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With Giant Treasure Chest of Cash Total Could Be Big Beneficiary of Discounted Gulf of Mexico Assets

September 14, 2010 | About:

I own a few shares of giant French oil company Total. The company is priced very reasonably in comparison to its existing reserve base. Total is also run by straight shooting CEO Christophe de Margerie who is one of the few oil company executives to admit that the world is starting to bump up against the a rate of daily oil production that will be impossible to surpass.

The company is now in the enviable position of having a large cash hoard that is available to deploy just as assets in the Gulf of Mexico are being priced at a large discount. France’s biggest oil company increased its holdings of cash and near-cash items to a record 14.8 billion euros ($19 billion) at the end of the second quarter. According to Bloomberg that is even more than Exxon Mobil Corp.’s $13 billion and Royal Dutch Shell Plc’s $12 billion.

Yesterday I read a report from Sandford C Bernstein that suggested that Total may buy Cobalt International Energy Inc. I’ve written previously about Cobalt:


Cobalt has a massive resource potential as it has 8.9 billion BOE of unrisked reserves according to its independent third party reserve engineers. Total would be a natural acquirer as they already have a strategic alliance with Cobalt across 214 Deepwater Gulf of Mexico leases. Locking up the rest of Cobalt would give Total huge upside exposure to the Gulf of Mexico.

I believe both companies are attractive. Cobalt because with the current stock price you basically pay only for the reserves they have already discovered and get access to their enormous potential upside for free. And Total because at its current stock price sells for a healthy discount to existing net asset value and pays a very attractive dividend.

I would hope that Cobalt management would not be willing to sell the company for anywhere near the current share price. Cobalt has been leading the charge to educate politicians about how important production from independent producers in the Gulf of Mexico is for the United States. Cobalt arranged for an independent study of the importance of smaller companies and issued the following press release:

“The IHS Global Insight study demonstrates that independents are and will be a key driver of economic growth and development for the Gulf of Mexico region over the next decade. According to the analysis, in 2009, independents operating in the Gulf of Mexico accounted for more than 200,000 jobs, $38 billion in economic benefits, and $10 billion in federal and state revenue and royalty payments. There were 121,000 jobs generated by independents in the deepwater Gulf of Mexico alone.”

“Policy that has the effect of excluding independents from the Gulf of Mexico would significantly shrink offshore activity, threaten hundreds of thousands of jobs, and result in billions of dollars in lost economic activity. In fact, according to the IHS Global Insight study, if the independents are excluded just from the deepwater, the job losses would total 265,000 by 2020, with a loss of $106 billion in tax revenue from the four state Gulf region over that same time period. Total tax losses to the federal government would be higher because of the taxes generated elsewhere in the country from manufacturing and investment related to Gulf activities.”

“It is Cobalt’s hope that this study will provide an independent and objective factual basis for the consideration of policy changes, which will allow responsible companies – independents and majors – to remain active in the exploration and development of the vital domestic energy resources in the Gulf of Mexico.”

Cobalt patiently acquired its portfolio of massive exploration targets with an eye towards higher future oil prices. I can’t imagine that they would be willing to part with them now at a point in time when a 1 in 50,000 event (the BP oil spill) temporarily results in the stock market undervaluing them.

Here is their most recent presentation which is worth reviewing:


Total CEO de Margerie is worth following for his honest assessment of the energy industry. It would not be surprising that he would be interested in locking up the upside offered by Cobalt’s assets. Total recently purchased oil sands interests in Canada via UTS Energy that provide a very long term oil production asset. Here are some interesting excerpts from a recent interview with the European Energy Review that de Margerie did:

“His vision is clear: we must keep on producing fossil fuels – indeed, lots of them – or else, humanity will be unable to achieve economic growth. And although he is convinced there is enough oil and gas in the world for a long time to come, he does warn that we are headed for another period of high prices and possibly even energy shortages if we do not expand investments quickly enough. For this reason, he believes it is adamant for the industrial world to build long-term relationships with the big oil and gas producing countries, especially in the Middle East. He warns western governments, ‘if you consider the producing countries bad because they produce carbon, you get off to a very bad start.’”

“I have never said that we are running out of oil. I do not believe that. But we are running out of production capacities. It is not a question of reserves as “peak oil” theorists would have us believe but rather a question of available production capacities. So why is it we are reaching a production peak? First of all, there are few “easy” oil and gas fields left out there. Second, oil nationalism as well as the economic crisis are making matters worse. This is leading to less investment. Producing countries at present are quite simply asking “why invest now?”, when they have a shortage of cash and have other priorities.

There is a reduction in investment for there is a shortage of financing. The producing countries lack the financial strength of companies like Total. This stresses the importance of why an oil company like ours needs the profits it makes. Our balance sheet is helping us through the hard times and allows us to keep up our investment program. If we hadn’t made these profits, we would not have been able to continue investments as we are today.

But overall the crisis is having an adverse impact on investment. And I fear that in a few years’ time, once the economy picks up again, this will become a very big problem. Prices will climb again and what is more, we may face a shortage of energy. We now produce 84 million barrels a day. According to the International Energy Agency, we will soon need over 100 million barrels a day. Saudi Arabia can produce maybe 4 million more. That would take us to 88 million barrels per day. Still far short of what is needed. And when you see what is going on in Iraq, in Iran, in Venezuela, in Athabasca (Canada), in Russia, in Nigeria … The reserves are there, but will they be developed in time? “

[i][/i]I think Total is a very low risk investment with excellent upside. Cobalt could easily be a multi-bagger from here, but will take some research so that you are comfortable with how politics are and are not going to impact them going forward.

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