A Cheap Oil Giant With Strong Balance Sheet And Hefty Dividend Checks

| About: TOTAL S.A. (TOT)

Edited by Kate Boehme

TOTAL S.A. (TOT) is a leading energy company with operations all around the world. It is one of the largest companies trading on Euronext Paris. In terms of market cap, TOTAL is actually among the top five largest international oil companies in the world, behind Exxon Mobil Corporation (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and British Petroleum (BP). Based on total revenue, the company is currently ranked 11th in listings of the world's largest corporations.

TOTAL currently operates in more than 130 countries and in all sectors of the oil industry. The company holds a particularly strong position in specialty markets such as lubricant, jet fuel, bitumen, special fluids, and marine fuel. TOTAL engages in upstream (oil and gas exploration, liquefied natural gas, development and production), downstream (petrochemicals, refining, specialty chemicals, marketing and trading, shipping of crude oil and petroleum products), and chemical sectors. Furthermore TOTAL holds stock in coalmines that operate in the power generation and renewable energy markets. Because of its French origins, the company has significant advantages in the global marketplace when compared to western oil super giants, largely due to its far-reaching access to production in young, but high-yield, regions such as the Middle East and Africa.

For these reasons and many more, this company is presently a leading marketer of petroleum products in Western European markets. In addition, TOTAL has become one of the primary investors in the solar industry, since it acquired a 60 percent (which has now risen to 66 percent) stake in SunPower Corporation (SPWR). TOTAL has therefore fairly earned its honorable second position among the international oil companies in the Liquid Natural Gas field.

Financial Position

TOTAL's key economic indicators and annual financial information reveal that the company has a rock solid balance sheet. It also supports attractive valuation levels and a solid financial position with only minor debt levels. TOTAL's market capitalization at the end of 2011 soared to above $100 billion. For a brief time, the company occupied the first place position in the list of the largest companies as determined by market capitalization in the Eurozone.

However, it cannot be ignored that Total also has weaknesses including a deteriorating net income, low profit margin, and weak operating cash flow. Also, in 2011, TOTAL's average daily hydrocarbon production dropped to 2.346 kboe/d, a decrease of 1.3 percent when compared to 2010. Production levels dropped due to political violence in unstable regions such as the Middle East, Africa, South America, and the Asia-Pacific, where a significant proportion of TOTAL oil and gas production occurred. Approximately 24 percent, 28 percent, 10 percent and 8 percent, respectively, of combined liquids and gas production came from these four regions last year. Yet, there is no need to regard any decrease in the production level as a significant warning sign of corporate deterioration; TOTAL's production level changes can mainly be attributed to a collection of production ramp-ups on new investment projects, portfolio changes, integrating the net share of Novatek production, and other factors.

Despite the drop in production levels, in 2011 TOTAL sales were up 16 percent and adjusted net operating income from business segments was up 15 percent when compared to numbers in 2010. The hydrocarbon production, however, dropped by 1.3 percent. These facts made investors wonder about the root of the inconceivable imbalance, but there is a practical reason for the income gain; higher hydrocarbon prices, which arose from increased global demand for natural gas and oil products, as well as increased refining margins, were most likely the root cause. Last year TOTAL's average liquids price increased by 38 percent and their average gas price increased by 27 percent in comparison to 2010 results. From 2010-2011, a Brent price has been up 40 percent, soaring from 79.5/b to $111.3/b. Operating cash flow increased to $19.536 million, up six percent when compared to 2010. However, when compared to the average industry cash generation rate, TOTAL's growth is significantly lower.

In 2011, TOTAL's upstream sector operated most successfully as the downstream and chemical sectors faced more difficult conditions than in 2010. Negative factors included Euro-to-Dollar exchange rates, reduced refining margins, and the sale of the group's stake in CEPSA, as well as a more challenging end-of-year market. However, these factors were largely offset by improvements in operational performance. Yet, despite all the setbacks, the TOTAL balance sheet remains strong with a net debt-to-equity ratio of 23 percent in 2011, a slight increase from the 22 percent result in 2010.

Ultimately, in 2011 the European Refinery Margin Indicator [ERMI] for TOTAL dropped to its lowest level in the last three years. Last year, the company's ERMI was at 17.4$/t, compared to 27.4$/t in 2010 or to 17.8 $/t in 2009. This substantial decrease in TOTAL's refinery margin has been disconcerting to many of the company's investors.

Dividend Profile

TOTAL stocks are traded on the Paris, Brussels, London, and New York stock exchanges. Despite its temporary economic slowdown, TOTAL currently occupies the top position in both the CAC 40 and EURO STOXX 50, and the sixth position in the STOXX EUROPE 50.

Since 2009, TOTAL's payout ratio has dropped from 66 percent to 45 percent, reaching its lowest point in 2011. Despite a clearly negative trend in ratio changes over last three years, TOTAL's efforts to hold its dividends stable have been successful. Between 2011 and 2012, the dividend rate per share stayed the same, around €0.57. Similarly, between 2008 and 2012, the net dividend per share also remained unchanged (€2.28). Such examples demonstrate that TOTAL's investors need not worry about their dividends decreasing due to the company's temporary economic slowdown. Despite a certain amount of deterioration in TOTAL's economic stability, they continue to guarantee a stable dividend rate for investors, as the last three years show. Therefore, based on its dividend policy, TOTAL can be considered a favorable option for investment.

Additionally, TOTAL's dividend rate is higher than 90 percent of the companies tracked by "The Street Ranking." Moreover, adjusted fully-diluted earnings per share have soared by 45 percent consistently over the last three years, from €3.48 in 2009 up to €5.06 in 2011. Morningstar suggests, TOTAL's projected dividend yield as 5.7 percent, which is substantially higher than most of its peers. For income oriented investors, TOTAL seems like a nifty choice.

Total's P/E ratio of 6.40 is significantly less than the S&P 500 average (17.70). The price-to-book ratio of 1.07 also indicates a discount against the S&P 500 average of 2.41 and an even greater discount against the industry average of 1.71. This is evidenced by the price-to-sales ratio which, at a rate lower than the S&P 500 and industry averages, points to a noticeable discount. Based on fundamental ratios, TOTAL is clearly trading at a discount compared to industry alternatives.

Economic Outlook

TOTAL's strategy is based on sustainable growth and includes a profitable investment program. In 2012, the company announced three new major projects: the Ichthys LNG project in Australia (24 percent of the investment budget), the development of Hild field in the Norwegian North Sea (51 percent of the investment budget) and the development of the Ofon II offshore field in Nigeria (40 percent of the investment budget). In Refining and Chemicals, at the end of 2011, TOTAL signed an agreement to purchase its partner's stake in the petrochemical company, Fina Antwerp Olefins. After that deal, TOTAL now owns 100 percent of the entity, thus strengthening its refining and petrochemical platform in Antwerp. Furthermore, at the beginning of 2012 TOTAL also started a major project to increase capacity at its petrochemical site in Daesan, South Korea (50 percent). TOTAL continues to evaluate numerous other projects, particularly in Western Africa, Russia, and Canada.


Although TOTAL has experienced an economic slowdown over the last three years, the company continues to follow an attractive investor-oriented dividend policy, guaranteeing its investors a stable and high dividend rate. Additionally, TOTAL constantly develops ambitious investment programs, thereby engaging all drivers for its expected upswing in business. Combined, these factors generate opportunities for the company's short-term economic growth.

Furthermore, TOTAL's investors can currently rely on a solid balance sheet, successful start-up, and ramp-up of investment projects. The investment program implementation involves TOTAL's experienced management team, and is certain to accelerate the growth of operating cash flow and net income. As a result, investors can expect a strengthening of the company's financial position. I would consider Total as a safe investment. The current price offers a cheap entry point for those interested.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.