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TOTAL Remains Neutral

by Zacks Equity Research

May 23, 2012 | Comments : 0 Recommended this article: (0)

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We reiterate our Neutral recommendation on integrated oil and gas company TOTAL S.A. ( TOT - Analyst Report ) as the gas leak in the Elgin platform in the UK North Sea raised doubts regarding the safety and reliability of TOTAL’s operations.

TOTAL has one of the best production growth profiles among the oil super majors, and continues to move ahead with its aggressive drilling strategy spread across the globe. The company has earmarked $2.5 billion for exploration in 2012 alone. Besides, a low exposure to mature hydrocarbon fields adds to the explorer’s advantage.

The company also restructured its reporting segments to turn more competitive and profitable than its peers. Ventures into the alternate energy arena in order to complement its oil and gas assets will diversify growth. Moreover, TOTAL’s strong financial position allows it to make strategic acquisitions to expand its global reach.

On the flip side, a presence across more than 130 countries exposes the company to a wide gamut of risks, namely geo-political risks, acts of terrorism and currency fluctuation impacts.

A significant portion of the production increase in the first quarter was attributable to strategic acquisitions made by the company in the recent past. If the company finds it difficult to venture into accretive transactions in the future, the growth rate could be negatively affected.

Besides, like all other oil and gas operators, 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.

1Q12 Recap and Outlook

The first quarter earnings of $1.78 per share were in line with our expectation. However, the results were lower than the year-ago figure of $1.89 per share.

The Zacks Consensus Estimate for the second quarter is currently at $1.74 per share.

Zacks Rank

TOTAL S.A. retains a Zacks # 3 Rank, which translates into a short-term Hold rating. The company competes with BP plc ( BP - Analyst Report ) and Exxon Mobil Corporation ( XOM - Analyst Report ) , both presently retaining the Zacks # 3 Rank.

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