On Apr 1, 2013 we have maintained our Neutral recommendation on oil and gas major TOTAL S.A. (TOT). TOTAL currently has a Zacks Rank #3 (Hold).
Why the Reiteration
TOTAL continues to perform well and leverage its strong financial position despite an earnings miss in the fourth quarter of 2012. Earnings per share were lower than expected primarily due to lower sales volume.
The aggressive exploration strategy alongside acquisition of new drilling licenses aids the company to add to its reserve base. TOTAL also continues to unlock value from its non-core midstream and downstream assets. In 2012, TOTAL acquired assets worth $4 billion and divested assets worth $5.9 billion. The fund generated from divestitures will allow the company to concentrate on its core operations.
TOTAL’s strong balance sheet gives it the flexibility to continue returning capital to shareholders through increased dividend payouts, while maintaining a vigorous capital expenditure program. The company was also able to lower its outstanding debt in 2012. The net debt-to-equity ratio was 21.4% as of Dec 31, 2012 versus 23.0% as of Dec 31, 2011.
However, the ongoing economic weakness in Europe and the prevailing insecurity in Africa could weigh on TOTAL’s operation. We remind investors that a substantial portion of the company’s production comes from these regions. TOTAL’s operations in more than 130 countries across five continents expose it to risks associated with doing business abroad.
TOTAL’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. A sustained decline in oil prices and European refining margins will impact the company’s performance.
Other oil and gas companies which are performing well and warrant a look are Statoil ASA (STO) and YPF S.A. (YPF) having a Zacks Rank # 2 (Buy). We have EPL Oil & Gas Inc. (EPL) which carries a Zacks Rank #1 (Strong Buy).
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