Total SA: The Last Surviving European Oil Dividend
Summary
- Following BP and Royal Dutch Shell both reducing their dividends, Total SA is left with the last surviving European oil dividend.
- On the downside, their dividend coverage is likely to remain weak at best until there is a sustained recovery, after which they should have no issues.
- Thankfully their moderate leverage provides them with scope to continue funding any cash shortfalls with debt during the next year whilst awaiting a full recovery.
- Their strong liquidity further boosts this ability and removes any risk of them being forced to take hasty value-destructive actions like equity raising or panicked asset sales.
- Whilst their dividend is still risky, I believe that they are likely to manage to sustain it throughout this downturn, and thus maintaining my bullish rating seems appropriate.
Introduction
The list of surviving dividends from the oil and gas industry is getting very small, especially in Europe after both BP (BP) and Royal Dutch Shell (RDS.A) (RDS.B) reduced their dividends. This has left the often underfollowed French major, Total SA (TOT) with the last surviving European dividend in the oil and gas industry with a high yield of around 7.50%, which begs the question of whether they are the next to succumb to the pressure.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
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There are significant short- and medium-term uncertainties for the broader oil and gas industry; however, in the long-term, they will certainly face a decline as the world moves away from fossil fuels.
Detailed Analysis
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Instead of simply assessing dividend coverage through earnings per share, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact to their financial position. The extent that these two results differ will depend upon the company in question and often comes down to the spread between their depreciation and amortization to capital expenditure.
The impacts from this Covid-19 inspired downturn are easily apparent with their operating cash flow decreasing 51.64% year on year during the first half of 2020, or 60.27% once the impacts of working capital movements are removed. This sits slightly better than BP, which saw an equivalent decrease of 68.95% year on year, but was materially beaten by Royal Dutch Shell with their decrease only being 45.10% year on year, as per my previous articles(1) (2).
When looking at their ability to continue covering their dividend, it will obviously depend on the future of oil and gas prices and due to their high volatility, accurately predicting them is impossible, but judgments can still be estimated from their historical cash flow performance. Outside of a downturn, they have no issues covering their dividends, given their strong coverage of 162.19% during 2019, which was not materially aided by a script dividend program unlike the two previous years.
This naturally changes for the worse during a downturn, even though oil prices have increased to over $40 per barrel recently, there are still significant uncertainties when a sustained recovery will eventuate. Given their negative free cash flow from the first half of 2020, it appears that their dividend coverage will remain weak at best and thus assessing the way in which management speak of their dividend is interesting to review.
"But equally important, the Board reaffirms the sustainability of this level of the dividend in a $40 per barrel Brent environment. And as you know, we are above $40 per barrel since the beginning of June."
"So again, I cannot tell you more than that, that one I just told you about the sustainability of the dividend at $40 per barrel."
- Total SA's Q2 2020 Conference Call.
On one hand, they are not being overly committal by stating that their dividend is sustainable with oil at $40 per barrel, as it leaves the door open for them to reduce it in the future if oil prices take another temporary plunge. Whereas on the other hand, it seems reasonable to assume that if management were looking for any reason to change their dividend policy, it would have already happened as this downturn provided the perfect reason.
Given this situation and their resolve to sustain their dividend thus far into the downturn, it seems likely that they will continue utilizing debt to fund any cash short-fall providing that their financial position remains healthy. This subsequently means that their capital structure, leverage and liquidity are even more important than normal.
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It can be observed that their net debt has increased significantly during the first half of 2020 from $35.24b at the end of 2019 to $47.967b, which should not be too surprising given their negative free cash flow and continued dividend payments. It should be noted that the net debt presented in this analysis differ materially from those provided by management due to the latter including net current and non-current financial assets, which lowers their two previously stated net debt numbers to $31.124b and $39.377b respectively.
To keep the analysis simple, I normally only utilize their cash and debt as stated on their balance sheet since there is seldom ever a situation whereby it makes a material difference. Ultimately each investor is entitled to form their own views and thus due to the material difference in this one situation, I have presented both sets of results for readers to consider and assist in making their own judgments.
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When 2019 ended they were well prepared for the following downturn with low leverage, as primarily evidenced by their net debt-to-EBITDA of only 1.00. This helps ensure that they could defy the trend of their peers and sustain their dividend despite oil prices falling further than anyone could have predicted at the start of 2020.
During the years of normal operating conditions, such as 2017-2019, I believe in judging their leverage across all financial metrics. Whereas during these times of a severe downturn I feel that the gearing ratio provides a superior technique to analyze their leverage, as their volatile and temporarily devastated earnings have less of an impact.
Following their net debt increasing during the first half of 2020, their gearing ratio has increased from 22.80% to 31.66%. Even if using the previously discussed net debt numbers from management, the situation does not materially change with their gearing ratio still increasing significantly from 20.70% to 27.60% during this same period of time.
Whilst a gearing ratio above 30% is normally deemed to represent high leverage, given it only just sits into this territory and the impact to their other financial metrics such as net debt-to-EBITDA should only prove temporary, their leverage was ultimately deemed to only be moderate. Given this situation, it appears that they should be capable of funding their dividend payments with debt for at least one more year if required.
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When reviewing these financial metrics, the strength of their liquidity easily becomes apparent, with their current and cash ratios of 1.31 and 0.49, respectively, indicating it sits firmly into the strong territory. They have always carried a large cash balance and amidst the recent turmoil they took actions to boost this even higher. Due to their very large size, decent overall financial position and supportive central bank policy, there are no reasons to be concerned that they cannot find support in the debt markets to provide liquidity and refinance any upcoming debt maturities if required. This situation further assists their ability to sustain their current dividends even if operating conditions take a number of years to fully recover.
Conclusion
Until such time as operating conditions have a sustained recovery and the prospects of further Covid-19 pain fade, their dividend will remain a risk simply due to it requiring debt funding. If nothing else, their ability to sustain it this long and not replace it with promises of future share buybacks is commendable. If I had to take a firm stance on either side of the fence, I believe that their dividend will not be reduced, and thus I believe that maintaining my bullish rating is appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from Total SA's Second Quarter 2020, Fourth Quarter 2019 and Fourth Quarter 2017 reports, all calculated figures were performed by the author.
This article was written by
Analyst’s Disclosure: I am/we are long BP, RDS.B. 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.
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