EUR 850.00 For Business Accounts Only

Morningstar | Total’s Annual Analyst Day Reinforces Our Positive Outlook

After Total’s annual analyst day on Sept. 25, we are maintaining our fair value estimate and moat rating, as key guidance items largely were not modified. We retain our positive outlook on Total’s ability to drive free cash flow growth in the coming years. With shares trading at a wide discount to our fair value estimate, Total continues to rank as one of our best ideas among integrated oils.

Total maintained its production target of a 5% CAGR for 2017-22, with 6%-7% average growth through 2020 and 2%-3% thereafter, representing one of the best rates within the group. Furthermore, it maintains its focus on cost despite the rise in oil prices, as it increased its operating cost reduction target to $5 billion per year compared with 2014 levels, up from the $4.2 billion it's on track to achieve in 2018. Management also spent some time detailing technologies it plans to integrate into its operations, which should help hold the line on costs over time, even if increased activity leads to cost inflation, a key tenet of our thesis. Management’s guidance called for per-barrel operating costs to fall further through 2020 from 2018’s $5.5/bbl.

Management also held its capital guidance on capital spending at $15 billion-$17 billion, including net acquisitions. An area that differentiates Total from many integrated peers is the $1 billion-$2 billion in spending per year in renewables and power. This level of spending supports the company’s aim of reducing its carbon intensity and could bring its 2040 sales mix to 45%-55% natural gas, 30%-40% oil, and 15%-20% low carbon electricity.

This level of investment should help to hedge against potential declines in oil demand or future carbon costs, but it also holds risk, as these investments deliver lower returns (by the company’s own admission) and are a step outside the core business, while some past investments in renewables have proved capital-destructive. That said, the situation today is more favorable, given the improvement in renewables' cost position, which makes them better bets, as well as recent acquisitions that have expanded Total’s power generation, distribution, and marketing business.

For more on our integrated oil outlook, see our Sept. 4 report: "Integrated Oils: A Free Cash Flow Story".