Why Total SA Is the Best-Positioned European Oil Major

Total SA (NYSE: TOT  ) is one of the best-positioned stocks among European oil majors. The company is off to a solid start in 2014. The trajectory of the company's upstream volumes is turning positive, signaling the beginning of a period of strong upstream growth. The company offers investors an attractive combination of significant production and cash flow growth. Moreover, Total offers investors growing production with declining capex. Finally, the majority of the growth projects that underpin the company's 2017 production growth target are on budget and on schedule.

Considering the company's superior growth profile combined with decreasing capital intensity, Total is all set to become one of the leaders in free cash flow generation, which should provide room for dividend expansion at a lower risk.

Total's message of profitable growth and a strong pipeline has also struck a chord with investors, and the stock has outperformed both its European and American peers year to date. Total is up 17.2% so far this year; in comparison, Royal Dutch Shell (NYSE: RDS-A  ) , BP PLC (NYSE: BP  ) , ExxonMobil (NYSE: XOM  ) , and Chevron (NYSE: CVX  ) are up 12.5%, 4.9%, 1.6%, and 0.6%, respectively.

Source: Google Finance.

Off to a solid start
Total reported adjusted first quarter net income of $3.3 billion, in line with consensus estimates and above the top end of the company-compiled consensus of $2.9 billion to $3.2 billion. While it was not a stand-out quarter, it does show a picture of improving free cash flow and good project execution.

Despite headwinds facing its downstream business and problems with the non-operated Angola LNG and Kashagan, the company remains confident in its ability to demonstrate solid results.

Growth projects on target
Total's three key projects, CLOV, Ofon 2, and Laggan, are on track and on budget and should contribute materially to cash flow. CLOV is on track for a June 2014 start-up, followed by Laggan-Tormore and Ofon 2 in the second half of the year. Yamal LNG, a joint-venture between Novatek, Total, and China National Petroleum Corporation, is also on track (two rigs are currently in operation, and 12 wells have been drilled). Total sees no issues around the financing, which is mostly provided by Chinese banks. 

Total sanctioned Kaombo in April. This project is a good illustration of the company's new focus on cost control. The company reduced the project capex from $20 billion to $16 billion and increased the capacity from 200,000 barrels per day to 230,000 barrels per day. This project is targeted to be on stream by the end of 2017, with a plateau target in 2019. 

While the completion of the sale of Usan (Nigeria) is still pending government approval, operationally, Exxon already took over operatorship in February 2014, which frees up resources and people to work on other projects. 

Russian operations not affected
So far, Total's Russian operations are not affected by the standoff between Russia and the west. Moreover, the company does not expect any setback in the future, either. Total is proceeding with its plan to increase its stake in Novatek, the second largest gas producer in Russia after Gazprom, to 19.4% from its current stake of 17%.

Yamal LNG, in which Total has 20%, is also progressing well, and the French integrated oil major said it takes comfort in the fact that more than 50% of project financing is to come from a consortium of Chinese banks, which should lower the political risk.

Increasing return to shareholders
Total significantly improved its free cash flow position in the last year. Free cash flow in the first quarter totaled $821 million, representing more than a 250% increase from the same period last year ($231 million) and the highest level of free cash flow since 3Q12.

Total remains confident in its ability to grow cash flows materially, and it reiterated its commitment to a progressive shareholder return policy. Along with increasing returns via growing dividends and buybacks, the company may consider reducing its gearing in line with its peers once the new wave of high-margin projects come on-stream.

Bottom line
Total is one of the best-positioned stocks among European majors. The company offers investors a compelling combination of absolute value, growing production, and growing free cash flow. The company's renewed focus on improved capital efficiency, coupled with improved decline rates, the benefits from successful downstream restructuring, and the nearing of the key 2H14 start-ups (CLOV, Laggan Tormore, Ofon 2), is likely to substantially improve the company's cash generation.

Total has outperformed its peers year to date, and a ramp-up of the current disposal program, in particular a potential longer-term partial monetization of the restructured downstream businesses, could provide further upside, especially if it led to further return of cash to shareholders in the form of buybacks.

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