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Total SA (NYSE:TOT) is one of the largest major integrated oil and gas companies in the world. Founded in 1924; the Paris-headquartered Total has operations in Europe, the United States, Africa, as well as China. The company operates in Upstream, Downstream, and also Chemicals segments. As of last quarter, Total had combined proved reserves of about 11.4 million barrels of oil and gas. It holds interests in about 20 refineries around the globe. Total has a strong balance sheet. Each share comes with a cash equivalent of almost $7 per share. However, the stock has been a loser for a year, and its current price is substantially below the analysts' target price.

As of the time of writing, Total stock was trading at $42, with a 52-week range of $39 - $58. It has a market cap of $96.6 billion. Trailing twelve month [ttm] P/E ratio is 6.6, and forward P/E ratio is 7.8. P/B, P/S, and P/CF ratios stand at 1.1, 0.4, and 4.0, respectively. Operating margin is 14.4%, and net profit margin is 7%. The company has some minor debt issues. Debt-to-equity ratio is 0.3. Total pays nifty dividends. The projected yield is 5.9%.

Total has a 4-star rating from Morningstar. It is categorized as a large-value company. Its trailing P/E ratio is lower than the industry average of 7.8. Out of five analysts covering the company, two have buy, one has outperform, and two have hold ratings. Wall Street has diverse opinions on Total's future. Average five-year annualized growth forecast estimate is 7.4%.

What is the fair value of Total, given the forecast estimates? We can estimate Total's fair value using discounted earnings plus equity model as follows.

Discounted Earnings plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.

Valuation

Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate. In order to smooth the results, I will also take the average ttm EPS of $6.64 along with the mean estimate of $7.66 for the next year.

E0 = EPS = ($6.64 + $7.66) / 2 = $7.15

Wall Street holds diversified opinions on Total's future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 7.4%. Book value per share is $39.46.

The rest is as follows:

Fair Value Estimator

V0

E0

$7.15

V1

E0 (1+g)/(1+r)

$6.68

V2

E0((1+g)/(1+r))2

$6.24

V3

E0((1+g)/(1+r))3

$5.83

V4

E0((1+g)/(1+r))4

$5.45

V5

E0((1+g)/(1+r))5

$5.09

D

E0(1+g)5/[r(1+r)5]

$46.26

BV

Equals

$39.46

Fair Value Range

Lower Boundary

$82.7

Upper Boundary

$122.1

Minimum Potential

88%

Maximum Potential

178%

I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my five-year discounted-earnings-plus-book-value model, the fair-value range for Total is between $82.7 and $122.1 per share. The current price indicates that the stock is deeply undervalued. Based on my FED+ fair value estimate, Total has a minimum 88% upside potential to reach the lower-end of its fair-value. Analysts has a target price of around $61, which also implies about 50% upside potential.

(click to enlarge)

(Source: Finviz)

Summary

Looking at the price performance graph, one can observe that $46 is was a strong support level for Total SA. However, the sell-off pressure was strong enough to break that support level. At the current valuation, the stock is trading near the bottom of its trading range. I highly doubt the stock can fall below $40. Earnings are expected to increase by almost 15% in the next year, which suggests a single digit P/E ratio of 5.74 Total. Unless the commodity prices collapse, a bounce back is very likely.

The integrated oil & gas companies are among the cheapest ones in the market. And Total is no exception. The company is a truly global one, which is moving aggressively into the U.S. markets. The company also has a strategic alliance with Chesapeake Energy (NYSE:CHK). Total is also one of the main customers of Chesapeake Midstream Partners, L.P. (CHKM).

At the beginning of this year, Total agreed to enter into a joint venture with Chesapeake Exploration, L.L.C., subsidiary of Chesapeake Energy. Total initially paid $700 million for a 25% stake in the joint venture. The company also committed to pay additional amounts of $1.63 billion in the next seven years to support the drilling activities of its partners in the Utica Shale.

Total's partner is going through rough times as it has substantial exposure to natural gas-related assets. However, I do not think that natural gas prices could go any lower. The market for natural gas has become extremely volatile, but the fundamentals suggest that there should be a convergence between the prices in the U.S. and the rest of the world. Total's bold move into this field can prove to be extremely profitable for the company. That might not happen tomorrow, but I am positive for the company's long-term prospects.

Source: Total: On Sale For A Limited Time