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Total SA: Long Reserve Life Offers Dividend Safety

By Daniel Gibbs – Mar 4, 2014 at 7:25AM

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Total offers one of the highest dividend yields out of all the oil majors. This dividend is made secure by the company's substantial reserves, which ensure that it will be able to maintain its current production even if it has one bad year in discovering oil.

French oil giant Total S.A. (TTE 2.99%) has long offered one of the best dividend opportunities out of all of the so-called oil "supermajors," which were originally the six largest oil companies in the Western world. Although today there are many other oil companies that are similar in size and scope to the oil supermajors, these companies are still some of the most powerful companies in the energy industry. Total boasts the highest dividend yield of this group, which also includes such companies as ExxonMobil (XOM 4.48%) and Chevron (CVX 3.06%). It also has some of the largest reserves relative to its production, which should help ensure the safety of the dividend.

Fourth quarter highlights
Total announced its fourth-quarter and full-year 2013 results on February 12. Many of the company's key numbers showed slight declines on a year-over-year basis, but this can be largely accounted for by lower oil prices and weakness in the European refining industry rather than by any problems with the company's operations. Here are the highlights from the company's fourth-quarter and full-year results:

  • Total sales of 47.753 billion euro in the fourth quarter, a slight decrease from the company's fourth quarter 2012 total sales of 49.868 billion euro.
  • Adjusted net operating income of 2.797 billion euro in the fourth quarter compared to 3.320 billion euro in the fourth quarter of 2012.
  • Adjusted net income of 2.467 billion euro in the fourth quarter of 2013 compared to 3.041 billion euro in the fourth quarter of 2012.
  • Net income of 1.605 billion euro in the fourth quarter of 2013 compared to 2.341 billion euro in the fourth quarter of 2012.
  • Increased trailing dividend to 2.38 euro per share, which represents a 3.4% increase for the remaining dividend of 2013.

Despite the somewhat lower net income, Total's cash flow from operations increased on a year-over-year basis to 9.656 billion euro in the fourth quarter, which will help improve the company's ability to afford this higher dividend. However, Total is certainly not in financial trouble, nor is it struggling to pay its dividend.

Large and secure reserves
In a previous article, I discussed the importance of an oil company's reserves in the continuation of its operations. An oil and gas company needs to either discover or purchase new sources of oil and gas to replace the reserves it extracts and sells if it wishes to continue its operations on a long-term basis. 

Total did not neglect this aspect of its business in 2013. At the end of 2013, Total's reserves were 11.526 billion barrels of oil equivalent, an increase of 1% over its reserve level at the end of 2012. This means that Total managed to replace every barrel of oil equivalent that it extracted from the ground in 2013 and then some.

Source: Total

The chart above breaks down Total's reserve development into both oil and gas. This is necessary because Total produces both compounds. Unfortunately, the company's 2013 reserve development was heavily weighted toward natural gas. Total did not actually find or acquire enough oil to replace what it removed from the ground. This could certainly be a problem if it continues. However, Total has begun to take steps to ensure that the decline of its oil reserves in 2013 will not become a problem.

Acquisition of productive stake in large fields
In the fourth quarter, Total was awarded a 20% stake in the gigantic Libra field off of the coast of Brazil. This field is estimated to contain eight to twelve billion barrels of recoverable oil resources. Total's push to get this stake shows its desire to maintain its oil reserves at a level sufficient to maintain its current production levels going forward and even grow this production level. The Libra field could eventually become one of the world's largest oil production centers, possessing estimated peak production potential of 1.4 million barrels per day. With its stake in the field, Total will proportionally benefit as this field is brought online.

Long reserve life
Total still has plenty of reserves to maintain its current production while it works to increase its oil reserves. At the end of 2013, Total had a proved reserve life of more than thirteen years. This means that the company can continue to produce for more than thirteen years at its current rate just by using its proved reserves. This gives the company one of the longest reserve lives among all of the oil supermajors.

High dividend yield
Total pays its dividend quarterly like its American peers. However, because Total declares and pays its dividend in euro, its dividend fluctuates with the exchange rate from the perspective of U.S.-based investors. As mentioned earlier, Total just recently increased its dividend to 2.38 euro per share. However, this is the trailing dividend rate, taking the company's Q1-Q3 2013 dividends into account.

The dividend going forward will be 2.44 euro per share or 0.61 euro per quarter per share. This is the dividend that an investor buying the stock today will receive. The stock trades for 46.22 euro on the stock exchange in Paris so this gives the stock a 5.3% yield on its native exchange. The ADR should have a similar yield as it trades at approximately the same price converted to dollars. This dividend is subject to the French withholding tax of 15% for U.S. residents and so the best place to put an investment in Total is in a regular, taxable account.

Daniel Gibbs has no position in any stocks mentioned. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any stocks mentioned. Powerhedge LLC has no position in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Chevron and Total SA. (ADR). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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