Thursday, May 9, 2019

A Current AIM International Equity Holding: Total S.A. (TOT, $55.18): “Totally Positioned For Profit” By: Connor Jones, AIM Student at Marquette University

Total S.A. (TOT, $55.18): “Totally Positioned For Profit”
By: Connor Jones, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Total S.A. (NYSE:TOT) is an integrated oil company that explores, develops, produces, and markets oil and gas. They are also engaged in the trading and shipping of crude oil and petroleum products. TOT operates in the following segments: Exploration and Production, Gas, Renewables and Power, Refining and Chemicals, and Marketing and Services.

• TOT increased production to a new high of more than 2.95 million barrels per day, representing a 9% YoY increase in 1Q19.

• Management expects to grow their LNG business to 10% of the global market by 2020.

• TOT is increasing their investment in their downstream segments in growth areas including advantaged feedstock and petrochemicals to consistently generate high returns and provide countercyclical free cash flow.

• The Board of Directors set a target of $1.5 billion in share repurchases throughout 2019, with $350 million being bought back in 1Q, representing 38% of operating cash flow before working capital.  

Key points:

Total’s integrated business model led them to, once again, be the most profitable of all major oil companies in FY18 with revenue and net income increases of 18.06% and 26.79%, respectively. This increase was driven by an 8% increase in hydrocarbon production in FY18 with an expected increase of over 9% in FY19.

Management’s goal is to turn TOT into the responsible energy major by integrating climate into strategy to anticipate energy market trends. This goal is being worked on through three key strategic priorities. The first is a focus on investments with a low breakeven point to enable the company to withstand potential declines in demand while benefitting from higher oil prices. The second is to expand operations along the value chain for natural gas, which is predicted to be the lone fossil fuel to grow over the next 20 years. The final priority is to significantly strengthen their presence in low-carbon electricity to capitalize on strong growth demand.

TOT’s integration along the value chain of their businesses enabled them to take advantage of the volatility in the recent oil price cycle to acquire high-quality resources at attractive prices. This can be seen through the 7 billion barrels of oil that have been added to reserves between 2015 and 2018 at a cost below $2.5/boe. The emphasis on integration also led to TOT acquiring Engie’s LNG assets, making them the second largest publically-traded player in the LNG business which has been growing at 5% a year.

TOT continued their history of strong operational performance enabling them to cut costs and acquire high-quality assets. Management confirmed their objective to grow production in E&P by 5% a year on average between 2017 and 2022 with production costs of $5.5/boe expected in 2019, which is among the lowest across energy majors. TOT is targeting $4.7 billion in cost reduction and net investments of $15-$16 billion in 2019.

What has the stock done lately?

In December 2018, TOT shares bottomed at a price of $50.22, largely driven by earnings headwinds causing them to see a disproportionate amount of downgrades towards the end of the year. Since then, TOT has rebounded to $55.18 driven by guided FY19 production levels and Maersk selling off their remaining position from the merger removing an overhang on the stock and freeing up trading liquidity.

Past Year Performance:

TOT’s stock price has fallen 12.36% over the past year from $62 per share to $55.18. The price remained steady around $60 throughout most of FY18 before dropping to $50.22 in December due to earnings headwinds and softer performance in Q4. The stock has recovered slightly in 2019 due to positive guidance, a dividend increase, and an announcement of another share repurchase program. 

Source: FactSet
My Takeaway:

I believe that TOT is currently trading at a discount to its intrinsic value after the price fell in 4Q18 due to earnings headwinds. Total continues to be successful compared to other major oil companies in terms of profitability due to their ability to cut costs through the integration of their business model. After a strong FY18 and continued increases in production and profitability expected in 2019, I believe TOT is positioned well going forward and that the stock will appreciate once investors realize the mispricing.

Source: FactSet

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