Total S.A.: Portfolio Re-Balancing to Fuel Growth
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Total S.A. (NYSE: TOT) is aiming to raise $15 billion - $20 billion by 2014 by selling some of its assets to finance its future projects. The CEO Christophe de Margerie said that he is looking to increase dividends and improve production levels. Its bigger rival BP (NYSE: BP) is also on a selling spree since oil prices crossed $100 per barrel, increasing the demand for oil assets. BP has set a target to raise $38 billion by the end of 2013, and it has already achieved 84% of that. Total and BP’s biggest European rival, Royal Dutch Shell (NYSE: RDS-A), has also sold $12 billion assets since early 2011.
Total has been facing increasing pressure to improve their production numbers after a slow down due to the North Sea gas leak and political unrest in Syria, Yemen and Nigeria. Their 2011-15 production target has been revised upwards from 2.5% to 3% average annual growth as it moves towards achieving 3 million barrels of daily production by 2017. The company is expected to get rid of its non-core, peripheral, smaller assets in the North Sea, Africa and Latin America, which will significantly improve its asset portfolio in terms of profit per barrel.
Total recorded an operating loss of more than $45 million in its refining and petrochemicals segment. Refiners are not particularly high-margin businesses to begin with, and volatile oil prices have made it tougher. As part of its strategy to improve operations, it has set a target annual operating income of $650 million from this unit by 2015.
This week, it was revealed that Total is planning to invest 1.2 billion Euros ($1.5 billion) in its Belgian facility to improve diesel output. The new investment is aimed to create operational synergies in existing capabilities. In other words, it is not planning to invest in new European operations. Patrick Pouyanne, the head of refining, has explained that the business “will invest less. We will have to extract more value from the investments already made in the last five years."
For the first half of the current year, Total’s sales increased by 2% year over year to $130 billion while net income fell by 7% to $7.6 billion. Its quarterly sales have fallen by 4% sequentially and risen by 9% year over year to $63 billion. Total primarily operates in upstream oil and gas, which earned 83% of its $3.77 billion adjusted net operating income for Q2.
During the first half of the year, the company’s total upstream liquid and gas production increased in Africa by 7% and North America by 3%, but decreased in every other region. The biggest slump happened in the Middle East, where liquid production fell by 6% and gas production by 25%. The company's downstream operations witnessed declining sales in Europe and the Americas by 14% and 9%, respectively. In the Africa and “Rest-of-the-World” regions, sales increased by 4% and 11%, respectively. The net effect of this was an overall decline in upstream output by 1% and downstream sales by 8%.
|
Total |
BP |
Shell |
|
|
Gross Margin |
13.50% |
10.60% |
11.90% |
|
RoA |
7.48% |
8.77 |
8.96% |
|
YTD Return |
-2.48% |
-1.14% |
-4.90% |
|
% Yield |
5.60% |
4.50% |
4.80% |
Though all three companies are running net margins of around 6.6%, Total’s operating margins are the highest and are paying their shareholders to wait while they re-align their production profile.
Unlike most oil and gas firms, Total has clearly identified its future goals. It is aiming for minimum exposure to the debt-ridden European continent with expansion in Asia and Middle East. From 2007 till 2011, it has reduced its European production capacity to 500,000 bpd as it works to cut its European refining by 20%. It is discussing new opportunities in Asia with Saudi Aramco, Kuwait Petroleum Corp and Sinopec. It has recently acquired operatorship of Xerelete offshore project in Campos basin, Brazil. Production has started, along with its partners, in Halfaya project, Iraq. Besides this, Bulgaria, Kenya, and Uruguay have awarded new exploration licenses to the company.
Total has an excellent track record of turning its plans into output. We like their aggressive approach to rebuilding their asset portfolio to set up themselves up to profit from next leg of the economic re-alignment, where growth will be the strongest as the West struggles with debt deflation and currency debasement.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.
