Total outperforms BP as investors reward spending cuts

France’s Total SA (FP) is the best-performing stock among the world’s five biggest non-state oil companies this year and has overtaken BP Plc in market value. It’s also the only one that’s promised to cut capital spending. All five report third-quarter earnings this week.

Chief Executive Officer Christophe de Margerie said last month that Total can reduce investment while increasing oil and gas production. The promise impressed investors and analysts, who are concerned producers are spending too much on expensive projects at a time when crude prices have stagnated. They’d rather see the cash given back to shareholders. “Total has a message that really resonates,” said Jason Gammel, an oil industry analyst at Macquarie Capital Europe Ltd. in London. “We see 2014 as a period where the sector as a whole doesn’t produce enough cash to fund dividends. That implies the cash structure has gotten somewhat out of control.”

Officials at Total and BP declined to comment on the companies’ relative share price performance. The so-called majors – Total, BP, Exxon Mobil Corp. (XOM), Royal Dutch Shell Plc (RDSA) and Chevron Corp. (CVX) – have ramped up spending as they’re forced to drill more difficult wells to find and develop new fields, according to Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis. “The days of the giant, cheap oil finds are gone,” Youngberg said. “Production growth is an ongoing challenge.” All the big five, bar Chevron, are expected to report a year-on-year drop in third-quarter earnings. Maintenance halts at oilfields and weaker margins at refineries will hold back profit, Deutsche Bank AG analysts said in a note to clients.

Brent Crude
Benchmark Brent crude oil prices averaged $109.65 a barrel in third quarter, just 23 cents more than the same period last year. BP’s refining marker margin, a generic measure of profitability, dropped to $13.62 a barrel from $23.15 a year earlier. Shell Chief Executive Officer Peter Voser, who steps down at the end of the year, says cutting spending isn’t the right response to the malaise. Companies need to “invest heavily” to keep the world supplied with oil and gas, he said on Oct. 1. Shell is increasing spending this year and says it will invest more than $30 billion a year through 2015. Exxon has said it plans to maintain capital expenditure at about $38 billion for the next few years, and BP expects to invest between $24 billion and $27 billion from 2014 to the end of the decade after spending about $25 billion this year. Chevron also plans to increase spending in 2013.

Angola Project
Total’s spending is expected to fall to $24 billion to $25 billion in 2015 to 2017 compared with $28 billion to $29 billion this year after completing projects in Norway, Angola and Kazakhstan. “Total is really the only oil major projecting a fall in absolute capital expenditure,” said Neill Morton, an oil analyst at Investec Securities in London. “That gives confidence that it will generate free cash flow. At current prices, most companies aren’t generating enough cash for both capex and dividends.” The Paris-based company has gained 14.3 percent this year. Exxon, the biggest company, has advanced 1.6 percent in 2013, while Shell has lost 4 percent. Chevron, with an 11.5 percent gain this year, has run Total closest because they have the best prospects for production growth after developing resources including the Gorgon LNG project in Australia, analysts said. The San Ramon, California-based company plans to increase output about 20 percent to 3.3 million barrels a day by 2017.

Chevron Advantage
“Chevron’s advantage is that they’re more profitable per barrel than their peers and they have the most transparent growth potential,” said Edward Jones’s Youngberg. While Chevron hasn’t given any firm capital spending guidance, Vice Chairman George Kirkland has said investment will probably moderate as projects are completed. At BP, up 6.2 percent this year, an $8 billion program to buy back shares from investors hasn’t offset concern that the full cost of litigation resulting from the Gulf of Mexico oil spill in 2010 isn’t yet known. The company said in July it expects third-quarter production to slip because of maintenance.


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