Total overhaul: Analysts welcome planned asset sales

Total SA has joined a growing list of major oil companies, including BP plc and ConocoPhillips Co., in adopting a so-called shrink-to-grow strategy to improve profitability.

The Paris-based energy company told an investor conference on Monday, Sept. 24, that it will sell $15 billion to $20 billion of assets by the end of 2014 to offload less-profitable operations and raise cash for new investments.

The sales plan drew praise from analysts, which see the move as a chance to reshape a disparate exploration and production portfolio marked by a high proportion of minority and nonoperating assets. But the strategy notably failed to excite investors.

"Total's upstream portfolio is too dispersed, with operated production in the highest number of countries but below-average working interest and low operatorship," Credit Suisse Group analyst Kim Fustier noted Tuesday. "The company should take this opportunity to reduce its E&P footprint and focus its resources on fewer, but larger projects."

Total will use cash raised from the sales to reinvest in fledgling projects it already owns and to fund exploration. Those nascent projects are more profitable than older operations, Total CFO Patrick de La Chevardière told the investor conference. Selling assets should reduce Total's breakeven point to below $100 per barrel, well below the $113 per barrel average over the first half of 2012, the company said.

Total gave few hints about what assets are on the block. La Chevardière said the disposals will include smaller stakes across the company's entire operating portfolio, of upstream, midstream and downstream assets.

Given that Total is selling assets equivalent to as much as 17% of its €90.8 billion ($117 billion) market value, the company might have hoped for a more enthusiastic response. Its shares ended Monday, the day it announced its plans, marginally lower than they had opened and had lost more ground by Tuesday afternoon, when they traded at €40.35.

Part of that lack of enthusiasm may reflect the outcome of BP's and of ConocoPhillips's shrink-to-grow strategies. ConocoPhillips has sold more than $20 billion of assets since 2010, while BP, which admittedly has other problems, has sold about $33 billion. Neither have managed to ignite their share prices as a result of the sales.

If analysts were cautiously optimistic about the disposals, the immediate share price response suggests investors will wait to see what prices Total gets for its assets, and more importantly where it spends its cash, before backing the French company's version of shrink-to-grow.

"We believe that this is the opportunity for Total, if the move into exploration acreage translates not only into successful discoveries but similar levels of disclosure and quantification of resources in 2013," noted RBC Capital Markets analyst Peter Hutton on Tuesday.

The French oil company gave a taste of the sort of projects it will look for when it announced Monday that it will buy a 40% stake in the Rovuma liquefied natural gas field in Mozambique from Malaysia's Petroliam Nasional Bhd., known as Petronas. The basin has delivered big discoveries for other oil prospectors, including Anadarko Petroleum Corp., but exploration wells at the blocks that Total has bought into won't be drilled until the end of the year so the investment remains highly speculative. Terms of the farm-in deal were undisclosed.

Total is also banking on something called the mirror concept, a theory developed by geologists that suggests that big oilfields off the eastern coast of South America will be reflected on the other side of the Atlantic by similarly placed large fields off the coast of Africa.

Total said it could increase its production by about 3% a year until 2015, up from earlier guidance of 2.5% per year, if the oil price remains above $100. That figure takes into account the lost production from asset sales.