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.
Summary:
• 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
