Paris-based Total, under the leadership of former CEO Christophe de Margerie, had the reputation of being very aggressive in its pursuit of energy opportunities by doing business with many questionable leaders around the world in risky places.
That made sense when oil was over $100 a barrel.
With the crash in the prices of oil and natural gas, that strategy no longer makes sense. Production has fallen in many proven, stable areas. As an example, there is just one rig working in the Barnett Shale in Texas. In 2008, when oil and gas prices were high, there were over 200 pumping away at the northern Texas fossil fuel bounty.
Eventually, oil and natural gas prices will rebound, though.
United States Oil ETF (NYSEArca: USO) is trading around 12.5% higher than its 52-week low. United States Natural Gas ETF (NYSEArca: UNG) is up for the last week and is also trading above its 52-week low.
The recent Royal Dutch Shell (NYSE: RDS-A) acquisition of BG Group (OTC: BRGYY), a British oil and natural gas exploration entity, for $70 billion shows even more the wisdom of the Total SA agreement.
BG Group has substantial holdings in Africa, Australia and Brazil, among other countries.
It is well placed to serve the growing demand in emerging market nations. That is especially so as these countries switch from coal to natural gas. Royal Dutch Shell is the second largest energy firm in the world. Buying BG Group furthers its position in the areas around the globe where the most growth is expected.
Total SA is making a move in that direction in the Russian Arctic now, with investment capital from Chinese banks.
Total is spending $27 billion on the Russian natural gas project. About $15 billion in financing is being provided by Chinese lenders. At present, Total has a market cap of around $120 billion. At almost one-quarter of its market capitalization, this is obviously a sizeable deal for the company. That China is a huge customer for natural gas from Russia makes the transaction even more compelling, as the world’s largest consumer market is nearby with a burgeoning demand.
Wall Street certainly approves of the aggressive move, in which Total is seemingly brushing off Western sanctions against Russia.
Total SA is up for the last week, month and quarter of market action. It’s now trading just under $51 a share, and it was upgraded by Scotia Howard Weil on Feb. 23 to “Outperform,” with a target price of $59 a share.
The stock has appeal for growth, value and income investors. For growth investors, the consensus of the analyst community is that earnings will increase more than 60%.
Value investors should be attracted by the price-to-sales ratio of 0.57, which means that the sales of Total are trading at almost a 45% discount in the stock price. By contrast, the price-to-sales ratio for Exxon Mobil (NYSE: XOM) is 0.90.
Those attracted by income from a stock should find the dividend yield of nearly 5.4% very alluring.
Jonathan Yates does not own any of the securities mentioned in this article.
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