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Analyst Blog

On Nov 17, 2016, we issued an updated research report on integrated oil and gas company TOTAL S.A. (TOT - Free Report) . Amid the ongoing weakness in commodity prices, TOTAL is on track with its cost savings initiative. However, fluctuating commodity prices, operations in some politically troubled regions and stiff competition could impact the company’s profitability.

Recently, TOTAL reported third-quarter 2016 operating earnings of 84 cents per share (€0.76 per share), missing the Zacks Consensus Estimate of 85 cents by a penny. Operating earnings also plunged 28% from the year-ago tally of $1.17 (€1.06 per share). In addition, total revenue in the reported quarter of $37.41 billion was down 8% from $40.58 billion in the year-ago quarter.

To cope with the ongoing weakness in oil and gas prices, TOTAL has undertaken initiatives to reduce its overall expenditure. The company was able to save $1.5 billion in 2015, higher than its savings guidance of $1.2 billion. TOTAL has successfully trimmed its operating expenses as per management’s plans and is currently on track to generate cost savings of over $2.7 billion in 2016, which is 10% higher than its original target.

In a bid to counter the ongoing volatility in oil prices, the company is working to lower its breakeven point to remain operational in case of a steep decline in commodity prices. Also, its cost saving initiatives will surely be of great help in supporting margins. Going forward, TOTAL aims to achieve a $4 billion savings target by 2018 through these initiatives.

Additionally, the company has one of the best production growth profiles among all other oil majors, characterized by an upstream portfolio with above-average exposure to the faster growing hydrocarbon producing regions of the world. On the other hand, it has the lowest exposure to the mature North American and North Sea regions, which renders its upstream assets lower natural decline rates and longer productive lives. These factors offers TOTAL a significant and distinct competitive advantage over its peers.

However, TOTAL conducts operations in more than 130 countries across five continents. As a result, the company faces risks associated with international exposure. These risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism, and political/civil unrest to name a few. With a significant portion of the company’s oil reserves and production located in Africa, socio-political issues in the continent might dent TOTAL’s operations and profitability substantially.

During the first nine months of 2016, security issues in Nigeria and Yemen, along with the wild fires in Canada, adversely impacted TOTAL’s hydrocarbon production.

Zacks Rank & Key Picks

TOTAL carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space include Braskem S.A. (BAK - Free Report) , Royal Dutch Shell plc RDS.A">(RDS.A) and OMV Aktiengesellschaft (OMVJF - Free Report) .

Braskem has seen one upward estimate revision for 2016 over the last 60 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Royal Dutch Shell has seen two upward estimate revisions for 2016 over the last 60 days. The stock carries a Zacks Rank #2 (Buy).

OMV, another Zacks Rank #2 stock, has seen one upward estimate revision for 2016 over the last 60 days.

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