Are languishing Oil prices a “Total” loss?

Total SA, one of the world’s largest oil and gas companies, kicked off the week with a 16.6% drop and is currently trading around its lowest levels since 2011. Total’s stocks have shed 37 percent so far in 2020. Besides careening Oil prices, Total’s value was also pressured by the steep selloff in global equities.

Total SA set to face near-term strains

In the previous quarter, prior to the coronavirus outbreak and the slump in Oil prices, Total outperformed its peers as the French giant posted a better-than-expected profit of US$ 2.62 billion due to record output.

However, the current quarter tells a different tale, having born witness to dramatic events, namely the coronavirus outbreak and the crumbling of the OPEC+ alliance.

Considering Brent futures’ 48 percent year-to-date drop, while natural gas benchmarks have fallen between 18 to 40 percent during the same period, the entire sector is set to come under pressure. Against such industry headwinds, the French “supermajor” is expected to have a harder time servicing its debt load of 55.7 billion Euros. The company’s plans for raising dividends and share buybacks may also be hampered as the commodities complex remains mired in uncertainty.

Diversification to bear fruit over coming years

Despite the expected earnings downgrade over the near-term, Total’s shareholders can take comfort from the state of its balance sheet, which is in a better position compared to its industry peers, helping it to weather the downside risks. Over the medium-term, Total’s US$5 billion in renewable energy investments since 2015 should stand it in good stead for years to come. The company is aiming for an eight-fold increase in its renewable energy capacity by 2025, raising it to 25 gigawatts. Such ambitions have seen the French giant sealing two deals in Spain, as well as buying stakes in solar projects in India and Qatar.

Total’s immediate fortunes depend on Oil finding a floor

As long as Oil prices continue to languish at multi-year lows, Total’s shares are likely to remain below 40 Euros per share for the time being. Unless Saudi Arabia and Russia can put aside their differences and work towards meaningfully supporting Oil prices, O&G stocks could face more losses in the interim.

Still, given the recent correction in valuations, Total’s share may be well poised for a rebound once the market turmoil passes. As for determining exactly when that pivot happens, now that’s the tricky part.

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Written on 03/12/20 08:00 GMT by Han Tan, Market Analyst at FXTM

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