When you hear the term "Big Oil," there are probably a few names that come to mind, but rarely is Total (NYSE:TOT) one of them. As the fifth big name in Big Oil, it sometimes gets forgotten. Unfortunately for those who forget about Total, they may be missing out on one of the better opportunities in the integrated oil and gas space. With lots of room left for oil and gas companies to grow over the next several decades, there is plenty of opportunity for investors to look at Total.
There is no guarantee that shares of Total will gain, and it's impossible to say with any certainty where they might be a couple of months or even a year from now. Instead, let's take a look at three things that give a high probability that shares of Total will rise over the long term.
1) Strong project portfolio
Bringing on new production is generally considered the sign of financial health for an oil and gas producers. The one issue with this mind-set, though, is that it assumes that all new production is profitable. This isn't necessarily the case. Sometime the cost of production is so high that new production barely moves the needle when it comes to profitability and return. In the case of Total, management has been very careful as of late to fall into the production-at-all-cost trap and has focused its new project portfolio on high-return projects
There are two key points from this investor presentation slide. The first is the type of production coming online. 75% of the company's production will come from either liquids or from oil-price-indexed gas. This is a more important factor than many might think. At today's prices, a thousand cubic feet of gas sold on the spot market at the National Balancing Point--the UK's trading hub for gas, similar to the US Henry Hub market--is just over $7.00. That's pretty good compared to US prices, but gas sold at a price indexed to an energy equivalent of oil will sell for closer to $16 per thousand cubic feet at current Brent crude prices. Selling gas for more than double because the contract is indexed to oil can go a long way.
The second important point in these numbers is the cash flow per barrel of oil equivalent. Total estimates that this suite of projects will net $50 of operational cash flow per barrel equivalent, which would be very impressive if it can acutally be achieved. Top independent oil producer ConocoPhillips estimates that only 40% of its best projects can achieve a barrel equivalent margin of greater than $40, so a $50 average cash margin across the entire project portfolio is extremely ambitious and could go a long way in improving returns.
2) Lots of potential to improve cash flow
One of the other misconceptions about investing in Big Oil companies is that people spend lots of time looking at earnings numbers without paying attention to free cash flow generation. For Total, this has been a bit of an issue over the past few years. Since 2011, operational cash flow has generated about $2.5 billion more than what was spent on capital expenditures, about 3% more--and that doesn't include changes in working capital, either.
Clearly, this is not a great model for future success, but there are efforts in place that should improve this. The first is that set of new projects that have the potential to generate high cash margins mentioned above, but the second part is that the company is adjusting its production base though divestmetns and sales to reduce the need to spend money to maintain production at older producing assets. Total estimates that its collective decline rate for its producing assets is in the 3-4% range, which will allow the company to reduce its maintenance and overall capital expenditures
With higher cash margin production coming online and lower capital obligations over the next few years, Total should be able to drastically improve its free cash flow from operations. This will give management more options at their disposal to improve shareholder returns with increased dividends or possibly buying back shares.
3) An eye on the future of energy
Calling Total an integrated oil and gas company may not be the right term. Perhaps a more appropriate term would be a diversified energy company, because Total has the largest exposure to alternative energy of its peers. Unlike the other big players that use solar and wind projects as a means for potentially offsetting carbon emissions from its oil, Total actually has investments in the alternative space built to grow the company through its 60% ownership stake in solar panel manufacturer SunPower (NASDAQ:SPWR). Total estimates that demand for photovoltaic panels will more than triple between now and 2020, and SunPower's position as a technology leader will differentiate it from the rest.
The one thing to keep in mind, though, is that Total's investment in SunPower is a very long-term play for the company that has little impact on the income statement today. SunPower's $2.5 billion in revenue over the past 12 months pales in comparison to Total's $232 billion in revenue from the oil and gas industry. As alternative energy starts to play a larger role in our energy mix, though, Total's forward thinking on diversifying its energy offerings could pay dividends down the road.
What a Fool Believes
If you are considering owning shares of Total, you should be looking at it as a long-term decision. Companies like Total will never wow you with huge gains in a single year, but their ability to generate returns on capital and give back cash to investors through dividends over the long term will pay off. If total can execute this project plan and reign in its capital spending through less maintenance capital needs over the next couple years, owning shares of Total could be a very good addition to your portfolio.
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