Total S.A. vs. Royal Dutch Shell - Financial Analysis Essay Sample

The company I chose to work on is Total S.A. TOTAL S.A is a French multinational oil and gas company. It is one of the seven most prominent companies that deal with oil in the world. The business oil and gas chain for Total S.A includes the crude oil and natural gas extractions, their production for power generation, refining of the crude oil, transportation, marketing of the various petroleum products and also marketing of crude oil. Total S.A also has a segment that involves large-scale chemical manufacturing. The head office of Total is in Tour Total in La Defense district in Courbevoie, west of Paris with Total S.A offices in Houston, Texas. The current CEO is Patrick Pouyanne who has been in office since 2014. In December 2015, Patricia Barbizet was appointed by the board to be the Lead Independent Director ("Total S.A," n.d.).

Total S.A cut across the whole energy sector with the following business operations:

1. Refining & Chemicals

Total S.A has developed transportation fuels, hydrocarbons, and polymers. It has developed products and ideas that on petrochemicals and refining that has made it a very significant supplier.

2. Exploration & Production

They are active and diverse in their exploration and diversification whereby with the enormous non-operated assets, they are doing deep offshore oil productions that are happening in the Gulf of Mexico. Total S.A is also doing onshore unconventional shale gas exploration. The company has a research center in Houston that researches on how to apply the innovative and superiors skills to help develop technology in the `exploration of different sources of energy ("Total S.A," n.d.).

3. Marketing & Services

The marketing and service segment helps market and distributes the various products ranging from high-performance lubricants to the various petroleum products which include special fluids, addictives, and marine fuel and aviation fuels. The head office of the marketing and service segment is in Houston, Texas.

4. Gas & Power

This is a significant business and source of income for Total S.A. Total Gas & Power North America, Inc. (TGPNA), which is a subsidiary of Total USA, is mainly involved in natural gas production and its financial trading and marketing activities in the larger parts of United States. TGPNA's currently responsible for the trade of the following: natural gases, petcoke produce in U.S, natural gas liquids (NGL) sold to wholesalers and liquefied natural gas (LNG) sold in cylinders (Total, n.d.)

5. Crude Oil and Refined Products Trading & Marketing

The responsibility falls on Atlantic Trading & Marketing, Inc. (ATMI), which is also a subsidiary of a Total USA. ATMI engages in trading most crude oil grades and nearly all qualities of the various refined petroleum products. Through their commitment to the oil markets and the as a leader in the development of the energy risk management, Total has mostly impacted on the market futures and derivatives (Total, n.d.). ATMI helps optimize the economies of scales to deal with any short or long-term market imbalance.

6. New Energies

Since there is a growing demand for energy in the long term, Total S.A is striving to diversify their supply. They are producing photovoltaic solar bio-fuels. Total decided to invest in the renewable energies that have less effect on the environment.

7. Specialty Chemicals

Total S.A also engages in the production of resin, adhesives, rubber processing and electroplating.

Royal Dutch Shell

My benchmark company shall be Royal Dutch Shell generally known as Shell. Shell is a Dutch multinational company that mainly specializes in the oil and gas field. They are headquartered in The Hague, Holland, but it has subsidiaries in many parts of the world including the United States. The company has a vertical kind of operation from the exploration of oil, transportation of the crude oil for production, refinement of the oil and then selling and marketing of the various products produced (Dedu, & Saforo, 2016).

The company gets its profits from various resources, and it can resist other players from entering its market. The various units in Shell are self-reliant and are treated as separate entities as they don't depend on one another. The company has also engaged in renewable energy activities which include bio-fuels.

Ratio Analysis

Liquidity Ratio

Liquidity

Ratios Total S.A Royal Dutch Shell

Year 2014 2015 2016 2016

Current Ratio 1.36 1.37 1.38 1.52

Quick Ratio 0.88 0.86 0.91 1.11

The current ratio is calculated BY dividing the current assets by the current liabilities. The quick ratio is calculated by dividing the total quick assets by the current liabilities. The current ratio for Total S.A increased from 2014 TO 2015. However, the Royal Dutch Shell had a better current ratio compared to Total S.A. Total S.A QUICK ratio deteriorated between 2014 and 2015 but increased in 2016 while that of Royal Dutch Shell was higher in 2016. From this analysis, we can conclude that Royal Dutch Shell has a better liquidity ratio compared to Total S.A.

Asset Management Ratios

Asset Management Ratios Total S.A Royal Dutch Shell

Year 2014 2015 2016 2016

Day sales outstanding(DOS) 30.78 35.27 37.46 37.32

Days inventory 4.041 43.91 48.1 53.65

Days Payable 68.71 70.68 72.46 74.01

Total Assets Turnover(TATO) 0.14 0.15 0.17 0.17

DOS can be calculated by dividing account receivables by average sales per day. The assets management ratios help to measure how a firm manages its assets when generating sales. All the assets management ratios for Total S.A have increased from 2014 to 2016 which indicates that the business has continuously had less money tied to its fixed assets for revenue generated. However, the Royal Dutch shell has better assets management ratios which mean it is doing better in term of not having money for revenue generation not tied to its fixed assets.

Leverage Ratios

Leverage ratios Total S.A Royal Dutch Shell

year 2014 2015 2016 2016

Debt ratio 0.25 0.24 0.21 0.23

Times Interest Earned (TIE) 7.76 6.32 6.11 6.53

The leverages ratios of Total S.A decreased from 2014 to 2016 which is a clear indication of the long-term sustainability of the business as it continues to reduce its debts in the long-run. Both the debt ratio and the time interest earned ratios decreased from 2014 to 2016. Total S.A has a better leverage ratio compared to Royal Dutch Shell.

Profitability Ratios

Profitability Ratios Total S.A Royal Dutch Shell

year 2014 2015 2016 2016

Gross margin 21.67% 24.78% 23.09% 17.97%

Operating Margin 6.72% 8.75% 7.93% 5.53%

Net profit margin 5.99% 6.09% 6.16% 5.97%

Basic earning power 6.72% 5.98% 8.12% 8.98%

Return on assets 4.83% 2.24% 3.64% 4.89%

Return on equity 6.71% 9.06% 12.13 11.50%

Profitability ratios are used to assess the ability of a business to generate earning and make profits in relation to the expenses it incurs. Gross margin measures how much a company can mark up sales above the cost of goods sold. The gross margin and operating margin for a total increased between 2014 and 2015 then reduced in 2016. Whoever, the gross margin was better than for the Royal Dutch Shell. The net profit margin increased over the three years and was better than Royal Dutch Shell. Both the return on assets and return on equity decreased between 2014 and 2015 but increased in the year 2016. However, Royal Dutch Shell had a higher return on assets and return on equity than Total .S.A.

Market Value Ratios

Market Value Ratios Total S.A Royal Dutch Shell

year 2014 2015 2016 2016

Price/Earnings ratios 11.99 14.95 21.14 21.64

Price/EBITDA ratios 4.7 5.1 6.2 6.2

The market value ratios are used to assess the value of a publicly traded company. The value of total S.A has continuously increased as indicated by the ratios over the two years although it has a lower price-earnings ratio compared to Royal Dutch Shell.

Weighted Average Cost of Capital (WACC)

Weighted average cost of capital (WACC) is the minimum rate of return that shareholders expect a company to earn after tax requirements have been factored into the accounts. The main components of WACC are the cost of equity and the cost of debt (Werner, 2003). The formula for calculating WACC is:

WACC Formula = (E/V * Ke) + (D/V) * Kd * (1 - Tax rate)

E = equity value in the market

V = Summazation market value of both equity and debt

Ke = this is the equity cost

D = debt value in the market by a company

Kd = the company's cost of debt in the market

Tax Rate = the prevailing corporate tax rate

Weights

The weight of equity is measure using the formula E/ (E+D)

=173824.21/ (173824.21+43912) = 0.7254

The weight of debt is measured using the formula D/(E=D)

=43912/ (173824.21+43912) = 0.2422

Cost of Equity

In this we shall use the Capital Asset Pricing Model (CAPM) so that we can generate the required rate of return for the company. We shall use the following formula

Cost of Equity = risk-free rate of return on equity + beta value of the assets* (expected rate of return in the market - the risk free rate of return on equity)

In our case, we are going use a 3 years constant maturity rate for the treasury as our risk free rate which will be 0.7811111

The Beta is for the sensitivity that is showed on the expected excess asset return compared to the expected excess market returns which is an average of 0.60

(expected rate of return in the market - the risk free rate of return on equity) is the market premium which we shall take at 5%

Therefore, the Cost of equity is:

0.781111+0.60*5%=4.30%

Cost of debt

In 2016 the interest expense was $940 Million. The total book value that showed debt is $54110 Million

Therefore, the cost of debt is

940/54110= 1.699%

Weighted Average Cost of Capital

We multiply the above with one minus the average tax rate

=0.7254*4.30%+0.2422* 1.699%*(1- 1.95) = 3.71%

Free Cash Flows (FCF's)

Free Cash Flows (FCF's) is used to measure the amount of cash a business generates after taking into considerations all capital expenditures such as freehold land, machinery, and buildings. The cash that is generated can be used to expand the business, pay debts, pay the dividend or any other purpose.

We can calculate FCF's using the formula:

Cash Flow from Operations+ Capital Expenditure= FCF

Year Cash flow from Operations $ Capital Expenditure

$ Total $

2014 22318 (13450) 8868

2015 24381 (14789) 9592

2016 27114 (18910) 8204

Totals $ 73813 (47149) 26664

Value of Operations

Value of Operations = OPERATING FREE CASH FLOW

DISCOUNR RATE-EXPECTED GROWTH RATE IN FCF

= $8204000

3.63%-5%

= $598,832,000

Conclusion and Recommendations

From the analysis done above, we can conclude that Total S.A is a going concern and that there are no alarming ratios. Its profitability ratios, leverage ratios, market value ratios and assets management ratios show that the company is doing well. For this reasons, and also taking into consideration the WACC, free cash flows and the enterprise value, I would recommend one to buy stocks for Total S.A.

References

Dedu, V. K., & Saforo, F. (2016). Prediction of Stock Performance on the Ghana Stock Exchange Using Financial Ratios: A Logistic Regression Approach. International Journal of scientific research and management. doi:10.18535/ijsrm/v4i6.13

Growth, Profitability, and Financial Ratios for Total SA ADR (TOT) from Morningstar.com. (n.d.). Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P000005GS&culture=en-US&platform=sal

Importance of Oil and Gas Financial Analysis: Improving the Bottom Line. (2018, January 5). Retrieved from https://sprioilgas.com/importance-...