France-based energy giant Total (NYSE:TOT) had a disappointing performance last year, just like many European oil majors. However, it's looking forward to a more prosperous future driven by several project ramp-ups as well as new start-ups. Total takes a markedly different approach than its European oil and gas peers such as Royal Dutch Shell (NYSE:RDS-B), and Eni (NYSE:E) which also under-performed last year, primarily on the upstream side of the business, due to waning production and falling project returns. Production woes for Royal Dutch Shell and Eni were exacerbated by supply disruptions that made their operations in the Middle East and Africa increasingly risky.
What separates Total from its close rivals is that it's still making considerable investments in its upstream portfolio, while Royal Dutch Shell and Eni pare back. The latter two are busily selling off assets and using the proceeds to increase dividends and shore up their balance sheets instead of reinvesting in new projects. This may give Total a leg up this year and beyond, which is why management is confident in its outlook.
A rough 2013 left European oil and gas majors battered and bruised
Total, Royal Dutch Shell, and Eni all suffered, to some degree, from the same over-arching conditions. The economies in Europe remain slow to recover, meaning returns on existing projects shrank. This is apparent in their underlying results over the past year.
Total's profits fell 18% last year, due primarily to poor exploratory and production results. Its upstream profits fell 13%. However, it mostly kept its investment process going. Total divested $6.3 billion worth of assets last year, which actually represented a 15% decline from the prior year's divestments. Moreover, Total made $34.4 billion of investments, up 17% from the year before. That means its net investments grew 18% in 2013, year over year.
By contrast, Eni and Shell are taking an axe to their asset portfolios, and instead of using the proceeds to reinvest in new projects, they're for the most part content to increase dividends. Eni will reduce its spending over the next four years by 5% per year. Shell's planned cuts are even harsher. It will reduce capital expenditures to around $37 billion this year, down from $46 billion the year before. In percentage terms, that represents a nearly 20% decline.
Total's project line-up is headlined by start-ups of existing projects in Africa, Canada, and Russia, as well as entry into new assets in Brazil. Total launched its Yamal liquefied natural gas project in Russia in the fourth quarter. And, the company acquired a 20% interest in the Libra oil field in the Santos Basin of Brazil.
Total's existing projects kept production fairly steady and resulted in a 2.5% increase in hydrocarbon production from start-ups and growth from new projects. This was partially offset by a 1% production dip from normal field decline, which is why management intends to keep investing in projects to counteract future field declines.
Focus on what the future holds
The sluggish economic recovery in Europe and aggressive actions taken to cut costs and shed assets might call the outlooks of Total, Royal Dutch Shell, and Eni into question. And yet, Total is entirely confident that the future will be more prosperous than the recent past due to its ongoing upstream investments. Whether its rosy outlook comes to fruition remains to be seen, and requires a fair amount of faith in management in the meantime.
For investors willing to ride out the storm, what all three companies can offer you are solid dividend yields. Total, Royal Dutch Shell, and Eni each pay dividends near or exceeding 5%. Should Total's project line-up start to add to production soon and if oil prices stay supportive, it might have some solid momentum through 2014 and beyond. And, its juicy dividend yield could amount to icing on the cake.