An Opportunity To Pick Up This 6% Yielder On The Cheap

| About: TOTAL S.A. (TOT)

The oil company Total (TOT) has not had a good week. The company was forced to shut down its North Sea Elgin platform following the news that it had not been able to plug a persistent gas leak. The company now must decide to take six months to drill a relief well or to send down engineers to "kill" the leak, which is a solution that is much faster, but much more risky. The stock has lost more than 8% of its market value since this event, but I believe this represents a great opportunity to purchase this high yielding oil major at a discounted price. Key Facts

  • Although the market took out its wrath on Total's stock, this is not like the BP Plc. (BP) spill. It is a gas leak, not an oil spill. It is a much smaller release by orders or magnitude than that tragedy, no deaths were incurred and gas condensate is much less harmful to the environment than oil.
  • The incident happened in the North Sea. This should ensure there is not an overreaction by authorities to impose huge fines for a minor incident like what Brazil is attempting to do with Chevron (CVX) and Transocean (RIG) for a small spill off the Brazilian coast.
  • Total only owns 46% of the project with Eni (E) owning 22%, with other 32% allocated to other entities. It also only represents about 60K BOE/day of Total's worldwide production, a very small impact to its revenues.
  • The shutdown probably has a bigger impact to the U.K., as it represents almost 9% of its energy production.

TOTAL S.A. - "TOTAL S.A., together with its subsidiaries, operates as an integrated oil and gas company worldwide. The company operates in three segments: Upstream, Downstream, and Chemicals." (Business Description from Yahoo Finance).

4 additional reasons to pick up Total at under $50 a share:

  • The stock yields 6% and is priced around five times operating cash flow.
  • The stock is selling near the bottom of its five year valuation range based on P/S, P/CF and P/B.
  • The stock is going for less than 7 times forward earnings and just 27% over book value. In comparison, Chevron is selling for 75% over book value and Exxon (XOM) is priced at 166% over book value.
  • Before this incident, consensus estimates for FY2012 and FY2013 had gone up around 5% over the past two months. The median price target on Total is $62.50.

Disclosure: I am long (NYSE:RIG), (NYSE:CVX), (NYSE:TOT).