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Will Total Post Weaker Q2 Earnings Than Its Peers?

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Total SA (TOT) is scheduled to announce its second-quarter results on July 25. Analysts expect the company to post 2% lower earnings YoY (year-over-year) in the second quarter. A YoY decline in the oil price, gas price, and refining margin indicator could result in lower earnings for the company. However, analysts have a favorable opinion on Total before its earnings. The company’s upstream portfolio and financials are strong.

Reviewing Total’s stock market performance before its earnings, the stock has risen 1.7% since April 1. Based on the latest implied volatility, the stock could close 2.8% higher or 2.8% lower from its current price level in the next ten days until July 25. Total’s dividend yield is at 5.1%—higher than many of its peers. Since May 30, the short interest in Total stock has fallen due to a rise in oil prices and equity markets.

Higher first-quarter revenues

In the first quarter, Total reported a 3% YoY rise in its revenues to $51.2 billion. However, the company’s adjusted net earnings fell 4% YoY to $2.8 billion in the first quarter. Total’s adjusted EPS was at $1.02—6% lower than its adjusted EPS in the first quarter of 2018.

Total’s adjusted net operating earnings fell in its E&P (exploration and production) and Marketing segments. However, the iGRP (integrated gas, renewables, and power) and Refining segments’ earnings rose YoY in the first quarter. To learn more, read Total SA Stock Fell on Dull First-Quarter Performance.

Second-quarter estimates

Analysts estimate that Total could post an EPS of $1.30 in the second quarter, which is 2% lower than adjusted EPS in the second quarter of 2018. However, the estimate is 27% higher than the company’s adjusted EPS in the first quarter. Analysts expect Total’s revenues to be around $42.6 billion in the second quarter, which is about 8% lower than its revenues in the second quarter of 2018.

Analysts expect ExxonMobil and BP (BP) to post 14% YoY and 2% YoY lower EPS in the second quarter. Similarly, analysts expect Petrobras to post 10% YoY lower EPS in the second quarter. Analysts expect Chevron (CVX), Royal Dutch Shell (RDS.A), and Suncor Energy’s (SU) earnings to rise 4%, 9%, and 22% YoY in the second quarter.

Total’s indicators suggest lower liquids and natural gas prices YoY in the second quarter, which could lead to a fall in its E&P earnings. The European refining business margin indicator fell during the same period, which could impact the company’s refining earnings.

Segmental earnings outlook

Before we proceed with Total’s second-quarter segmental outlook, let’s review the company’s segmental performance in the first quarter. Total’s overall operating earnings rose 1% YoY to $3.4 billion in the first quarter.

Total SA’s E&P adjusted operating earnings fell 5% YoY to $1.7 billion in the first quarter due to a fall in its liquids and gas realizations. However, the company’s volumes rose 9% YoY in the first quarter led by upstream project start-ups and ramp-ups. Total’s Marketing earnings fell 7% YoY to $343 million.

In the first quarter, Total’s adjusted operating earnings in its Refining segment rose 5% YoY to $756 million due to higher refinery throughput and better margins. Total’s European Refining variable cost margin rose 11% YoY in the first quarter. The iGRP segment’s earnings rose 23% YoY to $592 million. The increase was due to higher LNG (liquefied natural gas) sales volumes. The increase was partly offset by lower natural gas prices.

Second-quarter indicators

Total’s indicators show that average liquids prices fell from $68.4 per barrel in the second quarter of 2018 to $63.7 per barrel in the second quarter. Also, natural gas prices fell from $4.6 per MMBtu in the second quarter of 2018 to $3.8 per MMBtu in the second quarter. Total’s E&P earnings could fall YoY in the second quarter due to lower liquids and natural gas prices.

The company’s refining margin indicator for its European business narrowed. The indicator fell from $33.9 per metric ton in the second quarter of 2018 to $27.6 per metric ton in the second quarter. The fall in the indicator means that Total’s refining margins could decrease, which would impact its refining earnings in the second quarter.

Analysts’ “buy” rating

Total received more “buy” ratings compared to the previous year. In July 2018, four analysts rated Total. Among the analysts, two recommended a “buy.” Now, all four of the analysts recommend a “buy.” The company’s mean target price of $72 implies a 28% gain from the current level.

Chevron, Suncor Energy, Royal Dutch Shell, and BP are rated a “buy” by 74%, 91%, 92%, and 45% of the analysts, respectively.

Why do analysts love Total?

Total has a comfortable debt position. The company’s total debt-to-capital ratio was 33% in the first quarter—below the global peer average of 34%. Total’s debt ratio shows that the company has a fair percentage of debt in its capital structure, which gives the balance sheet strength and flexibility.

Total had a strong upstream performance in the first quarter. The company’s production rose 9% YoY to 2.95 million barrels of oil equivalent per day in the first quarter. Total started production at its key projects at Kaombo, Angola, and Egina, Nigeria. Total expects its hydrocarbon production to grow 9% this year due to start-ups and ramp-ups. The company made two important discoveries in the first quarter.

The company strengthened its foothold in the global LNG industry with its entry into the Arctic LNG 2 project, investment in the Driftwood LNG project in the US, and an agreement for the Papua LNG project.

Analysts are positive on Total due to its favorable debt situation. Also, the company’s upstream volumes are expected to grow.

Total stock compared to oil prices and markets

Amid volatility, Total stock has risen since April 1—the beginning of the second quarter. We’ll compare Total’s stock returns to the SPDR S&P 500 ETF, which is a broader market indicator, and WTI, which represents benchmark crude oil.

Since April 1, Total stock has risen 1.7% due to the better equity market. The rise was partially offset by weaker oil prices. Chevron, Royal Dutch Shell, and Petrobras have risen 2.1%, 3.1%, and 3.6%, respectively, since April 1. However, ExxonMobil and BP fell 4.6% and 6.9% during the same period.

WTI has fallen 0.9% since April 1. Investors’ expectation of oil supply glut drove the fall in oil prices. However, OPEC attempts to balance the global oil demand-supply dynamics with its production cuts. Extending the cuts until March 2020 helped oil prices. Also, US sanction against Iran supported oil prices.

The US equity market has risen. SPY has gained 6.5% since April 1. Investors’ expectations of an interest rate cut as early as July supported the market. Total stock has risen since April 1. However, the stock has underperformed SPY.

Total’s stock forecast

The implied volatility in Total has risen by 0.5 percentage points since April 1 to 17.1%. During the same period, the stock has risen 1.7%.

Total’s stock price range is based on its implied volatility of 17.1% assuming a normal distribution of prices and one standard deviation. The stock price could close between $58.2 and $55.0 per share in the next ten calendar days ending on July 25. The price estimates imply that Total stock could close 2.8% higher or lower from the current level until its earnings.

Peers’ implied volatility

The implied volatility in YPF has risen by 2.8 percentage points since April 1 to 38.1%. However, the implied volatility in Chevron and Royal Dutch Shell has fallen by 2.6 percentage points and 0.9 percentage points, respectively, to 16.0% and 15.1% during the same period. If we consider their stock prices, then YPF, Chevron, and Shell have risen 29.1%, 2.1%, and 3.1%, respectively, since April 1.

Total’s dividend yield

Total’s current dividend yield is 5.1%. The current dividend yield is a company’s annualized dividend as a percentage of its stock price. Total’s yield has risen from 4.5% in the third quarter of 2018. The yield rose due to the fall in Total stock in the past year.

Total plans to raise its dividends 10% in the 2018–2020 period. In line with the target, the company has increased its dividend 3.1% in 2019.

Total has returned wealth to shareholders through dividends and share repurchases. In the first quarter, Total incurred $0.5 billion and $1.8 billion toward net share repurchases and dividend payments, respectively.

Total plans to offset the dilution, caused by scrip dividends, through share repurchases. The company plans to repurchase $1.5 billion in shares in 2019. Total plans to repurchase shares up to $5 billion between 2018 and 2020 to share the benefits of higher earnings with shareholders. The company decided to eliminate its scrip dividend option from June.

Peers’ dividend yield

Royal Dutch Shell, BP, and ENI have better yields than Total. Shell, BP, and ENI’s yields were 5.8%, 6.0%, and 5.7%, respectively. However, ExxonMobil, Chevron, Equinor, and Suncor Energy have lower dividend yields at 4.5%, 3.8%, 4.8%, and 3.9%, respectively.

Total’s short interest

The short interest in Total has fallen by 0.06 percentage points since May 30 to 0.04% of its outstanding shares. Usually, a drop in the short interest implies a decrease in the bearish sentiment for the stock. During the same period, Total stock rose 8.8%.

Since May 30, the bearish sentiments in Total have fallen due to an increase in oil prices and equity markets. WTI, the benchmark oil, has increased 5.3% since May 30. The rise in the markets would have lifted the positive sentiments in the stock. SPY, a market indicator, has risen 7.8% since May 30.

Peers’ short interest

The short interest in ExxonMobil and BP has fallen by 0.11 percentage points and 0.28 percentage points, respectively, since May 30. Currently, the short interest in ExxonMobil and BP is 0.78% and 0.11%, respectively. The short interest in Suncor Energy has fallen by 0.41 percentage points since May 30 to 0.23%.

Since May 30, ExxonMobil’s and Suncor’s stock prices have risen 7.1% and 3.6%, respectively, while BP’s stock price has fallen 0.8%.

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