Despite the fact that the European economy continues to struggle, international oil companies (IOCs) headquartered in the region (like Total) will stand to benefit immensely from the seemingly inevitable - albeit gradual - European nuclear phaseout.
In 2009, oil & gas (37% oil, 24% gas) accounted for 61% of EU energy consumption versus 14% for nuclear. As the percentage of nuclear power consumption begins to decline, I expect the oil & gas share of the European energy mix to increase significantly. This energy void left by nuclear presents a unique opportunity for European oil & gas companies to expand sales in a familiar, mature market with relatively low geopolitical risk.
There are only two possible alternatives to an increase in oil & gas consumption. Theoretically, the region could experience an uptick in coal usage, but this is unrealistic given the clean-energy initiatives and political climate of the EU-27. The only other candidate – renewables like wind, solar, and hydro – will likely see a slight rise to about 16% of EU final energy consumption (up from 12.5% in 2010) but high costs will prove to be an obstacle to further progress. Indeed, the EU goal to have renewables account for 20% of the energy mix by 2020 seems increasingly unattainable – especially given a recent report finding that electricity prices for German households have increased 61% since 2000. At a time when average Europeans are experiencing financial troubles, the rigid and idealistic legislation coming from Brussels seems misguided and out-of-touch.
Enter Total. Over the long-term, this French supermajor seems particularly well-positioned to take advantage of the 10% “European energy gap” (-14% nuclear, +3.5% renewables) left by the nuclear phaseout. The company relies on the region as its revenue engine – over the past 3 years, combined sales in France and the rest of Europe accounted for 70.2% of total group sales. Such a high geographical concentration of sales, while usually a cause for concern for investors, should prove beneficial for Total as we move toward 2020.
Perhaps partly due to its Eurocentric focus, Total is often misrepresented in the press as an overly-conservative company not willing to take calculated risks. Reality paints a starkly different picture. Total is more leveraged than any of the other five supermajors, with a net debt to equity ratio of 45.5%. Exxon and Chevron, by comparison, have net debt to equity ratios of 8% and 10%, respectively. Given the availability of cheap credit in today’s low interest rate environment, Total is likely operating under a more optimal – and opportunistic – capital structure than its competitors. In its willingness to take on debt, Total is projecting a message of confidence to its shareholders.
In recent years, Total has also invested heavily in its African E&P business – a decision which has seen African sales increase 42.7% from 2010 to 2012 to a level that now exceeds North American sales. Of Total’s 11.368 billion barrels of proven reserves (known in the industry as “1P” - 90% probability of production), 3 billion are found in Africa – more than in any other region. In what should be interpreted as a vote of confidence in Total’s upstream business, Chief Executive Christoph de Margerie has also publicly trumpeted a production target of 3mllion b/d by 2017. This would mark an impressive 100% increase in crude production over a 2007 level of 1.5 million b/d. Additionally, Total is targeting a FCF of $40bn a year between 2015 and 2017, a 39% increase over the projected FCF for the 2012-2014 period. While Mr. de Margerie has ruled out any acquisitions for the time being, a portion of the company’s large cash balance will be earmarked for exploratory activities. These are hardly the actions of an overly risk-averse or complacent company.
Though the well-documented decline of North Sea production has forced Total to search beyond its own backyard for reserves, its decision to pursue exploratory activities in East Africa – which, along with the Arctic, is one of the few remaining “oil frontiers” – is a clear indicator of the company’s growth ambitions. As the global demand for oil imports moves east following the US shale revolution, Total’s presence in Tanzania, Kenya, and Mozambique provides a strategic proximity to key Asian markets. Indeed, as the United States begins to scale back its crude imports, China, Japan, and South Korea will play an increasingly important role for many IOCs. The three countries each rank among the top-five globally both in terms of net oil imports (combined 11.1 million b/d imported as of 2007) and refinery capacity (combined 15.9% of global capacity).
In the coming years, it will also be interesting to monitor whether Total can capitalize on an increasing demand for liquefied natural gas (LNG), an industry in which it is a self-proclaimed “pioneer.” Of the world’s top 8 LNG importers, 3 (UK, Spain, and France) are found in Europe, a fact which should play to Total’s regional strength and expertise. Though LNG currently comprises only 10% of gas demand in Europe, LNG consumption in the region is expected to increase 128% between 2008 and 2015. Though the market for LNG remains comparatively small, Total’s success in this area would reassure investors of the company’s ability to adapt to a rapidly-evolving competitive landscape in the oil & gas industry.
Lastly, it is worth noting that short interest as a % of float for Total is a mere one-tenth of one percent (0.11%) – lower than any of the other Supermajors except Shell. For reference purposes, a troubled company such as Research in Motion presently has a short interest of 33.3%.
Despite an effective tax rate of approximately 60%, a ban on hydraulic fracturing in its country of domicile, aging fields in the North Sea and a sluggish European economy, Total has managed to turn in consistently solid performances. Given its strong balance sheet and its resilience in the face of incredible adversity, Total seems perfectly poised for a breakout performance over the next five years – especially given the reality of Europe’s fundamentally changing energy mix.
By. Philippe Casey