strong margin combined with the increasing oil production from the Tengiz field will provide the company with higher profits.

Natural gas - growing in significance

Total also has significant production volume from LNG. Last year the company produced 11.4 million tons, or MT, of LNG, and it plans to increase it further. With demand for natural gas rising in Asian countries, natural gas producers are developing reserves of natural gas near these countries. With a natural gas reserve of around 110 trillion cubic feet and located closer to Asia, Australia provides a large opportunity for natural gas players to monetize these resources.

Total has an interest of 27.5% in the GLNG project in Australia, which is expected to come into production by 2015. The project has an estimated build cost of $18.5 billion and is 60% complete. Total realized an average gas price of $6.97 per million British thermal units, or mbtu, during the first half of this year. The company has signed deals to supply natural gas with South Korean company Kogas and Malaysian company Petronas (OTC:PNADF). It will supply a total of 7.2 MTPA of LNG to Kogas and Petronas. We believe that the price of natural gas will remain firm in Korea and Malaysia due to the increasing demand for cleaner energy in both countries.

Korea recently saw a surge in the consumption of natural gas because of the closure of nuclear power plants in May this year due to safety and environmental concerns. The total installed capacity of LNG power generation in Korea is around 23,611 million watts, or MW, which contributes around 25% of the country's power demand. The country is planning to build six LNG power plants by 2017 to cut down emissions. In Malaysia, consumption and government subsidies are driving the demand for natural gas. We believe that the shift to natural gas in Malaysia is going to continue because it pollutes less than coal. This leads us to believe that the company's contract with Kogas and Petronas will provide a huge upside to its revenue.

Royal Dutch Shell is also focusing on developing natural gas assets to export into Asia. It is expected that the gas demand will grow at the rate of 2% per annum and the majority of it is expected from Asia. Last year the company sold around 20.2 MT of LNG, around 8% of the world's natural gas market, and plans to increase it further. In September this year, the company signed an agreement with Ukraine to extract natural gas from the Yuzivska block. The extraction will start in 2015. This will further strengthen Royal Dutch Shell's position as a major player in the natural gas sector. At the current market price of around $3 per mbtu to $5 per mbtu, Royal Dutch Shell realized a profit margin of around 10% to 15%. So, we believe that the new production increase will further enhance profitability.

What are the growth prospects?



Forward P/E




Royal Dutch Shell






Source: Yahoo Finance

A comparison of the current P/E and forward P/E shows a favorable valuation for Total. Its current P/E ratio of 10.37 will reduce to 8.1, and this reduction is highest among its peers, Chevron and Royal Dutch Shell. As we have discussed, Total is expanding its portfolio of energy resources to both oil and natural gas. Its project in the Kashagan oil fields will increase production in due course to cater to a ready market in Kazakhstan. On the other hand, Chevron is enhancing its position in Kazakhstan through increasing output in the Tengiz field.

Total is also entering into the natural gas market that Royal Dutch Shell has a heavy presence in already. To compete in the natural gas market, Total has targeted high growth markets like Korea and Malaysia. We believe that Total's strategy will provide it with growth in the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.