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Total SA (TOT) - Awaiting Margin of Safety

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Total SA (TOT) - Awaiting Margin of Safety

Post by James Ranson on Wed Dec 14, 2011 3:07 pm

Total S.A. (TOT) is one of the six supermajor oil companies in the world. It is a French company established in 1924.

The company is rather diverse with interests in LNG, LPG, gas and nuclear power generation, coal, solar, refining, shipping, and chemicals manufacturing to complement is dominant upstream activities. It operates in more than 130 countries and is one of the biggest producers of natural gas.

Most of the “easy” oil in the world has been produced, sold and consumed. Companies like TOTAL are forced to explore for oil in deeper water and in higher risk countries, and this trend will continue into the future. TOTAL has a number of operations in Africa as well as Iran and Russia, and has invested heavily in deep water, oil sands and LNG.

In the future, EPS growth will come predominantly from an increase in the price of oil (and the price of natural gas) as growth in production is getting harder and harder to come by. In the shorter term the price direction of oil is not clear. As Europe slides into a recession, demand for oil, at least from that region, will decline and the price of oil may drop as a result. But over the longer term it is hard to see the price of oil going anywhere but up. Oil production is becoming a more expensive exercise as time goes by, and new oil discoveries are mostly a lot smaller than the sort of discoveries enjoyed in the 20th century.

As with most resource companies, the larger the company the lower the cost to produce per unit volume. These economies of scale often make the bigger oil & gas producers more attractive an investment. That and their enormous cashflow. TOTAL has generated total Free Cash Flow over the last 5 years of over $87B versus total net earnings over the same period of $76B. Its net debt to equity is a very manageable 26%.

Quality Rating


TOTAL achieves a poor quality rating predominantly due to lack of growth and declining profitability. Chevron (CVX), ConocoPhillips (COP) and Exxon Mobil (XOM) all have similar Quality Ratings to TOTAL.

Intrinsic Value


Value Investing involves, at the basic level, the buying of high quality companies at a share-price that is at a meaningful discount to Intrinsic Value. Neither criterion is met with TOTAL, so Value Investors would likely not be interested in the stock.


The above graph indicates that TOTAL has lifted its game recently after a few years of declining performance. The future performance of TOTAL is heavily dependent on the price of oil – if the price of oil sky rockets as many predict it will over the next 5 or 10 years, so does the performance of TOTAL. If the oil price drops, stays the same or increases only slightly, TOTAL will struggle to achieve decent growth or profitability.


Investors who believe the price of oil over the longer term (10 years+) is going up will be interested in TOTAL due to its large amounts of proved oil and oil equivalents and its aggressive exploration and project development. The stock is paying a dividend yield of 2.7% on current prices. Value Investors will be keen to see a Margin of Safety prior to an investment, and as such will want to wait to see how things play out with the impending European recession.
James Ranson
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Joined: Thu Nov 17, 2011 10:23 am

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