Buy Total: Highest Dividend Yield Among Peers, Cheap Valuations

Aug.10.12 | About: TOTAL S.A. (TOT)

Total S.A. (NYSE:TOT), a French-integrated oil and gas company with its ADR listed in the U.S., has a diversified production and distribution portfolio worldwide. The company expects to grow its production annually through an aggressive exploration budget, as witnessed in the past.

TOT is currently offering the highest dividend yield among its integrated oil and gas peers, and is trading at a cheaper valuation compared to its peers. The company has three business segments: Upstream, Downstream, and Supply and Marketing. It has operations in more than 130 countries worldwide.

Upstream

The Upstream business is divided in two segments, namely Exploration and Production and Natural Gas and Renewable Energy. The Exploration and Production segment is involved in the exploration, discovery, and production of hydrocarbon reserves from different locations worldwide.

The Natural Gas and Renewable Energy segment is involved in the entire chain of natural gas with expertise in the storage, marketing, trading, and transportation of natural gas, liquid natural gas (LNG), and liquid petroleum gas (LPG). It is also involved in the production, trading, and marketing of coal, which is primarily for power generation and other services for power generation. This segment is also involved in developing renewable energies, such as solar energy and biomass.

Downstream

The Downstream business is involved in the Refining and Chemicals segment and in Trading and Shipping. The refining business employs complex processes to convert crude oil to petroleum products. The chemical business is involved in the production of petrochemicals and fertilizers through its subsidiaries.

The Trading and Shipping segment involved the trading of crude oil in the market, and the shipping and transportation of crude oil.

Supply and Marketing

This business segment is involved in the supplying and marketing of petroleum products through general trade and its vast retail station network of more than 15,000 service stations.

Financial Performance

The company reported total revenue of $231,906 million in 2011, an increase of 24% compared to the revenue of $186,358 million in 2010. The increase in revenue is due to the higher prices of oil and gas in 2011, as compared to 2010.

The prices of oil and gas increased primarily due to unrest in the Middle East and the North African Region vis-à-vis the Arab Spring uprisings, which threatened oil supply from the Middle East (responsible for one-third of the world's total oil supply).

2011

2010

Revenue

Upstream

25.17%

13.19%

Downstream

64.53%

74.36%

Chemicals

10.30%

12.45%

Click to enlarge

In Q2 2012, the company reported revenues of $62,962, showing a decrease of 3% compared to revenues of $64,772 earned in Q2 2011 and a decrease of 6% as compared to revenues earned in Q1 2012. The decrease in revenues year over year and quarter over quarter is due to the lower average crude oil and liquids prices realized in Q2 2012.

€/$

European refining margins ERMI ($/t)

Brent ($/b)

Average liquids price ($/b)

Average gas price ($/Mbtu)

2Q2012

1.28

38.2

108.3

101.6

7.1

1Q2012

1.31

20.9

118.6

115.2

7.16

2Q2011

1.44

16.3

117.0

110.6

6.60

Click to enlarge

Source: Company website.

The earnings of $15.9 billion for 2011 witnessed an increase of 17%, as compared to earnings of $13.6 billion in 2010. The earnings increased due to an increase in average price for liquids and gas, and a better exchange rate in favor of the dollar in 2011 as compared to the previous year. That was partially offset by lower refining margin indicator (ERMI) and hydrocarbon production of 2,346 (kboe/d) for 2011, which was a decline of 1% compared to 2010.

The earnings of $4 billion for Q2 2012 have shown a decrease of 4% year over year and 6% quarter over quarter. The reason for the decrease in earnings is lower average prices of crude oil, which have shown a decrease of 7% and 9% year over year and quarter over quarter, the exchange rate deteriorated in favor of the euro and decreased production of 2,261 (kboe), which was a decline of 2% and 5% year over year and quarter over quarter.

These declining factors were partially offset by improved refining margins, which is why earnings for the Refining and Chemical segment have improved drastically, and a lower effective tax rate of 55.1% in Q2 2012 as compared to 59.3% in Q1 2012.

The environment for the chemical segment improved in Europe, while the performance of petrochemicals was stable.

$ Millions

Q2 2012

% change

Q1 2012

% change

Q2 2012

Earnings

Upstream

3,204

-17%

3,852

-9%

3,536

Refining and Chemical

491

514%

80

90%

259

Supply and Marketing

309

-8%

337

-19%

380

Total

4,004

-6%

4,269

-4%

4,175

Kboe

Hydrocarbon production

2,261

-5%

2,372

-2%

2,311

Click to enlarge

The earnings contribution, as shown below, from the Upstream segment is the highest with about 80% of the earnings being driven by the Upstream segment. That is followed by Refining and Chemical, and Supply and Marketing.

As seen in the table below, the contribution for the Refining and Chemical segment is improving due to the improved refining margins.

Q2 2012

Q1 2012

Q2 2011

Earnings Contributions

Upstream

80%

90%

85%

Refining and Chemical

12%

2%

6%

Supply and Marketing

8%

8%

9%

Click to enlarge

The cash flow from operations of $7.9 billion for Q2 2012 witnessed an increase of 8% compared to the same period last year. The net cash flow was positive $2.8 billion for Q2 2012 compared to a deficit of $1.7 billion in Q2 2012, showing a lower level of acquisitions. The exploration budget has been increasing and was $2.1 billion for 2011, showing an increase of 10% from 2010.

The company has a net debt-to-equity ratio of 21.5% at the end of Q2 2012 as compared to 24.3% at the end of Q2 2011, and 22.25% at the end of Q1 2012. This shows that the company does not have high leverage.

A Dividend Play

TOT increased its Q2 2012 dividend, and is offering the highest dividend yield (6.34%) among its integrated oil and gas peers.

Major Developments

  • Started Halfaya project in Iraq, Bongkot South in Thailand, and Islay in the U.K.
  • Gas and condensate discovery in the Norwegian North Sea.
  • Started development of Tempa Rossa in Italy and new development phase of the Yucal Placer gas field in Venezuela.
  • Stake in the Ichthys LNG project in Australia was increased from 24% to 30%.
  • Successfully intervened and stopped the gas leak on the Elgin platform in the U.K. North Sea.
  • Became operator of the Xerelete block in Brazil.
  • Exploration licenses were acquired in Bulgaria, Kenya, and Uruguay.
  • Commercial notice issued for Absheron gas discovery in Azerbaijan.

Please click here for more detail on the above-mentioned developments.

Outlook

TOT, like most of its competitors, is primarily an oil and gas play due to more than 80% of its earnings being driven by the Upstream segment, and given that it has a diversified geographic portfolio. However, TOT has placed itself in a market leading position in the development of renewable energy. The company intends to increase production by 2.5% annually by following an ambitious exploration program. However, the stock is an ADR, and revenues and profitability are susceptible to exchange rate fluctuations.

The stock is trading at cheap forward P/E, P/B, and P/S multiples of 6.5 times, 1.3 times, and 0.5 times, respectively, when compared to its peers. And it offers the highest forward dividend yield of 6.34% among its integrated oil and gas peers. Therefore, we have a positive stance on the stock.

Name

P/E ((NYSE:X))

EPS ($)

Dividend Yield (%)

ROE (%)

P/Book

P/Sales

Total SA

6.87

5.44

6.34

19.11

1.31

0.53

Exxon Mobil Corp (NYSE:XOM)

11.47

8.42

2.61

27.26

2.65

0.84

Chevron Corp (NYSE:CVX)

8.68

13.44

3.29

23.75

1.78

0.85

Occidental Petroleum Corp (NYSE:OXY)

12.95

8.15

2.44

18.94

1.92

3.00

Sector average (Mean)

11.51

n/a

2.59

12.04

2.64

1.3

Sector median

11.47

n/a

2.61

14.38

1.78

2.26

Click to enlarge

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