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No. of Recommendations: 21
I am considering another E&P with downstream operations. It has an enormous dividend yield of 7.0% and the price per share has dropped from its 52-week high. It is only a few of dollars from the 52-week low. During the depths of the past recession it hit this price, struggled to gain anything during the all-too-brief recovery and has now dropped again.

It generates enough CFFO to continue the dividend for the foreseeable future but FCFE does not quite make the payment in 2009-2010. The payout ratio hit 60% in 2009 when EPS dropped nearly 20% from 2008. In 2010 the payout ratio is 48%

The dividend yield often exceeds the PE depending on how the stock is moving on a particular. It has moved between $45 and $48 since I started this.

The company is Total SA.

I prefer no refining segment and bought Apache and CNQ for their high reserves and zero refining business. I did make an exception for CVX for the dividend.

COP and Marathon seem to agree and are getting rid of downstream. Should we take that as a sign that downstream is a millstone?

July 14 (Bloomberg) -- ConocoPhillips, the third-largest U.S. energy company, plans to shed its refining business through a spinoff to free capital for oil exploration and increase returns for investors.
ConocoPhillips will divide into two separate, publicly traded companies by the end of June 2012, the Houston-based company said in a statement today. Chief Executive Officer Jim Mulva, who has led the company since its creation nine years ago in a $25 billion merger, plans to retire once the spinoff is complete.

Oil producers such as Chevron Corp. and Marathon Oil Corp. have been trimming refining holdings to focus capital on more lucrative ventures such as offshore oil exploration and North American natural gas drilling. Through yesterday’s closing price, Marathon’s spinoff of its refinery network, completed June 30, has yielded shareholders a 110 percent bonanza since it was announced in January.

“I love it!” said Fadel Gheit, a New York-based analyst for Oppenheimer & Co., who rates the shares “outperform” and owns none. “It worked for Marathon and it will work even better for ConocoPhillips. ConocoPhillips is a much better company.”

Marathon Oil to Spin Off Refining, Sales Operations


HOUSTON—Marathon Oil Corp.'s said Thursday it is moving forward with a long-dormant plan to spin off the company's refining and sales operations, a move that Marathon's leaders say could make the company's businesses worth more separately than combined.

Marathon is following in the footsteps of other oil producers and refiners who have stripped assets in attempts to become leaner, more-profitable companies. Marathon had planned for such a split when crude-oil prices peaked more than two years ago, but it backed off in February 2009 after the financial crisis punctured the commodities bubble.
Clarence Cazalot, Marathon's chief executive, said in an interview that both companies' business plans used "conservative" oil prices and refining margins estimates to ensure they can remain profitable even if conditions change.

"We have not built our business plans around $90 a barrel," Mr. Cazalot said. "We are not looking for prices to remain at very high order to make these businesses viable on their own."
Mr. Cazalot said the company isn't planning to spend more that the $3.9 billion it already invested to further increase its Garyville refinery, but that due to better-than-expected results in the expansion, the refinery's capacity rose to 464,000 barrels of oil a day from 436,000 barrels a day.

Most analysts welcomed Marthon's revival of the spinoff plan, saying the split should free the company's profitable upstream operations from having to take earnings hits due to downstream projects. Since the financial crisis hit, refining operations have been far less profitable than the sale of oil and gas, because of weak U.S. demand for gasoline and diesel fuel.

"We firmly believe the separation is being done to bolster Marathon's discount valuation relative to its peers," UBS analysts said in a note to clients. The bank estimates the sum-of-the-parts value of Marathon at $49 a share. UBS estimates the value of Marathon's refining business alone at around $11 billion.

During a conference call with analysts, Marathon Executive Vice President Dave Roberts said the lack of physical integration between the company's refining and exploration-and-production segments was a leading reason for the spinoff. Only about 5% of the crude produced by the Marathon was being used by the company's refineries, he said.


As of December 31, 2010, TOTAL’s combined proved reserves of oil and gas were 10,695 Mboe (53% of which were proved developed reserves). That is an increase of 2% over 2009.

Liquids (crude oil, natural gas liquids and bitumen) represented approximately 56% of these reserves and natural gas the remaining 44%.

That works out to:

5989.2 billion barrels of oil
25,820.7 billion CF gas

I found it strangely difficult to parse out revenue for refining for both Chevron and XOM to make some comparisons. I managed to find the oil and gas revenue and then to get a rough idea, subtracted that from revenue. It will include chemical and other small amounts of revenue. It is rough but will give an idea of just how much revenue in refining it takes to make a very small amount in net earnings that add a correspondingly small percentage to combined net in these companies

For 2010

Starting with Total:

In euros

Total revenue 159.3 billion
Oil & gas revenue 31.7 billion
Refining revenue 123.0 billion
O&G net 8.9 billion
Refining net 1.2 billion

)&G net margin 28.7%%
Refining net margin 0.9%

Refining/total revenue 77%
Refining net/consolidated net 11%


Total revenue $204.9 billion
O&G revenue $57.2 billion
Refining revenue $155.1 billion
O&G net $17.7 billion
Refining net $2.5 billion

O&G margins 30.9%
Refining margins 1.6%

Refining/total revenue 76%
Refining net/consolidated net 7%


Total revenue $370.1 billion
O&G revenue $62.6 billion
Refining revenue $307.5 billion
O&G net $24.1 billion
Refining net $3.6 billion

O&G margins 38.0%
Refining margins 1.2%

Reining/total revenue 83%
Refining net/consolidated net 20%

The O&G margins are not strictly comparable as the available information is not exactly comparable. While TOT reports net for O&G sans intersegment the others simply label it upstream net. I suspect intersegment is in there causing the margins for XOM and CVX to be better.

Bottom line is the terrible refining margins and how much revenue it takes to trickle down to the bottom line to make much of an impact on earnings. It’s the same for all of them.

Reserves compare favorably to Chevron. CVX has 6.5 billion barrels of crude,NGLs and synthetic oil.

XOM has 11.7 billion barrels of proved oil reserves.

Total has 6 billion barrels reserve in oil.

Reserves at current production were estimated to last 14 years without any additions

These reserves were located in Europe (mainly in Norway and the United Kingdom), in Africa (Angola, Gabon, Libya, Nigeria and the Republic of the Congo), in the Americas (Canada, the United States, Argentina, and Venezuela), in the Middle East (Qatar, the United Arab Emirates, and Yemen), and in Asia (Indonesia and Kazakhstan).

I might worry a little about Venezuela, Nigeria and now Libya. Most of the rest is relatively stable.

For the full year 2010, average daily oil and gas production was 2,378 kboe/d compared to 2,281 kboe/d in 2009.

In 2009, TOTAL’s combined proved reserves of oil and gas were 10,483 Mboe (56% of which were proved developed reserves). Liquids (crude oil, natural gas liquids and bitumen) were 54% and natural gas was 46%.


TOTAL’s worldwide refining capacity was 2,363 kb/d at year-end 2010, compared to 2,594 kb/d in 2009 and 2,604 kb/d in 2008.

The Group’s worldwide refined products sales in 2010 were 3,776 kb/d (including trading operations), compared to 3,616 kb/d in 2009 and 3,658 kb/d in 2008.

TOTAL is the largest refiner/marketer in Western Europe

The marketing network has 17,490 service stations in 2010, compared to 16,299 in 2009 and 16,425 in 2008, more than 50% are owned by Total. Service stations are another part of majors I don’t much care for and only want for them to at least be neutral. Service station revenue is not broken out separately.

They have interests in twenty-four refineries (including ten that it operates), in Europe, the United States, the French West Indies, Africa and China. Highlights of 2010 included a slight recovery of the refining environment that led to improved refining margins in refineries worldwide,

What’s not to like about refineries and service stations? They are a capex intensive low margin business that IMO opinion can at best not cost a company money. The amount of cash sunk into refinery and downstream business could be used elsewhere with better results and higher margins and much better returns on capital .

Total helpfully gives a return on capital:

Definition ROACE

Ratio of adjusted net operating income to average capital employed between the beginning and the end of the period.


2010 2009 2008
Non-Group sales 123,245 100,518 135,524
Operating income 982 2,237 826
Net operating inc 922 1,773 525
Adj net op inc 1,168 953 2,569
ROACE 8% 7% 20%

Adj for special items and inventory valuation

Upstream results for comparison:

It does not include transfer or intersegment sales. In the table where I compared XOM, CVX and TOT, I included them to make the comparisons a little more useable. When included, it raised revenue. Net margins will be much lower because intersegment sales are not included in net

This table is pure third party results.

2010 2009 2008
Non-Group sales 18,527 16,072 24,256
Operating income 17,450 12,858 23,468

operating margins 94.2% 80.0% 96.8%
net operating margins 47.8% 38.7% 43.1%

Net operating income 8,852 6,218 10,446
ROACE 21% 18% 36%

Refining margins [as measured by Total’s own formula] fell in 2009 to historically low levels, with TOTAL’s European Refining Margin Indicator (ERMI) falling by 65% to $17.8/t compared to $51.1/t in 2008.

Trading and shipping is also included in downstream results. Sales for trading in 2010 were 3 billion euros.

• sells and markets the Group’s crude oil production;

• provides a supply of crude oil for the Group’s refineries;

• imports and exports the appropriate petroleum products for the Group’s refineries to be able to adjust their production to the needs of local markets;

• charters appropriate ships for these activities; and

• undertakes trading on various derivatives markets.

The Trading & Shipping division’s main focus is serving the Group.

Last but not least is chemicals. 2010 ROACE was 12% with 17 billion euros in sales and 5% net margins. It is not a big part of revenue at 10% with low margins that do not add significantly to net at 7.8%.

TOTAL’s results are affected by changes in crude oil and natural gas prices and refining and marketing margins and changes in exchange rates, particularly the value of the euro compared to the dollar.

Higher crude oil and natural gas prices generally have a positive effect on income, since its Upstream oil and gas business benefits from the resulting increase in revenues realized from production.

Lower crude oil and natural gas prices usually have a corresponding negative effect. The effect of changes in crude oil prices on Downstream depends upon the speed at which the prices of refined petroleum products adjust to reflect such changes. In the past several years, crude oil and natural gas prices have varied greatly.

As TOT reports its results in euros, but conducts its operations mainly in dollars, the effect of an increase in crude oil and natural gas prices is partly offset by the effect of the variation in exchange rates during periods of weakening of the dollar relative to the euro and strengthened during periods of strengthening of the dollar relative to the euro.

In 2010, the market environment for the oil and gas was marked by the rebound in the demand for oil, gas and petroleum products, driven by the global economic growth, in particular in emerging countries.

Crude oil prices increased in 2010 to reach an average $80/b. Spot gas prices in Europe and Asia also recovered. Following the 2009 record low levels, refining margins recovered to average $27/t in Europe.

In the Chemicals segment, demand for polymers improved in all consuming areas and led to recovering petrochemical margins.

In this context, TOTAL’s 2010 net income was €10,571 million, up 25% compared to €8,447 million in 2009, reflecting the improved environment with production growing in the upstream by more than 4% compared to 2009.

Benefiting from a strong increase in its cash flow from operations, TOTAL strengthened its balance sheet with a net debt to equity ratio of 22% at year-end 2010, down from 27% at year-end 2009

Capital expenditures will mostly be focused on the Upstream segment with an allocation of €12.3 billion ($16 billion)-- 35% of the investments in the Upstream segment should be dedicated to producing assets while 65% is to develop new projects.

In the Downstream and Chemicals segments, capital expenditures will amount to nearly €3.1 billion ($4 billion) in 2011, in particular dedicated to upgrading the Normandy refinery and petrochemical plant and building the Jubail refinery in Saudi Arabia. In addition, major turnarounds of Group refineries should increase compared with the lower number recorded in 2010.


Total has paid dividends since 1946. Future dividends will depend on earnings, financial condition and other(?) factors [they don’t expand—could be debt].

The payment and amount of dividends are subject to the recommendation of the Board of Directors and resolution by the Company’s shareholders at the annual shareholders’ meeting.

Since 2004, Total has paid an interim dividend in November and the remainder after the Shareholders’ Meeting held in May of each year. The 2010 interim dividend and the remainder was paid in compliance with this policy.

For 2010, TOTAL plans to continue its dividend policy by proposing a dividend of €2.28 per share at the Shareholders’ Meeting on May 13, 2011, including a remainder of €1.14 per share, with an ex-dividend date on May 23, 2011, and a payment on May 26, 2011.

This €2.28 per share dividend is stable compared to the previous year. Over the past five fiscal years, the dividend has increased by an average of 5.1% per year.

On October 28, 2010, the Board of Directors decided to change its interim dividend policy and to adopt a new policy based on quarterly dividend payments.

The calendar for the interim quarterly dividends and the final dividend for 2011 should be as follows:

September 19, 2011
December 19, 2011
March 19, 2012
June 18, 2012

The provisional ex-dividend dates above relate to the TOTAL shares traded on Euronext Paris.

Dividends paid to holders of ADRs will be subject to a charge by the Depositary for any expenses incurred by the Depositary in the conversion of euro to dollars.

In dollars

2010 2009 2008 2007 2006 2005 2004 2003
Dividends 2.53 3.28 3.10 2.31 1.98 1.88 2.27 1.11

The last year’s dividend paid June 2011 and December 2010 was $2.71.
At current rates the 2.28 euro converts to $3.29. That’s a 7% yield. But how safe is it?

Total’s absolute long-term debt keeps increasing although in the last 8 years the ratio of debt/capital has been stable. It has increased from 31% to 33%. It is part of the cash flow structure that allow the company to continue to cover capex and dividends and still have billions in cash at the end of the year. They also make divestitures that bring in cash. My impression is one of a stable capital structure that is likely to remain so even as they pay down debt as it matures. They just keep rolling forward but keep leverage at stable levels.

The payout ratio is 48% for 2010 in euros

LT net percent
LT debt hedgees of total

2012 3,756 3,355 18%
2013 4,017 3,544 19%
2014 2,508 2,218 12%
2015 3,706 3,404 18%
2016 and beyond 6,796 6,392 33%

Total 20,783 18,913 100%

From the cash flow statement

2010 2009 2008
CFFO 18,493 12,360 18,669
Capex (13,812) (11,849) (11,861)
Acquisitions (862) (160) (559)
FCFE 3,819 351 6,249

dividends (5,098) (5,086) (4,945)
FCFE-dividends (1,279) (4,735) 1,304

Cash 14,489 11,662 12,321
Net issuance debt 3,789 5,522 3,009

Valuing for the dividend seems reasonable since that is the only reason I would be a buyer

Total may be a stable model if history is any guide and the dividend could be capable of growth between 4%-5%. Unfortunately for ADRs, the exchange rate is not going to make that predictable. Using the euro for calculating the payout ratio, the stock is worth €47 and if you convert, it’s $68. That is 4% growth in euros. I believe it is possible for growth to be somewhat lower maybe even flat for a couple of years

If I use a two stage model, the value drops to €34 and $49 about where the company is now. That supposes only 1% growth for three years and then 4% in the stable phase. If the company continues to roll its perpetual debt machine forward and if oil does what I think it will and see increased demand, then TOT should benefit as prices go higher or at least stabilize around $80-$90 per barrel that seems to be the new normal. I expect the chemical and refining business not to add much to returns and hope they continue to at least make a small but continuing positive addition to earnings.
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