TOTAL: COMPANY AND INDUSTRY ANALYSIS

A report submitted to

Prof. Shobhit Aggarwal

In the partial fulfillment of the requirements of the course

Corporate Valuation

By

Rishav Kumar

Roll No. – 1911205

On
10-08-2020
ABOUT THE COMPANY:

TOTAL S.A. is a France based multinational energy player, founded in 1924, and is included

in list of ‘Supermajor’ (world’s seven largest traded) oil and gas companies. With a presence

in over 130 countries, the group is involved in activities covering the complete oil and gas

chain spreading from exploration and production of oil, gas and electric power generation to

trading, refining, transportation, and marketing to the end consumer. The group is listed at

three major stock exchanges which are NYSE (New York Stock Exchange), FWB (Frankfurt

Stock Exchange) and, Euronext Paris (France’s securities market).

The group operates its business by structuring it within following four segments:

a. Exploration & Production – It involves searching for potential oil and gas field,

exploration of the fields for production of oil and gas. Mergers, acquisition, and

divestitures of unexplored/matured fields also occur here. This segment is popularly

known as “upstream business”. At most of the oil fields TOTAL either holds a license or

has certain stake and right to operatorship or has production sharing contract.

b. Integrated Gas, Renewable & Power (iGRP) – It includes operations of the group in the

integrated gas business (including upstream and midstream LNG activity) and low-carbon

electricity businesses such as solar and wind power generation. It is one of the most

diversified segments in terms of revenue generation. TOTAL sells LNG (Liquified

Natural Gas) acquired from liquefaction projects where the group holds a stake through

long-term agreements and spot activity. Additionally, it is also involved in trading of

LNG wherein it purchases from American projects and sells on long-term contract in high

LNG-growth Asian market. The group is also involved in low carbon & renewable

electricity generation wherein it has plants in France, Belgium & Abu Dhabi for power

production from natural gas. It also operates solar power plants and wind power projects
 in many nations and provide energy storage solution through its subsidiary Saft. It

operates in electricity marketing by selling in professional as well as residential market at

6 Million sites across France, Belgium, UK, Netherland with delivery of 46 TWh of

electricity in 2019.

c. Refining & Chemicals – The segment includes refining of petrochemicals, and production

of specialty chemicals. It is the largest segment for TOTAL by revenue generation. It also

includes the activity of selling of Group’s crude oil, trading of crude oil for maintaining

Group’s refineries production, marine shipping of crude oil. The segment is sometimes

termed as ‘midstream business’ of th.

d. Marketing & Services – It includes the

TOTAL Business Segment Wise
group’s activities of marketing and
Operating Income (M$)
selling of its petroleum products ranging
2052; 12%
from high-sped petrol to lubricants to

3342; 20% end consumers, throughout the world,

through various selling channels under

10542; 62%
1184; 7% TOTAL brand name. It operates in B2C

market through its 15,000+ TOTAL-

TOTAL Business Segment Wise branded service station and has
Exploration & (M$)*
Production iGRD
Revenue
Refining & Chemicals Marketing & Service
significant B2B presence in developed
38590; 16%
66887; 27% market under long-term contracts. It also

20992; 9% generates revenue from innovative

product and service development such as

electro-mobility, hydrogen refilling

stations in Germany and, natural gas

116973; 48%

Exploration & Production iGRD

Refining & Chemicals Marketing & Service
 vehicles (NGV) fueling stations. This segment forms the ‘downstream segment’ of the

group.

COMPETITORS:

ExxonMobil is an American energy provider and petrochemicals manufacturer,

headquartered at Texas. It operates across the upstream, midstream, and downstream segment

of oil & gas chain. It is seventh largest refiner in the world and sells it product under the

brand name of Exxon, Mobil, and Esso. It is one of the “Big Oil” companies across the

world.

Royal Dutch Shell also operates in all the segments of oil & gas chain ranging from

exploration and production to refining, trading, and marketing of products. It also has

significant operation in renewable energy including wind, biofuel, and hydrogen fuel. With

business in around 70 countries, the British-Dutch multinational is listed on four exchanges

across the world.

BP is a UK based oil & gas ‘supermajor’ and is vertically integrated in the industry. Alike

TOTAL and Shell, it too operates across all the segments, including in the field of renewable

energy. The company is a major player in USA and UK.

Chevron is an American multinational and among world’s largest integrated oil companies.

With operation in upstream, midstream, and downstream the group distributes its product in

more than 180 countries under the brand name of ‘Standard’ and ‘Chevron’.

INDUSTRY’S REVENUE MODEL:

The industry generates revenue from sales of its product being generated at different steps of

oil & gas chain. While a major part is sold to customers, government, institutional or

individual, a significant volume of intersegment sales also occurs in every company within
 the industry. The key metrics that drive the revenue in the industry are classified below,

based on segment they affect i.e., upstream exploration & production or downstream

marketing & services.

Upstream segment:

 Hydrocarbon production –
Hydrocarbon Production (in kboe)
4000
3500 represented in kboe/d
3000
2500 (Thousand barrel of oil
2000
1500 equivalent per day), it is
1000
500
0 the cumulative oil and gas
2017 2018 2019
TOTAL SHELL BP EXXONMOBIL CHEVRON production at the fields

owned by the company.

 Proved reserves - is the

Proved
Price Reserve (in million of barrels)
Realization
amount of hydrocarbon (natural
70 45000

60
40000 gas – in Mboe, and oil – in
35000
50 30000 Mb) resources that can be
40 25000
20000 recovered from the field with a
30
15000
20 10000 reasonable level of certainty.
10 5000
0  Price realization - is the
0 2017 2018 2019

TOTAL SHELL BP
average price received on per unit
TOTAL SHELL BP
EXXONMOBIL EXXONMOBIL
CHEVRON CHEVRON
sale of the hydrocarbon. Since the

rates for both crude oil (in $/barrel) and gas (in $/Mbtu*) fluctuates throughout the

year, an average price is determined on the sale.

Midstream segment:
  Refining capacity – is the daily total crude oil refining capacity of the company

across its different refineries; represented in terms of Kilo barrel per day (Kb/d)

 U
Refinery Utilization (FY'19)
ti
6000 96%
95%
94% li
5000
92% z
4000 91%
90%
3000 at
88%
87% 87%
2000
86% io
1000 84%
n
0 82%
TOTAL SHELL BP EXXONMOBIL

Capacity Throughput Utilization

rate – is the average percentage utilization of the refining capacity of the company

throughout the year. In number terms it is known as refining throughput.

 Refining margin – is the difference between the cost of procurement, production

of crude oil and its sales price. While it is not published by the companies in their

annual statement, a direction towards improvement or reduction in refining

margins is provided by the management. For TOTAL, the variable cost margin

was $34.9/t in FY’19 which was a reduction of 8.6% over FY’18. Weak demand

in the market leads to negating the benefits of economies of scale and hence eating

away the refining margin.

Downstream segment:

 Sales volume – with prices being decided by the market, it is the sale of oil & gas

products such as petrol, aviation fuel, lubricant, LNG, polymer and chemicals, that

drive the revenue of the companies operating in the downstream segment. Most ‘Big
 Oil’ companies are dominant in a region while allowing others to operate in another

region at dominant position.

 Installed capacity – energy companies which are fully vertically integrated have their

power generation plants installed at various locations, including low-carbon and

renewable power plants. Installed capacity is the maximum electricity output that the

plant has been designed to produce.

TOTAL: CAPEX & OTHER COST

Capital Expenditure by TOTAL is undertaken at a significant scale of over $19bn with 79%

(around $15bn) expenditure in upstream segment (including upstream capex in iGRP

segment), also termed as organic capex.

Upstream capex includes following expenditure on:

 Acquisition of assets with proven reserves

 Acquisition of leases and acreage of unproven assets

 Exploration cost, including costs of drilling exploratory wells

 Development cost for starting the production at the reserve by establishing

infrastructure

Rest of the amount of capex is spent in midstream and downstream segment on installation of

refining unit and setting up of distribution system of end-product to consumers, which totals

at around $3bn. The group generally commits a capex at the start of financial year and adjust

it according to the prevailing business situation, as visible from the drop in capex from

$22.1bn in FY2018 to $19bn in FY2019.

The largest cost to the company is the purchases (includes for refining, trading or selling

purpose) which accounted for 65.9% in FY2019 of the revenue which decreased viz a viz the

previous FY2018 where it stood at 68.3% of the total revenue of the group.

Critical cost to TOTAL is the operating expense which is 15.5% of the revenue from sales in

FY2019 which is an increase of over 60 basis points over FY2018 (at 14.9% of revenue).

Another critical cost to the group is the cost of depreciation, depletion and impairment on the

tangible and mineral assets which stood at 8.9% of the revenue in FY2019, an increase of 130

basis points over FY2018 (at 7.6% of revenue). An increase in both the impairment cost as

well as operating expense shows reducing efficiency of the group as well as less oil and gas

realization from the reserves.

INDUSTRY OUTLOOK

Oil & gas industry traditionally has been one of the highly regarded in the eyes of the

investors, primarily because of their consistency in dividend growth and payment. While

historically Middle East was the major region for exploration of oil and gas, growth in US

shale gas production over past 10 years (from 0 in 2010 to 7 Mb/d in 2020) has significantly

transformed the global oil market.

Upstream, there has been significant growth in total proven reserves found across the world

due to cheaper exploration cost in recent years. As the companies in upstream segment

compete fiercely to get licenses or right of operatorship, the companies have done significant

capex in the sector. But as the upstream segment heavily relies on oil & gas demand for

maintaining viability of operations, the uncertainty brought by COVID-19 has negatively

affected the already reeling segment from falling oil prices. Even the long-term outlook of the

segment is negative due to a) global recession period (including recession in major consumer

nations) b) world thrust towards greener energies c) oil price projection to be stabilizing
around $40/ d) OPEC nations not agreeing to further production cuts (to protect their income

from sale). In such a scenario, most operators will have to incur a heavy asset impairment

cost (TOTAL announced $8.1bn of asset impairment in Q2’20) on their books due to

production cost going below breakeven point and even exit from some sites.

Midstream, the refineries are operating under loss due to lower utilization rate of refineries

coming from lower world demand and glut in the market. The refining margins have

generally driven on the higher refining volume and a demanding market, none of which is

currently present, partly due to COVID-19 and partly due to sharp rise in shale production

which creating a supply-demand imbalance towards supply. Though companies have been

able to offset the weak refining margins with strong and standing petrochemical margins,

companies like TOTAL have reported 60% drop in refinery utilization in Q2 of 2020 due to

over 30% demand drop of fuels. The industry will have to readjust its midstream operation at

the current level for the long term by focusing on improving margins and consolidation of the

refining operations.

Downstream, lockdown in most of the countries led to reduction in demand of petroleum and

polymer products, both from B2B and B2C buyers, as only essential services were

operational. Even as the countries open, the phenomenon of social distancing and restricted

international air travel have kept the demand low. And with experts believing the COVID-19

virus will remain in the environment for long (until 2024), the demand is to remain weak

from B2C perspective. The shift in energy & power generation from renewable and low-

carbon sources in future is another factor aiding the outlook of weak growth in oil & gas

demand. But LNG demand has seen an uptick even in the current situation, majorly because

of countries securing LNG for local consumption in case of supply chain disruption due to

COVID-19 and also due to the fact of LNG being a low-carbon fuel.
INDUSTRY SPECIFIC METRICS

There are certain metrics which are used specifically in oil and gas industry to assess the

performance and do comparative analysis of companies, which are mentioned below:

 Cash CapEx – is the capital expenditure by the company on core business operations

including expenditure on exploration, acquisition (by merger, consolidation or

through lease/contract) of asset, setting up of drilling rigs and other related

infrastructure (development cost).

 OpEx – is the operational expenditure on day-to-day operations of the company. It

includes production cost and non-cash items like depreciation, amortization expense

as well as impairment cost.

 Margins – as explained before it is the difference in cost of production and marketing

of the products coming from the refinery to the realized sales value.

 Asset Impairment – it the non-cash expense induced when the carrying amount of any

reserve is below its recoverable value, which is generally triggered by fall in oil prices

or in case the oil & gas reserve found is less than the quoted proven reserve during

exploration

 Brent price – is the per barrel price of Brent crude, the crude traded physically and

financially across oil market of Northwest Europe.

Additionally, ‘price realization’ & Headline CFFO (cash flow from operations) excluding

WC (working capital) are the key metrics used by analyst in analysis of the industry.

FOCUS AREA FOR VALUATION:

Two major components in valuation of TOTAL would be i) future projection of oil (Brent)

and natural gas prices in the market and, ii) demand forecasting of oil & gas across the world.

It is basis on this that the company would plan of its capex on acquisition of assets and
operationalization of project or planning reduction in opex. To come with an accurate

forecast on either of the above components, following factors needs to be analyzed:

1. Global economic scenario: The sluggish economic growth in 2019 had reduced the

energy demand across the globe leading to oil price shock in FY19. China and India,

largest importers of LNG reported a decline in their demand in FY19. The current

COVID-19 situation and subsequent lockdown in major industrial areas has put major

energy importers in a recession situation who would try to curtail their import bill to

increase domestic spending and spur growth. So, the short-term and long-term impact

of COVID-19 on the world economy and subsequent steps taken by the govt. would

have to be analyzed to estimate its impact on oil & gas prices.

2. World Energy Outlook: It is the annual report published by International Energy

Agency which provides medium to long-term oil market projections, future of energy

pattern, govt’s emission target and their future actions. It provides a guidance to

policy makers as well as outlook for all fuels (renewable & fossil) basis the current

political and environment.

3. OPEC action: OPEC nations have historically driven the price as well as supply of oil

& gas in the world, majorly through production reduction and creating a supply-

demand imbalance. Though outcome of their actions hasn’t transmitted fully to the oil

market in recent times (with member companies not following quota cut on

production), actions and statements of OPEC (+Russia) still needs to be analyzed to

comment on the future energy prices due to their significant share in the oil

production regions.

4. Geopolitics developments: The protectionist measures spreading across the world

could affect the group’s operation due to changing tax structure and govt. regulations.

Additionally, TOTAL operates in many nations which have high probability of facing
 political, social, or economic instability, which could disrupt TOTAL’s operation and

lead to huge cost and depreciation of assets located there. In past TOTAL had to

divest all its interest in Iran due to US sanctions and had to cease operations in Cuba

& Venezuela. These events also provide a guidance to oil prices in short term.

5. Competitors: Any consolidation or M&A in the energy industry will impact

TOTAL’s bargaining power in oil market and could impact its plan of assets

acquisition.

REFERENCES

1. Christyan F Malek. (2020). Royal Dutch Shell B Trading a welcome 2Q bright spot E:

J.P. Morgan Cazenove

2. Lydia Rainforth. (2020). Total moving to a loss for the quarter: Barclays

3. Danny Cliffson Crispin Benos. (2020). Chevron Corporation Snapshot: Acquisdata

4. Luc Maessen. (2020). Total SA - Hit by Falling Prices Taking Drastic Steps: FDA

5. Phil Gresh. (2020). Exxon Mobil Corp, Preview of 2Q's 8-k Release: J.P. Morgan

6. Will Hares. (2020). Total Earnings Timeline; Bloomberg Intelligence

7. Annual Financial Reports for FY19, FY18, FY17 of: TOTAL, SHELL, BP, CHEVRON,

EXXONMOBIL