Oil Giant Total’s Stock Could Rise 20%
The French integrated oil and gas producer has been cutting costs and pumping up production. The 6% dividend doesn’t hurt, either.
Returns could flow nicely from French oil and gas giant Total, despite the industry’s challenges.
Total, an integrated energy company whose activities span production, refining, petrochemicals, and marketing, is keenly focused on profitability, which is great for investors. It has a superior growth profile, and the capital intensity of its operations is falling. “They are doing the right things for shareholders,” says one portfolio manager who owns the stock.
Total shares (ticker: FP.France), which closed in Paris at 40.60 euros ($45.30) Friday, could add more than 20% in the next 12 months. They have been essentially flat since the start of the year, and are down 16% over the past two years, outperforming the price of oil, which has sunk by more than half in that span, despite a recent rally. Total’s stock-market value exceeds €100 billion.
At the current price, Total’s shares trade for 10.5 times estimated 2017 earnings. That’s relatively cheap, compared with the four other super majors. Exxon Mobil (XOM) and Chevron (CVX) fetch about 20 times next year’s earnings, while BP (BP) and Royal Dutch Shell (RDS.A) trade at 13.7 and 12.3 multiples, respectively. “Relative to its global majors peer group, on a [price/earnings basis] you would describe it as inexpensive,” says Brendan Warn, senior oil and gas analyst at BMO Capital Markets. Total would be worth €50 a share, if it commanded 13 times next year’s estimated profits, still a substantial discount to the European majors’ average 16.6 times.
Total, formed in the early 2000s from mergers with Petrofina and Elf Acquitaine, has American depositary receipts (TOT) that trade in New York. They were down nearly 3%, at $45.45, Friday afternoon, caught in a broad drop in energy shares. Each ADR is equivalent to one ordinary share.
The past couple of years have been difficult for energy companies, pummeled by dramatically lower oil prices. It has been tougher for Total than most: Charismatic CEO Christophe de Margerie was killed in an aircraft accident in Moscow in 2014, forcing new leadership on the company at a difficult time. But Patrick Pouyanné, who succeeded de Margerie, has guided the company through an awkward period with a minimum of fuss.
Under Pouyanné, Total has continued a strategy of stressing value over volume. It has concentrated on disciplined spending; capital expenditures will fall below $19 billion this year, from a peak of $28 billion in 2013. Operating outlays are sliding, too. The company targets $3 billion in annual savings by 2017.
Production is increasing. Output is projected to rise, on average, 6% to 7% between 2014 and 2017, driven by increased efficiency and more project start-ups.
Liquefied natural gas and deepwater drilling are expected to account for more than half of new production by 2019. Major new projects coming on stream in 2016 and 2017 include Ichthys LNG in Australia, the giant Kashagan oilfield in Kazakhstan, and the deepwater Angola deposit, Kaombo.
The new production can deliver higher-margin barrels than Total’s existing base. That could boost cash flows by a compound annual rate of up to 7% through 2019.
In the near term, the price of oil will be key. Total has maintained a generous dividend – the shares currently yield about 6% – even though organic free cash flow has been negative in recent years. It has protected the payout through leverage, asset sales, and by offering shareholders a scrip alternative to cash, which has had a strong takeup.
If oil fetches $55 to $60 a barrel next year, however, Total could fund its cash dividend payment entirely from organic free cash flow. Of course, much depends on the future direction of petro prices. But it looks as if the lows in the current cycle are in the past. Nonetheless, even if energy prices don’t improve, Total’s dividend looks secure, and could act as a plump cushion against any more weakness in the share price.
Last year, Total earned $5.09 billion, or $4.56 a share, in net income. Net is forecast to rise next year to $10.53 billion, or $4.34, from $7.98 billion, or $3.34, in 2016.
Total isn’t pinning its future solely on fossil fuels. Compared with most of its peers, it has made bigger strides in renewables, and it aims to generate 20% of profits from low-carbon businesses by 2035. It has a high-quality platform with its SunPower affiliate, one of the world’s leading solar energy operators. Earlier this year, Total bought Saft Groupe, which makes batteries for industrial use.
All in all, Total looks well-positioned for the future.
