Total: This 5% Yielder Is the Fastest Growing and Most Defensive Oil Major

Oil majors are very popular in the income-oriented investing community, mostly thanks to the generous dividends that they offer. Total (TOT) is one of the 8 best dividend-paying oil stocks for 2019 and beyond based on its expected returns. Surprisingly, this exceptional stocks passes under the radar of the vast majority of investors, who monitor Exxon Mobil (XOM), Chevron (CVX) and BP (BP). In this article, we will analyze the special characteristics of Total, which render the stock an outstanding investment.

Business overview

Total is the fourth-largest energy company in the world, with a market capitalization of $149 billion. Like the other oil majors, it has an integrated structure and thus operates in four segments: Upstream, Downstream (mostly refining), Marketing & Gas, Renewables & Power. In 2018, these segments generated 64%, 21%, 10% and 5% of the total earnings of the company, respectively.

Growth

Unlike its American peers, Total has no presence in the booming Permian Basin, in which domestic companies grow their production at an impressive pace. However, it would be a great mistake to conclude that Total does not have strong growth prospects. Last year, the company grew its production by 8% and thus achieved an all-time high production level of 2.8 million barrels per day.

Even better, the oil major expects to grow its production by 9% this year thanks to the biggest exploration activity in its history. More precisely, Total expects to drill 23 wells this year, which is a record number and about three times the number reported in 2016 and 2017. The company will perform a total of 8 major start-ups in 2018-2019 and will thus outperform its peers by a wide margin in production growth throughout this period.

TOT Production

Source: Investor Presentation

It is remarkable that LNG production will increase more than 40% this year. On the other hand, as it is nearly impossible for an oil giant to maintain such high growth rates for many years, Total expects to decelerate to an output growth rate slightly in excess of 2% per year during 2020-2025.

Moreover, Total has greatly improved its asset base in recent years. Since 2015, it has acquired 7 billion of reserves at a cost below $2.5 per barrel. These assets have a return on capital invested about 10% at an oil price of $60 and are expected to enhance cash flows by more than $4 billion per year from this year. Given that last year’s cash flows were $12.1 billion, it is evident that these assets will have a significant contribution to the results of the company.

Resilience to downturns

As the energy sector is highly cyclical due to the dramatic swings of commodity prices, the earnings of energy stocks incur wild fluctuations. Therefore, it is paramount to check the resilience of an energy stock to downturns before purchasing it. Total is by far the most resilient oil major during downturns.

In the most recent downturn of the sector, which was caused by the collapse of the price of oil and natural gas from 2014 to 2016, Exxon Mobil saw its earnings per share plunge 75% while Chevron and BP saw their earnings completely evaporate, as they reported losses in 2016. Total outperformed its peers by a wide margin, as its earnings per share fell only 49%.

The outperformance of Total was driven by its superior refining segment. During the rough years of refining (2008-2013), all the oil majors were generating approximately 90% of their total earnings from their upstream segment. As a result, Total’s peers sold many of their refineries and thus increased their exposure to the oil price. On the contrary, Total retained most of its refineries. Consequently, when the price of oil collapsed, the robust refining segment of Total mitigated the impact of the downturn.

Some investors will claim that the volatility in performance is not important, as the recovery from a downturn will ultimately offset the effect of the downturn. However, this is far from true. Most investors cannot stomach volatile results and the accompanying wild swings in stock prices and thus tend to sell their long-term holdings at the worst time, during a downturn. Resilient business performance greatly reduces the volatility in the stock price and thus makes it easier to hold a stock for the long run.

Competitive advantages

Apart from its superior resilience to downturns, Total also exhibits some other competitive advantages when compared to its peers. Total produces less than 10% of its natural gas in the U.S. As a result, it enjoys much higher selling prices than its American peers. To provide a perspective, in 2018, Total reported an average natural gas price of $4.78, which was 51% higher than the Henry Hub average price of $3.17.

Moreover, Total has achieved a much lower production cost than its competitors. While all the oil majors drastically reduced their operating expenses during the recent downturn, Total managed to drive its production cost to $5.7 per barrel, which is about half of the production cost of the other oil majors.

Source: Investor Presentation

Dividend

Total is offering a 5.2% dividend yield, which is lower than the 5.8% yield of BP but much higher than the 4.1% yield of Exxon Mobil and the 3.9% yield of Chevron. While BP has an extremely shareholder-friendly dividend, it has a much higher debt load than Total and is much more vulnerable to downturns than Total. Therefore, investors should not rush to select BP over Total without performing further due diligence.

On the other hand, Total has a lackluster dividend growth record. The company raised its dividend by 3% this year and expects to raise it at the same rate next year. Exxon Mobil and Chevron are the only two dividend aristocrats in the energy sector, with dividend raises for 36 and 32 consecutive years, respectively. Nevertheless, as Total offers a much higher yield than its U.S. peers, it excels in this aspect, given the small difference in the dividend growth rate.

Valuation

As Total passes under the radar of most investors, it usually trades at a much cheaper valuation than its peers. This is the case today. The stock is trading at a forward price-to-earnings ratio of 11.0 while Exxon Mobil, Chevron and BP are trading at earnings multiples of 15.2, 14.9 and 12.3, respectively. Thanks to its cheap valuation and its high dividend yield, Total is likely to offer a significantly higher total return than its peers in the upcoming years.

Final thoughts

While Total passes under the radar of the vast majority of investors, who monitor Exxon Mobil, Chevron and BP, the French oil major has some striking advantages compared to its peers. It is the most resilient oil major to downturns, with by far the lowest cost of production. In addition, it has a much cheaper valuation and a much higher dividend yield than its U.S. peers. Given all these factors and the exciting production growth prospects of Total, the stock is likely to offer attractive returns to its shareholders in the upcoming years.

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