Total Has It All

Mar.12.12 | About: TOTAL S.A. (TOT)

As a stockholder in multiple oil companies, I have a profound liking for the industry. Total (NYSE:TOT) is one of the best companies in the industry to invest in. The French company gives investors many reasons to at least add it to their watch list.

Strong Safety Culture

One of the most important factors for investors wanting to buy oil stocks should be safety. A good oil company has a good and clean history, safety-driven tradition and practices and makes safety one of its top priorities. After all, oil is a very risky business as we all have seen the case of BP (NYSE:BP) that might end up paying multiple years' earnings to for settlements in the notorious oil spill accident in 2010. Total is a safety-driven company and it pays a lot of attention to this aspect. The company would rather spend a few million dollars and fix a few broken things than have the broken things blow up and cost the company billions. Due to the recent improvements in its processes, Total's upstream segment has met all of its safety standards, and downstream segment is expected to reach those standards within a year or so. Currently the upstream segment has an injury rate of 1.3 per each million man-hours worked, which is very impressive.

Impressive Replacement Rate

Total has one of the best reserve replacement rates among the giant oil companies. While competitors such as BP and ExxonMobil (NYSE:XOM) have reserve replacement rates near 100%, Total enjoys a replacement rate of 185%. That is, the company is able to discover 185 barrels of oil for every 100 barrels of oil it extracts. This is good for the sustainability of the company. This success is definitely a result of the company's $22 billion investment in 2011. Even if the company doesn't discover or buy new oil fields, it has enough reserves to last for 13 years in today's production rates.

New Investments

The company had giant discoveries in Azerbaijan, French Guyana and Bolivia in 2011. In addition, the company increased its oil field acreage in Norway, Poland, Qatar, Uganda, Kenya, Tanzania, DRC, Angola, Argentina, Mauritania, Indonesia and US (Ohio). Considering the fact that most of the oil reserves in the world are in politically unstable geographical locations such as the Middle East, this company's new oil reserve additions are especially valuable because they are mostly in politically stable locations. Political stability is very important to oil production as evidenced by many examples such as Libya and Iran. The company also partners with Statoil (NYSE:STO) in some projects.

Earnings Growth

In 2011, most of Total's earnings growth came from its upstream segment. This segment's earnings grew by 20%, whereas downstream segment's earnings grew by 7% and chemicals segment's earnings grew by 10%. In the same year, the company sold assets worth of $15 billion and bought assets worth of $17 billion. The bought assets were predominantly upstream industry, whereas sold assets were from a variety of industry segments of the company. The company's increase of investment to more upstream is a wise decision as this is where most of its growth comes from.

Total is very good at generating cash flow. Since 2009, the company increased its cash flow by 50%. According to the company's own analysis, each $10 increase in barrel of Brent oil will increase the company's yearly earnings by about $1.6 billion, and each 0.1 US Dollar to Euro appreciation will increase these earnings by about $600 million. The company has very limited Henry Hub gas exposure.

Commitment to Dividends

The company has a policy of returning 50% of its cash flow to its shareholders in dividends, however, certain fluctuations may happen year to year. I believe that Total's dividend payments will be safe for many years to come, as the company already announced its commitment to not only paying dividends but to paying them at the specific rate mentioned above. Also, the company's safety focused culture will make certain accidents and related lawsuits less likely events, helping the company keep more of its earnings. The company currently yields a dividend of 6.99%. France will withhold a tax from Total's dividend payments, however those taxes can be claimed as foreign tax credit by Americans. Also, keep in mind that Total's dividend payments are announced by Euro, so your actual dividend payment might fluctuate depending on Euro/USD rate at the day of payment.

Analyst Ratings

Of the 8 analysts covering the stock, 5 rate it as either "strong buy" or "buy" and 3 rate it as "hold". The company's current P/E ratio is just above 7 and it is expected to be around 6 next year. The average price target on the stock is $65, which provides it with an upside of 10%.


Due to economic conditions in Europe and France, the company's stock shares still trade around 2009 price levels even though the company's financial health is excellent. I like Total, its management, its commitments and the way it values shareholders. As an investor that values dividends, I don't hold Total shares for capital appreciation; however I see absolutely no reason why it shouldn't see a strong capital appreciation in the next few years.

Disclosure: I am long TOT, BP, XOM.