Even on an adjusted FIFO basis, Exxon-Mobil (XOM) seems better armed to face the coming inflationary period with approximately twice the ROE of Total/Fina/Elf. Additionally, the common size FIFO adjusted petroleum inventory ratios of Exxon are higher than Total’s. The dependence of Total/Fina/Elf on Africa and its thin inventory base exposes it in particular to terrorist threats or political risks originating from that volatile region.
French petroleum giant Total/Fina/Elf (market cap $159 billion dollars) is the number one petroleum/refining company in Europe, number one in Africa and the fourth largest in the world. Elf-Aquitaine, its better half, is often remembered for a scurrilous sex/politics/power and money scandal in the early 1990’s (more on that later), but now the company is laying low and trying to do what it does best: produce and market petroleum and chemicals. Compared to its Texas based rival, Exxon-Mobil (market cap 385 billion), it concentrates on Africa and Europe while Exxon-Mobil has a highly diversified presence all over the globe, with an emphasis on Asia/Pacific (21% of sales) America (35% of sales) as well as Europe (25% of sales). Total's stock market performance runs neck and neck with Exxon’s, although its trailing P/E is almost twice that of Exxon’s (19.09 for TOT against 10.39 for XOM).
Source: Yahoo! Finance
Total is overpriced, but is it better prepared to face the possibly stagflationary future since, as a European company, it uses FIFO to value its downstream inventory and doesn’t have to engage in undue LIFO liquidations? (A Lifo liquidation is where a company that uses Lifo reports liquidation in older inventory, effectively inflating its paper profits.)
Exxon, for instance, reports in its consolidated statements that in 2004, net income was inflated by $227 million due to a Lifo drawdown and by $215 million in 2005. While this may seem derisory compared to a total net income of 25.3 billion dollars and 36.13 billion dollars, still a Lifo liquidation is an unwanted event. Exxon informs us that its Lifo reserve in 2004 and 2005 increased the actual replacement cost of inventories by $9.8 billion and $15.4 billion respectively. These increases in Lifo reserves (designed to adjust inventory to a more current Fifo level) was inflationary in nature. In fact, they can be used to measure the inflationary impact in the petroleum industry quite precisely.
Who’s afraid of the big bad inflationary wolf?
In an inflationary situation in general, a FIFO based company provides a more accurate picture of its inventories, since LIFO based companies may have to resort to Lifo liquidations due to unanticipated inventory reductions, due to recessions or other bearish events. In the current possible stagflationary situation, this should be a concern for oil companies which are Lifo based. However, in the following table, we see that Exxon, even when adjusting inventory valuation to a Fifo basis is not in as weak a position as Total.
Total seems to be precariously placed if ever there were threats to their supplies such as wars or terrorist events.
Exxon’s ROE, even adjusted for the LIFO reserve, is much higher than Total’s. The Lifo reserve, remember, is the amount added on to a Lifo based inventory valuation necessary to adjust it to a more accurate Fifo based valuation.
The whore of the republic?
When I wrote my article about French iShares (EWQ) oh so long ago (France on a plate), I mentioned how important this one company, Total, was as a proportion of the index. Much like in the old adage about GM’s business being America’s business, Total still represents to a lot of French people the company involved in one of the most salacious scandals involving money, power and sex that hit France in recent history. During the early 1990’s, during the Miterrand years, Total/Fina/Elf’s predecessor company, Elf Aquitaine, was accused of operating a $1 billion slush fund to payoff key government officials, involving Dumas, Miterrand’s foreign minister. Elf-Aquitaine, a state company which was subsequently privatized, was also accused of hiring a former lingerie model, Christine Devers-Joncour, to seduce Dumas and shower him with gifts, and who subsequently wrote a kiss-and-tell memoir of the affair, “The Whore of the Republic.”
Those high-flying days are long gone for Total/Fina/Elf. A much more sober oil company these days, it is trying to keep a low profile, but everyone is conscious of the links it keeps with key government ministries and officials. As with the Credit Lyonnais debacle, one always knows that the French state is a major supporter of such a consequential company for the French economy, the downside being a lack of transparency, whether real or perceived. But whether Total’s presence in Africa may be considered an advantage or not, Total and France itself (remember all the colorful African dictators descending on the Cote d’Azur during the 1970’s) will surely be buffeted by developments in that continent, most probably in a detrimental way in the coming years.
Disclosure: The author is long ExxonMobil (XOM)