* Buy thesis underpinned by cultural change — Performance in Global Big Oil, we
think, will be dependent on the ability of companies to make a rapid transition to a
$65-75/bbl oil world. The company that seems most in touch with this ambition is
TOT, where deep-seated changes look to prioritise a culture of cost-cutting and
better capital allocation. Although this increasing emphasis on costs has been a
feature of TOT for several months now, we think the market underestimates the
extent to which this change in focus is becoming imbedded in the organisation.
* FCF >> DY — Our forecasts see the business delivering improving ROE and 2017E
FCF, some 40% higher than consensus estimates. Forecast 2017E FCF yield of
7.7% is the highest in Big Oil. While we are generally wary of “wall of cash” stories
in the oil sector we think the deep changes around capital allocation within TOT
suggest higher capital returns to shareholders will be a priority.
* $9 B self-help — As part of updating medium-term business plans this summer we
expect TOT to increase cost-cutting targets in the core Upstream from -10% to -
20%. No other Big Oil player is cutting as deep; indeed many have no cost-cutting
agenda at all. Costs drive 20% of an estimated $9 B self-help, with the other 80%
from delivery on growth investment currently in-train.
* The cost of change — A shift to a lower oil world will call into question some of
past capital. TOT has already impaired $8 B of assets; we think another $10 B is
possible. That will put gearing >40%, in our view explaining the pre-emptive moves
around the hybrid bond issue and discounted scrip dividend introduced in 1H.
* Sustainability — Does 7.7% FCF yield = higher shareholder returns? Under a
changed strategy that prioritises returns over growth, and taking benefit from
supply-chain deflation, we think that TOT can hold capex at c. $20 B and still grow
in-line with the industry. We do not see a need or ambition to make acquisitions.