(By Kevin Donovan) As bleak as the European landscape is, a European company with worldwide reach and a sumptuous dividend makes us pay attention. Though still not enamored of energy names as a whole, we like Total SA (TOT), a European company in a sector that typically slumps in lockstep with bad economic times.
But the dividend is too enticing. Total offers a 6.49% dividend yield at its current New York Stock Exchange price of $46.54, compared with 2.70% for Exxon-Mobil, 4.70% for BP and 3.40% for Chevron.
As for share price appreciation, we think it's worth taking another look at the worldwide oil patch since we advised rotating out of big oil two months ago. During that period, the major integrated oil companies have essentially been dead money, dipping with the price of crude and climbing back as crude appeared to have stabilized.
But shares of the big oil companies probably won't be buoyed by economic data. We expect the macro numbers to by and large be weak, as evidenced by the Institute for Supply Management's report earlier this week that showed manufacturing in the U.S. contracted in June for the first time in three years. And the U.S. payroll numbers due Friday are unlikely to change that tone.
No, we think selective equity purchases in the energy sector can work because sentiment could shift from the current weakness to expectations of the institutional response – more easing by the world's central banks, including the Federal Reserve, which could prolong commodity pricing power.
Now that doesn't mean we have changed our view that oil prices have seen their highs for a while, but we do think that expectations of more monetary stimulus could have a salubrious effect on economically sensitive investments like energy. And if the Euro zone countries continue to make progress in shoring up a shaky financial structure, sentiment could get a further boost.
Being a multinational with proved reserves of 11.4 billion barrels of oil equivalent at the end of 2011, the Paris-based Total is an active explorer and refiner in 130 countries.
Recent finds include what Total called "a significant gas and condensate discovery" in the King Lear prospect in the Southern sector of the Norwegian North Sea. TOTAL has a 22.6% share in the well, which it said has encountered volumes estimated between 70 and 200 million barrels of oil equivalent. The company also recently announced finding and producing gas at a rate of 2,500 barrels of oil equivalent per day at its 40%-owned Azerbaijan property in the Caspian Sea.
What could go wrong? For one, Total could be forced to cut its dividend if free cash flow proved inadequate and borrowing to cover it proved onerous in a declining earnings environment. In the latest quarter, TOTAL reported $1.3 billion in net cash flow, up 40% from the year-ago quarter. Its net debt-to-equity ratio was 22.2% at the end of the first quarter.
Performance-wise, the shares have fluctuated between $38.66 and $56.05 in the past 52 weeks and are down 7.31% year to date. The risk, to us, is that the share price won't get cheaper. We would take what the dividend offers now.