SIF Folio: Why oil major Total could provide the balanced returns I seek

Tuesday, Nov 06 2018 by
19
SIF Folio Why oil major Total could provide the balanced returns I seek

Fireworks are exploding outside my office window as I write, but the stock market seems to have calmed down so far this month. My portfolios are now showing a mix of green and red price movements. That’s a pleasant change from the sea of red seen for much of October.

As Stockopedia writer Jack Brumby commented this week, October’s correction means that a number of good companies are now cheaper than they were a month ago. I share this view and hope to be able to add some new stocks to my SIF Fantasy Fund at attractive valuations this month.

Here’s how my Stock in Focus (SIF) screen results look at the time of writing. I’ve used the following colour code:

  • Green: already in the portfolio

  • Orange: potential new stocks

  • Red: Operates in the same business as an existing SIF folio stock. Doesn’t satisfy my diversification rules.

5be15e74e559fS1.png

As you can see, there are only three stocks I can consider adding to the fund. Excluding Russian dual-listed bank TCS Holdings (a previous star performer), I’m left with:

  • French oil and gas supermajor Total SA (LON:TTA)

  • Small-cap IT services group Scisys (LON:SSY)

My rules specify that I should consider the stock with the highest StockRank first. That means Total falls under the microscope this week.

Regular readers will note that SIF already holds heating oil distributor NWF. Would Total duplicate the oil market exposure provided by this business? I don’t think so.

As Paul Scott explained here, the cost of heating oil is passed on directly to customers. Profit comes from a fixed gross margin (c.1p) added to the price of each litre sold. So higher oil prices don’t boost profits for NWF. Indeed, the firm said recently that higher prices tend to stimulate price competition.

In road transport, the rising price of crude oil has pushed up diesel prices. My understanding is that diesel often accounts for about one-third of the cost of running a lorry. I’d expect NWF’s logistics business, Boughey Distribution, to include fuel price surcharges in its customer contracts. But these can do no more than pass through extra costs, leaving profits unchanged.

A market beater?

Although Total’s primary stock market listing is in Paris, I don’t see this as a major concern. Its business…

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Total S.A. (Total) is an oil and gas company. The Company has three segments: an Upstream segment, including the activities of the exploration and production of hydrocarbons, and the activities of gas and power; a Refining & Chemicals segment constituting an industrial hub consisting of the activities of refining, petrochemicals and specialty chemicals, and also includes the activities of oil trading and shipping, and a Marketing & Services segment, including the activities of supply and marketing in the field of petroleum products, as well as the activity of New Energies. Its Corporate segment includes holdings operating and financial activities. The Company operates in the renewable energies and power generation sectors. It is engaged in various sectors of oil and gas industry, including upstream (hydrocarbon exploration, development and production) and downstream (refining, petrochemicals, specialty chemicals, trading and shipping of crude oil and petroleum products and marketing). more »

LSE Price
€49.13
Change
0.4%
Mkt Cap (£m)
115,358
P/E (fwd)
9.3
Yield (fwd)
5.5



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6 Comments on this Article show/hide all

gus 1065 6th Nov 1 of 6
2

Hi Roland.

Thanks for the piece on Total. I have looked at this company in the past but never quite added it to my oil majors holdings. My main concern has been their aspirations for closer links with Iran. It’s not so much an issue with the rights and wrongs of the politics in the Middle East as the effect that US sanctions and the threat of retaliatory action will have on disrupting their strategic plans. The South Pars gas field development was announced last year as a major investment initiative but was subsequently shelved in August under US pressure.

https://www.total.com/en/media/news/press-releases/iran-total-and-nioc-sign-contract-development-phase-11-giant-south-pars-gas-field

Forward planning tends to have long lead times in the O&G business and this plank in their strategy has been taken away. Longer term, if the politics change, they are presumably well placed to get back in with a major producing country but that seems like a bit of a punt in the current environment.

Gus.

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Melvyngd 6th Nov 2 of 6

Hello Roland,
How much note do you take of the Altman Z score and how important is it to your approach ?
You have just said that you are going buy Total for the SIF and you personal portfolio but the Altman Z score is 1.59 almost approaching the distress zone.
How do you justify this approach ?

Regrds

Melvyn

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Roland Head 6th Nov 3 of 6

In reply to post #416179

Hello Melvyn,

The Altman Z-Score is not a metric I use very heavily. I do sometimes investigate the figures behind the score, but I wouldn't rule out a stock on this basis unless I had other concerns.

In the case of Total SA (LON:TTA), I don't see any serious risk of financial distress in the foreseeable future, so I'm not too concerned by the low Z-Score.

Regards,

Roland

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Jack Brumby 7th Nov 4 of 6
1

Hey Roland,

I have a bit of Shell but have never looked at Total so it was nice to see a couple of comparisons! I see Miton is in your PF - did you see it was Ed Shing's stockpick at the recent slam? It was a v. good presentation and he wrote a follow-up article that's worth checking out it you haven't seen it yet.

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Roland Head 7th Nov 5 of 6

In reply to post #416349

Hi Jack,

I hadn't noticed Ed's piece, thanks for pointing it out. Miton (LON:MGR) is one of my favourite plays in this sector.

Cheers,
Roland

Disclosure: I own shares of Miton.

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Silver Moon 8th Nov 6 of 6
1

Hi Roland, all things considered I think I'll be sticking with BP and Royal Dutch Shell, three oils would be a crowd in my portfolio.

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have a lingering interest in commodity stocks. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  My investment focus is increasingly on developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. more »

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