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3 Threats to Total's Success

Tyler Crowe
September 28, 2013

Much like its peers among the integrated major oil companies, Total (NYSE: TOT) has operations that span the globe. Unlike its peers, it doesn't have name recognition here in the United States, and investors sometimes forget about it. During its recent investor day presentation, the company announced that it is looking to bring 750,000 barrels per day of new projects online between now and 2017. Will its existing operations drag it down? Let's take a look at three issues that could potentially send Total off its growth plan.

Risky upstream production


For an integrated major with operations all over the world, Total has a concentrated production base. Fifty-five percent of its oil and gas production comes from Sub-Saharan West Africa, the North Sea, or the United Arab Emirates. When speaking only of oil, that number jumps to 69%. While it can be beneficial for a company to focus its production in core regions and replicate operational efficiencies, these regions have some major drawbacks.

Nigeria is one of today's most troubling regions in which to produce oil and gas. Theft, sabotage, and other headaches render this region less and less attractive for integrated majors despite the large reserves of oil in the Niger Delta. Total, like many of the other companies operating in the region, have tried to shift production from onshore regions to offshore, where these events can be more controlled. 

In the North Sea region, the company had a major gas leak last year in the Elgin field. What is especially troubling about this leak is the reason it occurred: it was caused when a salt used in the drilling fluid eroded the well casing. Total has now warned neighboring driller Royal Dutch Shell (NYSE: RDS-A) that the combination of these fluids with the high-pressure, high-temperature nature of these North Sea fields could result in other wells running into problems, and estimates that it will need to spend about $2.5 billion to replace at-risk wells.

Sluggish downstream earnings
For the most part, integrated majors derive the lion's share of their earnings from the upstream side. Total is no exception: in 2012, more than 85% of the company's earnings came from the upstream side of its business. Despite the small contribution that the downstream side provides the bottom line, the company's downstream operations have under-performed those of its competitors.

Company 2012 Downstream & Chemical Earnings ($millions) Net Income Margin for Downstream ROCE for Downstream
Total 1,661 0.8% 6.1%
Exxonmobil (NYSE: XOM) 10,588 2.8% 23.9%
BP (NYSE: BP)  2,539  0.7% 16.8%

Source: Company 10-ks, author's calculations 

One thing to note is that Exxon actually posted downstream earnings of $17.1 billion last quarter, but $6.5 billion of that was from the sale of its Japanese refinery and chemical facilities to a subsidiary. Earnings, margins, and ROCE in the table were adjusted to account for this sale.

There are two major reasons for Total's downstream blues. First, a majority of the company's refining and chemical capacity is in Europe, and high prices for both crude oil and naphtha for chemical feedstock is rendering it less competitive than similar facilities in the US. In fact, the company's refiners and chemical plants in the US ran at 99% capacity in 2012, versus an average of 86% across its other segments, showing the disparity between the two regions. To add insult to injury, European demand has been waning for the past five years: since 2007, total petroleum demand in Europe has declined by 10.5%.

The company is hoping to turn this around with the massive Jubail refinery and chemical facility it is about to complete in a joint venture with Saudi Aramco. This facility will net Total 150,000 barrels per day of refining capacity, as well