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Total S.A. : Portfolio Re-Balancing to Fuel Growth

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 mark which has increased the demand for oil assets. BP has set a target to raise $38 billion by the end of 2013, it has already achieved 84% of that. Total and BP’s biggest European rival Royal Dutch Shell (NYSE:$RDS) has also sold $12 billion assets since early 2011.

Total has been facing increasing pressure for improving 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 targets 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 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 volatile oil prices have made it tough. 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 for similar investments for 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% YoY 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% YoY 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, 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 downstream operations witnessed declining sales in Europe and Americas by 14% and 9%. 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 ~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 (NYSE:$SHI). 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 that will occur in the 2nd half of this decade, where growth will be the strongest as the West struggles with debt deflation and currency debasement.

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Peter Pham is a capital market specialist and entrepreneur.  With expertise as a Head of Institutional Sales and Trading he closely watches the market and probes for investment opportunities utilizing a unique blend of quantitative trading experience and macro trend analysis… (read more)

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