TOTAL (TOT): Start-ups Drive Growth, Commodity Price A Woe

On Aug 22, 2016, we issued an updated research report on TOTAL S.A. (TO:TOT) . This integrated oil and gas company has been gaining from rigorous cost management efforts and contributions from upstream start-ups. However, fluctuating commodity prices, operations in some politically troubled regions and stiff competition could hinder the company’s profitability.

TOTAL reported second-quarter 2016 operating earnings of 90 cents per share, easily surpassing the Zacks Consensus Estimate of 75 cents by 20%. Moreover, total revenue surpassed the Zacks Consensus Estimate of $35.3 billion by 5.4%.

TOTAL’s long-term goal is to increase production by an average 5% per year between 2014 and 2019. Thanks to 20 major start-ups across the globe, of which five are scheduled for this year, the company now expects production in 2016 to improve 4% from the 2015 levels. Meanwhile, TOTAL plans to reduce capital expenditure to the $18–$19 billion band in 2016, down 15% from the year-ago level. This marks a planned transition toward sustainable investment in the range of $17 billion to $19 billion from 2017.

Amid declining commodity prices, TOTAL has taken impressive initiatives to lower its overall expenditure. The company was able to save $1.5 billion in 2015, higher than its expectations of savings of $1.2 billion. TOTAL has successfully lowered operating expenses, as per its plans, and is on track to exceed its cost saving target of $2.4 billion in 2016.

In spite of the turnaround in commodity prices during the second quarter, prices remained below the respective year-ago levels. As a result, total revenue was down 17% year over year, despite a 5% improvement in hydrocarbon production.

TOTAL conducts operations in more than 130 countries across five continents. This exposes the company to risks associated with doing business abroad. During the first half of 2016, security issues in Nigeria and Yemen, along with the forest fire in Canada, adversely impacted its hydrocarbon production.

Zacks Rank & Key Picks

TOTAL currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the Oil & Gas industry include Repsol (MC:REP), S.A. (OTC:REPYY) , Devon Energy (NYSE:DVN) and Parsley Energy, Inc. (NYSE:PE) . All of the stocks currently sport a Zacks Rank #1 (Strong Buy).

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