Despite Continued Low Oil Prices, TOTAL Is An Attractive Long-Term Investment

| About: TOTAL S.A. (TOT)

Summary

Although crude prices have continued to fall sharply, and no sign of recovery has been seen yet, in my opinion, at the current price TOT is an excellent long-term investment.

The dividend yield is high at 6.5%, and according to 2016 estimated EPS of $3.16, the forward payout ratio is at 84% among the lowest in its group.

Total has had a lower average upstream production cost than peers. Thus, contrary to many loss-making peers, Total's upstream remained profitable.

Total has the strongest production growth among its peers, and its operational and financial results in the first three-quarters of 2015 had been pretty impressive.

TOT's valuation is good; the stock is trading near book value, the EV/EBITDA ratio is very low at 5.80, and its price to cash flow is very low at 4.12.

The French giant, TOTAL S.A. (NYSE:TOT), one of the world's five supermajors integrated oil & gas companies, has seen its earnings and shares price falling sharply, as a result of the crash in oil prices. Since July 01, 2014, the stock has already lost 43.4%. Also, the shares of the other majors integrated oil & gas companies have fallen sharply in this period. Chevron (NYSE:CVX) has lost 35.9%, ConocoPhillips (NYSE:COP) 54.3%, Exxon Mobil (NYSE:XOM) 23.5%, BP (NYSE:BP) 45%, and Royal Dutch Shell (NYSE:RDS.A) has decreased 52.7% in this period.

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Chart: TradeStation Group, Inc.

The table below shows the current price to book value, debt to equity ratio, dividend yield, and the price change from July 01, 2014, for the six major integrated oil & gas companies.

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Oil prices have fallen sharply in the last week; Brent crude oil has decreased 9.7%, and WTI crude oil has lost 11.3%. Since July 01, 2014, Brent crude price has lost an astounding 70.5% from $105.14 a barrel to its last price of $31.01 on January 15. WTI crude price has fallen 68.7%, in that period, the natural gas price has decreased 52.5%, and gasoline has lost 60.5% since July 2014, as shown in the table and charts below.

Brent Crude Oil, February 2016 Leading Contract

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WTI Crude Oil, February 2016 Leading Contract

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Charts: TradeStation Group, Inc.

Although crude prices have continued to fall sharply, and no sign of recovery fundamentally or technically has been seen yet, in my opinion, at the current price TOT is an excellent long-term investment. First for the generous dividend yielding about 6.5%, and second for a significant price appreciation when oil prices recover. Although TOT's stock might continue to fall, the upside potential is much higher than the downside risk. After all, the best opportunity to achieve high capital gains is when shares of a good company are trading near multi-year lows. What's more, despite the low oil prices, TOT's upstream segment continued to generate considerable net operating income.

Last Quarter Results

On October 29, 2015, TOT reported its third quarter 2015 financial results which beat EPS expectations by a big margin of $0.26 (28.6%). The company showed significant earnings per share surprise in all its last four quarters, as shown in the table below:

Source: Yahoo Finance

Rising oil and gas production and growing profits from its refining operations helped the TOT weather a slump in crude prices. TOT's adjusted net income fell to $2.76 billion in the third quarter, a decline of 23% from $3.56 billion a year ago. Total has joined other major energy producers in cutting costs and spending as oil prices plunged amid a global oversupply. The company said it remained on track to exceed its savings target of $1.2 billion in 2015 and reiterated its goal to reduce 2015 capital expenditure to $23 billion to $24 billion, $20 billion- $21 billion for 2016; and $17 billion to $19 billion by 2017 and onward.

In the report, Chief Executive Officer Patrick Pouyanne said:

In a context where the oil price has fallen by 50 percent in one year, Total was able to demonstrate its resilience. The group is benefiting from its integrated model, production growth and discipline on both investments and operating costs. Oil and gas production increased by 10 percent from a year earlier to 2.34 million barrels of oil equivalent a day as projects in countries including Australia and Canada started. Average output is now expected to rise by at least 9 percent for the whole of 2015, up from a previous goal of more than 8 percent. Total's refining and chemicals division was able to take full advantage of favorable margins in the quarter. The unit's adjusted net operating income almost doubled from a year earlier to $1.43 billion.

Next Quarter

Total is scheduled to report its fourth-quarter 2015 financial results on Thursday, February 11, before market open. According to four analysts' average estimate, Total is expected to post a profit of $0.66 a share, a 46% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.78 a share while the lowest is for a profit of $0.55 a share.

In contrast to upstream operation's profitability that is directly correlated to oil prices, the downstream operation is benefiting from the continued high refining margins and strong demand for refined products. While TOT's upstream adjusted net operating income fell 60% in its third quarter 2015 compared to the same quarter a year ago, downstream adjusted net operating income increased 82.3% in the same period. Also, the marketing & services segment adjusted net operating income increased 12.5%. However, the combined operating income decreased 24.5% compared to the same quarter a year ago, as shown in the chart below.

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Source: Company's reports

Total has joined other major energy producers in cutting costs and spending in 2015 as oil prices plunged amid a global oversupply. The company was on track to exceed its savings target of $1.2 billion in 2015; its goal was to reduce 2015 capital expenditure to $23-$24 billion. Total has had a lower average upstream production cost than peers. Thus, contrary to many loss-making peers, Total's upstream remained profitable. All in all, Total has the strongest production growth among its peers, and its operational and financial results in the first three-quarters of 2015 had been pretty impressive. The company's returns in both the upstream and downstream segments had been better than most its peers. As such, I believe that this strong momentum should continue in 2016, with further reductions in capital expenditure.

Total had generated $15 billion of adjusted cash flow from operations over the first nine months of 2015, despite a drop in the oil price. According to the company, its strategy is to continue to improve the underlying profitability of Total even in a relatively weak price environment. The current annualized dividend is at $2.66, and the yield is very high at 6.46%. The payout ratio is very high at 685%, however, according to 2016 estimated EPS of $3.16, the forward payout ratio is at 84% among the lowest in its group. As such, in my opinion, the dividend payment is sustainable. The average annual rate of dividend growth over the last ten years was at 6.8%.

TOT Dividend Chart

TOT Dividend data by YCharts

Valuation

TOT's stock is trading near book value; price to book is low at 1.03, and the forward P/E is low at 13.03. The price to sales ratio is very low at 0.62, and the Enterprise Value/EBITDA ratio is also very low at 5.80. In addition, the price to cash flow is very low at 4.12, the lowest among the major integrated oil & gas companies.

Summary

Although crude prices have continued to fall sharply, and no sign of recovery fundamentally or technically has been seen yet, in my opinion, at the current price TOT is an excellent long-term investment. First for the generous dividend yielding about 6.5%, and second for a significant price appreciation when oil prices recover. According to 2016 estimated EPS of $3.16, the forward payout ratio is at 84% among the lowest in its group. As such, in my opinion, the dividend payment is sustainable. Total has had a lower average upstream production cost than peers. Thus, contrary to many loss-making peers, Total's upstream remained profitable. All in all, Total has the strongest production growth among its peers, and its operational and financial results in the first three-quarters of 2015 had been pretty impressive. The company's returns in both the upstream and downstream segments had been better than most its peers. As such, I believe that this strong momentum should continue in 2016, with further reductions in capital expenditure. Moreover, TOT's valuation is good; the stock is trading near book value, and the EV/EBITDA ratio is very low at 5.80. In addition, its price to cash flow is very low at 4.12, the lowest among the major integrated oil & gas companies.

Disclosure: I/we 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.