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Why I Have Gone From Bear To Bull On Total S.A. (TOT)

When the names of the companies approved to bid on the newly available Mexican oil leases were released this week the list contained little of any real use to potential investors. It consisted largely of privately held and joint venture companies that offer no opportunity to most of us. In addition, the usual suspects such as Chevron (CVX) and Exxon (XOM) were there, but while the shallow water fields concerned have great potential, any production and profit from them will, in the grand scheme of things, have little immediate overall effect on the giant multi-nationals.

There was one name that stood out to me, though. The large French integrated company, Total S.A. (ADR: TOT) was among those granted permission to bid. Now, in the past, I have been bearish on Total, even going so far as to caution investors not to get involved when oil was set to rebound from the mid $40s in January. It has been my least favored multinational, integrated oil stock. If I may be permitted to toot my own horn a little, that worked out pretty well as TOT failed to participate in the subsequent bounce amongst other big oil stocks.

TOTADR

The reason for my negativity was that Total was concentrated on Europe and the troubles there looked far from over. To some extent that is still the case, but if they are successful in bidding for leases in Mexican waters it will give a large boost to their penetration in both North and South America. There is still the risk of Europe lurching to another crisis, but that possibility is increasingly looking to be priced into the stock.

Even as the possibility of a “Grexit” has loomed, however, there are signs that overall economic activity in Europe is picking up as the ECB finally bowed to the inevitable and embraced asset purchases, or quantitative easing. Last quarter’s 0.4% increase in GDP hardly constitutes a boom, but it does confirm that recession has been headed off and continues a positive trend.

TOTADR2

It is quite possible, then, that Total will see some kind of recovery in their base market. That possibility had already begun to intrigue me, but news of the potential for involvement in the coming liberation of Mexican reserves makes now a good time to pull the trigger. There are a couple of other reasons that TOT looks like a buy here as well, one technical and the other the most fundamental of all.

From a technical perspective, the recent weakness leaves the ADR close enough to the March low of $46.61 to leave plenty of room for appreciation, and provide a reasonable stop loss level. A stop to protect against a break of that level, say somewhere around $45, would limit potential losses to approximately 12 percent. There is some resistance around $55 that would have to be broken, but if that occurs the targeting a return to $65 with rolling stops 10-12 percent away could be a profitable strategy.

From a fundamental perspective TOT pays a respectable 5.2 percent dividend. For that to be of use to U.S. based investors, two things have to happen: Dividend payments must be maintained, even if they are trimmed somewhat, and the Dollar must stay strong. This week’s announcement of a dividend by the company allayed one of those fears and the bounce back in the dollar index over the last couple of weeks has most calling for even more dollar strength.

The inclusion of Total on the list of approved bidders in Mexico was welcome news for them, but may not have been enough on its own to change my view of the company’ prospects. When all of the other factors are combined, however, it looks like a good time for an abrupt change of mind and a transformation from bear to bull on the ADR.




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