The 2007 economic crisis sent Total (NYSE:TOT)’s stock face value tumbling down, and after six years there is no clear evidence of full recovery. As a matter of fact, the stock price has tumbled every time it seemed to enter a steady uptrend. Today, it stands at around $65, a little over $20 down from its 2008 zenith.
Most telling about the company’s performance is the evident reduction in their holdings. Hotchkis & Wiley, Charles Brandes (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio) and IVA International Fund (Trades, Portfolio), the largest shareholders, have all sold important parts of their positions. The question that remains is, why? Is the company heading for more troubled times? If so, why not sold out? Or, are these gurus collecting their share of rewards at a responsible time? These and other questions will be contemplated in the following analysis.
- Warning! GuruFocus has detected 8 Warning Signs with TOT. Click here to check it out.
- TOT 15-Year Financial Data
- The intrinsic value of TOT
- Peter Lynch Chart of TOT
New Agreement, New Hopes?
Total, like many other European integrated oil & gas producers have faced great difficulties since the last economic crisis. Returning to a path growth has not been easy due to the slow economic recovery registered at the Euro Zone. Troubles have reflected upon stock face value and many dropped the stock altogether. Others waited for the drop while taking advantage on the low price with the hopes of making a difference in the future. Performance has, however, been very unpredictable.
In an effort to improve overall performance, Total entered and made stronger bids on new and riskier markets. Most telling is the deepening of the partnership developed with China National Offshore Oil Corporation (NYSE:CEO) through a LNG Cooperation Agreement. The new agreement entails a price review regarding a pre-existing accord, a doubling of the quantity originally agreed upon, and further cooperation throughout the LNG value chain.
As much as analysts would like to pin-point the upside to the agreement’s review, benefits for Total are scarce. Securing a share of one of the fastest natural gas growing markets is surely a positive note. However, prospect investors should not forget that Chinese authorities do a great deal of meddling over profits.
In other words, profits are limited by local legislation. Sinopec (SIN) is one company that already knows quite a bit about this issue. That is the reason why many integrated oil and gas companies have entered the Asian region but located operations outside China. Most operations have been located in and around Australia in order to secure profits.
Highlights for Profit?
In 2013, Total has seen the uptrend come to a halt. Revenues and net income have registered a decline after rising for four years in a row. And even though cash flow remains stable, free cash entered the red zone while debt climbed for the third year in a row. Most importantly, during the same period operating margin has steadily deteriorated.
Declining results are a consequence of lower contribution from Total’s upstream and refining and chemical segments. Unfavorable production mix and higher exploration charges have been mostly blamed by the poor performance registered by the upstream and refining segment. Most importantly, management has made no announcements concerning this issue.
Since the growth registered during past years by Total is deeply related to acquisitions, it is hard to think the same performance can be repeated. Acquisition related risks have become evident as segment began to perform below average, bringing the growth season to a sudden end during 2013.
Currently trading at 11.8 times its trailing earnings, Total’s stock carries an 8% premium to the industry average. Most importantly, the stock pays a quarterly dividend of $0.80, representing a 3.92% annual yield. Moreover, annual yield is expected to rise to 5.08% during the next year. All these are signs of a struggling stock, which intends to lure prospect investors into taking a strong position while covering the risks associated with it.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.