Total: The Fairest Of Them All

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About: TOTAL S.A. (TOT)
by: Irina Slav
Summary

French Total is the only supermajor without exposure to U.S. shale.

It is investing heavily in energy storage and batteries.

It is also building a large presence in LNG.

These factors make the company a top pick in energy.

French Total (NYSE:TOT) is shaping up as a frontrunner in the race to a new energy future in the oil industry, diversifying into various directions without losing track of its core business. The supermajor might be better placed than most of its competitors for a leading position in the long term.

In less than a month, Total announced a 23% rise in its 2018 net profit and a major discovery offshore South Africa as well as the acquisition of a 10% stake in Novatek’s Arctic LNG-2 project. It has also been busy inking partnership deals in oil, gas, petrochemicals, and plastics recycling, as well as making acquisitions in the green energy and utilities sectors.

Total is everywhere as befits a supermajor with one notable exception: the U.S. shale patch.

No Shale, Merci

“Total today is the most profitable major company without any shale,” chief executive Patrick Pouyanne told Bloomberg in an interview last year. Indeed, the French company is the only one among the supermajors that has not joined the shale rush and, according to Pouyanne, it has a good reason for it.

“There is no link between resilience and shale,” he told Bloomberg, adding shale development was highly capital-intensive and he preferred to play into the company’s strengths rather than venture into new industry segments.

Indeed, shale has proven it’s not for everyone: it is, as Pouyanne told Bloomberg, a very capital-intensive segment of the industry and Total has been adamant about maintaining a strict capital discipline wherever oil prices go after 2014. So, the French supermajor is focusing on conventional crude, gas, LNG, and renewables.

In its core business, Total has had a bit of a mixed luck. While the South African offshore discovery could turn into a major source of additional production and revenues, the company was forced to leave the South Pars Phase 11 project in Iran after U.S. sanctions against Tehran snapped back.

South Pars is the world’s largest natural gas deposit and Total’s participation in its development would have constituted a considerable - and very desirable - expansion of its gas operations. However, with sanctions unlikely to be going away anytime soon, this path for growth is closed to Total.

Riding The LNG Train

Yet another is wide open: The French company said earlier this month it had struck a deal with Russia’s Novatek to acquire a 10% direct interest in the Arctic LNG-2 project. Total already has 19.4% in Novatek, so the new acquisition will give it 21.6% in the project. The company also has an option to buy an additional 5% in Arctic LNG-2 if Novatek decides to reduce its own stake below 60%. Furthermore, Total will have the option of buying a 10-15% stake in Novatek’s future LNG projects in the Russian Arctic.

A strong position in LNG is becoming increasingly central for oil and gas majors as analysts forecast strong demand growth will continue and even tip the world into a shortage in the early 2020s unless a lot of new capacity comes on stream, as Shell noted in its latest LNG Outlook.

With Europe and Asia the two markets that will absorb most of the current and new LNG demand, and Novatek’s LNG plants located so conveniently close to both market, ensuring competitive prices, Total has certainly found a comfortable position in this market segment.

Low Risk All The Way

The supermajor is also not putting all its LNG eggs in one basket. Last year, Total said it inked a preliminary deal with Sempra Energy (NYSE:SRE) to jointly develop two LNG export projects, one in the United States and the other in Mexico.

At the same time, it reduced its interest in Inpex’ Ichthys project offshore Australia citing cost overruns of as much as $5 billion and delays.

“In line with our capital discipline policy, we have therefore decided to control our capital employed in Ichthys by monetizing a 4% stake after the project start-up and de-risking,” Total’s head of exploration and production said.

Yet LNG is only one facet of the company’s expansion. Total is also on an acquisition spree in the energy storage, batteries and power utilities fields. Since 2016, the company has made nine acquisitions, of which four are in its core business of oil production and five are energy utilities, gas distribution companies and one, Saft, is a battery producer.

Acquisition Spree

The most recent acquisition Total announced was of French Synova, a company specializing in recycled plastics for the carmaking industry. The move is in line with Total’s participation in an initiative to end plastic waste, which is undoubtedly good for its reputation as a responsible fossil fuel company.

Yet it is also in line with a more pragmatic aspect of its business: expansion in petrochemicals. This has become a marked trend in the oil and gas industry, with sector players realizing they will come to rely more on their petrochemicals operation in the future, after oil demand peaks. As part of this increased focus, Total recently announced an expansion of a polypropylene plant in Pasadena, Texas.

The Saft acquisition back in 2016 is also notable: the French company is one of the largest producers of batteries for industrial use but also makes energy storage systems, which are slowly but surely gaining prominence as an important growth segment in the energy market, especially in renewable energy.

Batteries For Europe's EVs

The significance of Total’s acquisition of the battery maker becomes even more pronounced against the backdrop of scarce EV battery production capacity in Europe, a topic I’ve discussed earlier. This scarce capacity puts Saft - and Total as its owner - in an advantageous position as one of very few local battery suppliers to a market that most analysts say is set for a boom.

In renewables, Total has been active in solar for three decades but only recently entered wind power with a joint bid with Danish Ørsted for a 600-MW offshore wind farm in Dunkirk. Offshore wind is one of the most logical renewable expansion paths for oil and gas companies with a long history of offshore operations.

Here, Total may have been slow to join the party, but its other renewable energy initiatives have provided it with a comfortable place among the companies that are doing something about climate change instead of refusing to acknowledge it. In a social media-driven world where reputation is close to everything, Total has been, again, smarter than most.

Strong Balance Sheet

Total has a market cap of $150 billion. Like all supermajors, its share price is tied to crude oil benchmarks and last year saw a dip during the October-December oil price rout. But with recovering prices, so are stocks in the energy sector. What's more, diversification should help reduce the stock's dependence on oil price movements over the long term.

Most recently, Total reported a net profit increase of 28% to $13.6 billion, despite oil price fluctuations during most of the year. These price fluctuations, especially the October dive of Brent and WTI affected its profit margin for the quarter but that was otherwise stable at between 6.1% and 8.2% during the rest of the year.

Cash is growing and debt is stable, as this in-depth analysis of the French supermajor's financial situation shows. At $6.09 billion at the end of the fourth quarter of 2018, Total's free cash flow is comfortably higher than its capex during the same time, which stood at $4.55 billion, again in line with that strict spending discipline.

Going forward, Total plans to spend around $15-16 billion during both this year and next. The figure is basically flat in 2018, when Total's capex stood at 15.6 billion. It also plans to boost its oil and gas production despite the price volatility in both segments. It seems it can do more with the same amount of money.

Some Risks

After the South Pars debacle, Total is currently having to deal with a worker strike on its North Sea platforms. However, production is going as normal despite the strike. The workers' union has threatened escalation if the company does not respond to demands for shorter rotas and that might affect output but the effect would be only temporary in all likelihood.

The South African discovery might not live up to the initial promise but these are the usual risks every oil company has to live with and when an oil company is not focusing on one region exclusively but has a comfortable position in the Gulf of Mexico, Brazil, the Middle East, and the North Sea, then the risk is manageable.

Factors like these make Total a good pick for low-risk investors with an appetite for energy stocks. A stable balance sheet, an extensive global position in its core business and the prospect of less investor pressure for a change of direction due to its pre-emptive growth in greener energy segments all supports this advice.

The Fairest Of Them All

Skeptics might argue that the French supermajor’s refusal to enter the shale patch is a mistake. Everybody else is vying for a piece of the Permian, after all. But Total is playing the long game and shale, according to even the most favorable forecasts, is not part of this game, with production set to plateau at 14 million bpd around 2030 and virtually everyone in the industry vying for a piece of that pie.

Five years after the 2014 oil price crash, when other supermajors are beginning to loosen the strings on their purses, Total is still keeping them tight and not taking any major spending risks. A similar strict capital discipline approach rewarded ConocoPhillips (NYSE:COP) when it made it the only U.S. energy company to see its stock rise relatively consistently in 2018 while others booked overall losses. It would only make sense this approach also benefited the French supermajor, making it a lucrative pick for long-term investors in energy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.