Wednesday, April 23, 2014

China Will Be Profit-Gusher for French Oil Company Total

This article was originally published by TheStreet on April 16, 2014.
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- China and its energy market are big factors in French oil major Total's (TOT_) long-term plans. 

The company recently has struggled with growth, but it could double its liquefied natural gas, or LNG, supply to China in the coming years as it targets a 30% increase in production by 2017.
Last year, Total's sales fell 2% to $251.73 billion while profits fell 18% to $11.21 billion. The company's hydrocarbon production remained flat, at 2.3 million barrels of oil equivalents per day. But Total has forecast daily production of 2.6 million barrels of oil equivalents by 2015 as it tries to satisfy China's ever increasing energy needs.

Over the last 52 weeks, Total's American depositary receipts have risen by 39% to $67.74, easily outperforming the S&P 500, which is up 16% in the same period. According to analysts' estimates compiled by Thomson Reuters, Total's revenue could fall further in the current year, to $230.3 billion, but the company could start showing improvements in 2015.
On top of that, Total has said that it could potentially produce 3 million barrels of oil equivalents per day by 2017. The company's shares could continue to outperform on the back of this optimism.
Total enjoys a close relationship with Chinese oil companies such as CNOOC (CEO_), which is also one of the biggest importers of LNG in the world. The two companies have recently signed a new agreement that strengthens their existing partnership.
Moreover, Total is also helping China in meeting its shale gas targets. The company is developing China's shale gas reserves in the Anhui province by partnering with the biggest Chinese oil company China National Petroleum Corp., or CNPC.
With a history of partnerships with Chinese oil companies, Total is in a good position to capitalize on the increasing demand of natural gas in the country
When it comes to LNG, Total is the biggest player in the industry, with annual production of more than 12 million tons. The company has operations in every major LNG market, most of which are located in the Middle East and Asia Pacific.
LNG plays a dominant role in China's energy space as nearly half the country's natural gas imports consist of LNG.
Moreover, the country's LNG demand has been growing at a rapid pace. In 2012, China's LNG imports climbed 20% from 2011 to 706 billion cubic feet as it became the third largest importer of LNG. According to most recent estimates, in the first 11 months of 2013, China already had imported 6% more LNG than 2012.
Total has been a big player in China's LNG sector. Since 2010, the company has supplied nearly 5 million tons of LNG to China, serving more than 8% of the country's market. Under their new contract, Total and CNOOC will review the prices and will establish a framework to supply an additional 1 million tons of LNG per year.
Total, which currently fulfills China's demands from Middle East and Africa, is going to use the additional supplies from its projects in Australia, Russia and the U.S to pump more LNG into the country.
Furthermore, Total also has agreed to enter into a joint venture with InterOil (IOC_) by purchasing InterOil's 40.1% stake in the Elk-Antelope gas field in Papua New Guinea. The two companies will develop this attractive prospect to serve the energy-hungry Asian economies, particularly China.
Total is also playing a big role in helping China to meet its ambitious shale gas targets.
According to the U.S. Energy Information Administration, China has the world's largest technically recoverable shale gas reserves, of 1,115 trillion cubic feet. Most of these lie in the Sichuan and Tarim Basins.
In 2012, China produced just 1.8 billion cubic feet of shale gas from test wells. Government officials, however, have set an ambitious plan to produce 230 billion cubic feet of unconventional fuel by the end of 2015 and 2,100 billion cubic feet by the end of the decade.
Total and Sinopec (SNP_), are hunting for shale gas in China's Anhui province in the 4,000 square-kilometer Xuancheng permit close to Nanjing. Drilling could begin as early as this year, following evaluation of the reserves.
Sinopec and CNPC, China's largest oil company and the parent of PetroChina (PTR_), hold nearly 80% of the country's shale gas reserves. Together they are targeting shale gas production of 95 billion cubic feet by 2015. 
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.