Stock of the week: Total

Summary:
- Total acquired Maersk Oil last year
- Major natural gas projects underway
- Stock price to high degree correlated with crude price
- Solid dividend policy may encourage investors to look past short-term share price fluctuations
- Total (FP.FR) keeps trading below downward sloping trendline but benefited from the recent bounce in oil prices

Declines on the oil market pressured stock prices of major oil producers in the second quarter of 2019. Among such companies one can find Total, the French oil and gas company. In this short analysis we will take a look at recent acquisition and project developments as well as the company’s dividend safety.

It should not come as a surprise that revenue of the oil “supermajor” is moving in tandem with crude price. This shows us that major events for the oil market should not be downplayed by investors trading Total shares. The nearest such event will take place 1-2 July - the OPEC meeting on extending output cut agreement. Source: Bloomberg, XTB Research

Total has recently made a major acquisition - the French company bought Maersk Oil for $7.45 billion in early-2018. Along with the acquisition of the Maersk’s operating oil facilities, Total also became the owner of 49.99% stake in recently discovered Culzean field, east of the United Kingdom’s coast. The field is said to hold natural gas equivalent to 300 million barrels of oil. While such discoveries are happening from time to time, the way in which Total completed development of Culzean project is way more unusual. Namely, Total not only completed the project ahead of the schedule but it also managed to complete it around $500 million under the budget.

Apart from boosting operations on the North Sea, Total shareholders also have reasons to cheer when it comes to the company’s South American operations. Petrobras, the Brazillian state-run oil giant, announced the decision to expand Mero project last week. The project is said to produce around 600k barrels of oil per day during its peak production. Total has a 20% stake in the Mero project.

Both oil and natural gas play an important role in the Total’s portfolio. Production of oil (in BOE) increased by 16% over the past 10 years while natural gas output jumped 35% over the past decade. However, given that Total is currently undertaking more gas-oriented projects, it is not entirely impossible that natural gas will dethrone crude. Source: Bloomberg, XTB Research

Both of the aforementioned projects will boost Total’s output. A point to note is that one of the projects will supply crude while the other will provide natural gas. While both products are energy commodities, their price moves are not significantly correlated (2-year correlation coefficient in 0.20-0.25 range). Having said that, natural gas operations may provide a kind of a buffer at times of declining oil prices and vice versa. The company is expanding its LNG portfolio in order to make itself less dependent on crude oil. The Culzean project mentioned earlier will produce natural gas equivalent to 100k barrels of oil each day or, in other words, 5% of United Kingdom’s demand. Combined with other production facilities on the North Sea, Total will now be able to meet 18% of the United Kingdom’s demand for natural gas. However, it should be noted that North Sea is not the only place where Total is extracting natural gas. The French company is also benefiting from the ongoing expansion of the Yamal LNG project in which it holds a 20% stake.

Total has been paying dividends for over 35 years. During the period of steep decline on the oil market (2014-2015), the company had to use its reserves to pay out dividends as profits were too small to cover payouts. However, payout ratio declined to more reasonable already. Source: Bloomberg, XTB Research

While natural gas may be gaining importance in Total’s portfolio, the truth is that the company is still highly dependent on the level of oil prices. Unfortunately, there is little shareholders can do about fluctuations in oil prices and, in turn, in Total’s share price. One could argue that in such a situation, it could be better to just trade oil, through futures for example. However, Total shares have one key advantage over oil futures - dividends. Total paid out a dividend of €2.56 per share in 2018, a 3.1% increase against last year. The company has been paying dividends for over 35 years now and has recently elected a dividend policy that assumes Total will increase or at least leave unchanged the dividend payout each year. Moreover, the company has the second highest dividend yield in the Euro Stoxx 50 index - even after this week’s stock price jump yield sits above 5%. As depicted on the chart above Total had payout ratio in a “reasonable” range for the major part of the past 15 years. Indeed, steep drop in oil prices in 2014 caused the company’s payout ratio to exceed 100% in 2014, 2015 and 2016 but Total managed to get it back below that level in 2017 when oil prices started a 15-month long rally.

Total (FP.FR) has been trading in a downtrend since reaching ATH in late-2018. The stock price decline was guided by a decline on the oil market and unless a rebound occurs on the latter, the former may find it difficult to rally. Much can depend on the outcome of early-July OPEC meeting. An outcome positive for oil prices could push Total shares higher and maybe even allow them to break above the downtrend line. Source: xStation5