Big Oil's Richest Yield Is Cheap

12/22/2010 12:03 pm EST


Paul Tracy

Editor, The StreetAuthority Market Advisor

French oil giant Total combines a tasty payout with enticing growth prospects, writes Paul Tracy in High-Yield International.

Total S.A. (NYSE: TOT) offers the highest yield (5.7%) of any major integrated oil company and there's upside to that payout thanks to strong commodity prices and significant production growth potential over the next few years. Given its low net debt, high cash balance and wide geographic diversification, Total is a low-risk play on growth in global energy demand.

It’s Europe's third-largest integrated oil company and the largest firm listed on the Paris exchange. Total has been diversifying geographically in recent years but Africa and the Middle East remain its most important regions, accounting for close to 60% of total reserves.

Total pays out dividends twice per year in May and November. The oil giant last increased its payout in November 2008 and has maintained its dividends since then at a steady €2.28 ($3) per share annually. That's an impressive record when you consider that profits dropped off sharply in late 2008 and early 2009 due to the decline in crude oil and natural gas prices amid a global economic downturn.

Dividend Growth in the Pipeline
At the height of the energy commodity downturn in 2009, Total still paid out less than two-thirds of earnings as dividends and at current commodity prices its payout ratio is less than 50%. Thanks to the recent jump in oil prices and management's plans to boost oil output over the next five years, the company is on course to resume growth in its payout starting in 2011. Total has a history of generating consistent growth in dividends over the long term, with its total payout in euro terms growing by more than 8% annualized over the past five years.

Like all energy producers, Total was hit by a rapid decline in oil and natural gas prices during the heart of the global financial crisis of late 2008 and early 2009. For the full-year 2009, oil prices were off by more than one-third from 2008 averages while US and European gas prices dropped around 60%.

But while the macro environment for energy prices deteriorated in 2009, Total continued to execute well operationally.

And upstream results have improved markedly in 2010. Production in the third quarter of 2010 rose by 4% over the same quarter one year ago. And thanks to rising commodity prices, net income per share soared by nearly one-third in the first nine months of 2010.

With $27 billion in the bank and a net debt to capitalization ratio of less than 30% as of the end of 2010, Total has the financial flexibility to continue investing the vast sums needed to explore for oil and fund major project developments.

Total has promised 2% annualized growth in oil production over the 2009-2014 period. The plan calls for starting up a series of new projects amounting to over 800,000 barrels of oil equivalent production per day.

Africa Is Home Field 
The firm's most important competitive advantage is operational knowledge in Africa, Total's largest region in terms of total reserves and the company's main growth driver in the coming years. Deepwater developments off the coast of Angola are the lynchpin of that growth.

Beyond Angola, the company is pursuing a long list of upstream growth projects. For example, in Canada Total has stakes in a series of oil sands projects due to come on-stream by 2015-2016. Management expects heavy oil production such as oil sands to account for 10% of the company's total output longer term.

And while gas prices are currently depressed, excess global gas production is likely to diminish by the middle of this decade as demand rises. Total is investing in long-term growth, forming a joint venture to produce gas from the Barnett Shale and investing in a series of liquefied natural gas (LNG) projects in Nigeria, Angola, Australia and Qatar.

With a series of promising growth projects underway over the next few years, Total will be boosting production in a rising price environment.

An Un-American Yield
Total’s 5.7% yield is roughly twice the average of US peers ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), despite equivalent or better production growth prospects. And Total trades at less than 7.5 times forward earnings, considerably less than its major US and European peers with the exception of BP (NYSE: BP), a stock still depressed by the ongoing uncertainty surrounding last spring's oil spill in the Gulf of Mexico.

[If Ian Wyatt’s right about Peak Oil, Total figures to be even more of a deal. Curtis Hesler concurs and recommends a Canadian oil-sands producer. Roger Conrad favors a smaller Canadian driller with a yield even nicer than Total’s—Editor.]

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