by Aaron Levitt | April 18, 2014 10:33 am
Last year, the story for many of Europe’s major integrated energy stocks wasn’t that pleasant. Higher drilling costs and absolutely abysmal crack spreads on refining hurt profits and crimped share prices. From BP (BP) to Italy’s ENI (E), many of the European majors suffered.
Yet in this suffering, investors can find some pretty tasty long-term bargains. In this case we’re referring to French major Total (TOT).
Like rivals BP and E, Total didn’t have a great 2013. However, there are plenty of catalysts that should help propel TOT stock into the future. For investors looking for beat-up bargain, TOT stock could be the key to a great total return in the energy sector.
To say that 2013 was bad for many of Europe’s major energy firms would be an understatement. Aside from Europe’s slow-growing economy, many of the continent’s energy majors suffered hard at the expense of downstream and refining issues. Unlike many American refiners, most of the European majors have been forced to fight rising Brent crude oil prices. Those high prices managed to dent or obliterate refining margins.
Add in poor exploration and production numbers and it’s easy to see how the European majors faired so poorly throughout the year. Overall, Total managed to see an 18% reduction in its full year profits, with upstream operations profits falling 13%.
In response to the terrible year, many of Europe’s biggest energy firms have undergone a huge asset selling binge. Both ENI and Royal Dutch Shell (RDS.A) have begun selling everything but the kitchen sink as well as cutting capital expenditure on new projects. Shell — which had been the capex king — has reduced its planned spending by nearly 20% this year, while E has plans to reduce its spending over the next four years by 5%.
And since both E & Shell saw falling production amounts last year as well, cutting capex spending on new upstream and downstream projects probably isn’t a good idea for the long term.
However, here’s where the outlook gets rosy for TOT stock. Total continues to open up its wallet. Last year, the firm increased its capex spending by 18% to reach $34.4 billion. And so far in 2014, the deals keep coming.
First, TOT has entered the potentially prolific play in Chinese shale. Total recently partnered with Sinopec (SNP) to begin fracking China’s vast shale rock formations. Estimates peg China’s shale reserves as the world’s largest. The 1,500 square-mile region that Total and SNP are prospecting will yield around 10 billion cubic meters of natural gas by 2017.
Second, TOT continues to prospect in the deepwater off of the coast of Africa with great success. The firm has recently begun a massive offshore project in Angola. The Kaombo project will contain six oil fields, containing both heavy and light oil, across 59 wells. Once it is completed in 2017, the project will produce around 230,000 barrels per day or about 13% of Angola’s total daily production.
Adding these two deals and projects to others — such as a new liquefied natural gas (LNG) facility in Russia and exposure to Brazil’s Santos Basin — causes the longer-term production profile at Total to be quite sweet. Overall, the energy firm estimates that these projects will have it producing around 2.6 million barrels per day by 2015 and possibly 3 million per day by 2017.
And despite that bullish spending and production profile, TOT stock is currently trading at a discount to its European peers — except for BP, which is still struggling under the weight of its legal woes.
On a forward price-to-earnings metric, TOT stock currently trades for a little more than 10 times earnings. While that is above its historic norm, it’s still below rivals ENI & Shell. That duo currently trades for a forward P/E north 12. Total’s discount versus its European rivals extends itself to its price-to-book and PEG ratios as well. Not to mention its gross profit margin of 28% is higher than the other two firms.
Even when looking across the pond here in America, TOT stock is actually cheaper on a forward P/E basis that majors like Exxon (XOM).
On the dividend front, Total’s recent increase is another advantage. TOT stock is currently yielding 5.1%. That compares to only a 4.7% yield for both E & RDS.A. That dividend yield bests even America’s major energy players.
Total offers a higher long-term production growth profile and bigger dividends at a much cheaper price than its rivals. TOT stock is a great example of what constitutes a great bargain. Over the long haul, its new ambitious projects will help drive returns and future increases. The cheaper metrics make those projects even better.
Given that scenario, TOT stock is an obvious buy for investors looking to add some European muscle to their energy portfolio.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/04/tot-stock-e-rds-a-rds-b/
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