Brandes Investments Comments on Total

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Jun 15, 2016

We purchased France-based Total (NYSE:TOT), a vertically integrated oil company operating at all levels within the oil & gas industry, including exploration & production as well as refining & marketing. We had owned Total in the past and sold it in 2014 after the company had several positive developments. However, over the past year the stock declined significantly with the fall in oil prices and has traded near book value. We believe the company has positive attributes, including:

  • Solid fundamentals: While the market is concerned about the fall in oil prices, we see a strong company with industry-

leading profitability, a track record of investment discipline and strong growth potential in its liquefied natural gas portfolio.

  • Improvement in free cash flow: Total’s management has announced cuts to its capital expenditure (capex), which will likely improve free cash-flow generation. We expect capex spending over the past five years to result in production growth.
  • Attractive margin of safety: Using the assumption that profit per barrel and return on capital would normalize at a lower level compared to their 10-year history, and that long-term oil prices would increase as industry capex is cut, Total was trading at an attractive margin of safety relative to our estimate of long-term intrinsic value.

From Brandes' Global Equity Fund first quarter 2016 commentary.