TOT (Total S.A.): "Cheap Oil: Is it Totally over for TOT?"
By:
Patrick Sanchez Mitchell, Student at Marquette University
Disclosure: The AIM International 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 is a mega global oil and gas company headquartered in Paris, France. Total’s revenues are under heavy pressure due to the
current, massive slump in oil prices ($35 spot price for WTI crude). How low will oil go and for how long - and can TOT weather the storm?
•
The company’s margins have declined and management recently declared that it has entered
a new business cycle. TOT has adapted quickly to cut down on costs in order
to reach a lower breakeven price (US$40 per barrel).
•
Currently, management is focused on acquisitions, return to shareholders in
the form of dividends, and reducing its capital expenditure schedule. Steady
cash flow from operations is expected to make this
possible.
•
Management has indicated that it will continue to cut down overall costs in order to
mitigate the current weak commodity environment. TOT's managers realized that stronger volumes
couldn’t fully offset substantially weaker oil pricing.
•
If oil prices continue to decline, Total could be heading to new 52-week lows --- as production operations wouldn’t remain profitable.
Total S.A. (NYSE:TOT)
remains a solid integrated oil company compared to its peers. TOT is returning above industry average returns despite enduring headwinds
from a weakening commodity environment. The company is under pressure to remain
profitable and to satisfy its shareholders. Therefore, Total’s management remains
committed to cost reduction programs; however, weakness in the company’s
revenues caused by low oil prices have hurt earnings per share. Further, Total currently has a
debt-to-equity ratio that is higher than the industry's average (0.58 vs.
0.49)—and this needs to be evaluated further as the economy moves to a higher interest rate and credit spread period.
Management
has declared that since the fall in oil prices of over 50% since last year,
Total has demonstrated its resilience by lowering its operating costs. The company is benefited
by its integrated model and production discipline in order to limit losses on
net income—and Total’s net income has decreased only 16%, while the price of oil
has fallen over 50%. The loss was due mainly to its dependence on its
Exploration and Production segment; however, its Upstream margins are ahead of schedule as a result of the successful execution of its cost reduction program ($1.2 billion in savings realized for 2015).
During
the third quarter of 2015, Total posted impairments of $650 million and
inventory valuation changes of $760 million—this dropped net profit to $1.08
billion (-69% YoY). Despite the negative results, the company did exceed earnings
per share expectations by $0.26. This surprise indicated to investors that TOT
is one of the industry's best managed major integrated oil companies. Also, the firm saw a
strong increase of 90% in utilization rate for their refining and chemicals
segments. Total’s solid capital allocation and reduced cost spending programs
should allow it to continue to outperform its peers in the future.
TOT
has taken advantage of the industry's collapse by acquiring two major projects:
Surmot 2 in Canada and Gladstone in Australia. This demonstrates that Total has
no trouble in allocating capital towards future growth. Furthermore, Total's recent
partnership with Chevron to develop project Moho Phase 1b has now started
production and is expected to increase output substantially. TOT has a
total participation interest of 53.3% in this project.
What has the stock done lately?
Due
to the continued decline in oil prices, Total has introduced restructuring
plans to cut down on costs and improve results. However, since October 2015,
the stock has declined by 12% following oil prices (which recently reached a seven-year low).
Consensus forecasts indicate that this decline will continue as OPEC recently declared that it would
continue to keep pumping oil and add to the world’s total supply.
Past Year Performance: TOT
has decreased 9.7% over the past year, further indicting that the stock is
a bargain if you assume that oil prices will rebound from their seven year lows. Total has
underperformed the S&P 500, in part reflecting the decline in revenues
compared to last quarter’s revenue. Looking ahead, the company’s growth numbers
do not indicate a reversal in the decline experienced over the last twelve
months. Despite the strong decline, the stock is selling a for higher relative value
than its peers.
Source:
FactSet
My Takeaway
Despite
the headwinds surrounding the industry, Total has shown signs that indicate it is stronger than its industry peers. In general,
some factors indicate TOT's strength and some show weakness. Among the strengths of the
company are a strong management team and an integrated model of production.
On the other hand, weaknesses include higher leverage, decreasing return
on equity, and lower profit margins as a result of falling oil prices. There is little evidence to predict
Total’s performance moving forward in a struggling commodity environment.
Further, shareholders have shown frustration in its performance, which has put
pressure on management. Total’s success will continue to depend on oil prices
and the efficiency of the managers and directors. If oil prices rebound, Total is one of the most attractive major global oil companies and should outperform its peers.
