Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Despite what you might think, Big Oil knows its batteries. The first rechargeable lithium-ion battery to hit the market in the late 1970s came out of Exxon, of all places. So Total's announcement on Monday that it will pay $1.1 billion for battery maker and compatriot Saft Groupe isn't out of left field.

Batteries Included
Source: Bloomberg

Except that it is, in one important respect.

Total has made a point of investing in renewable energy, even as rivals such as BP -- remember "Beyond Petroleum"? -- have pulled back. In 2011, Total acquired a majority stake in U.S. solar equipment manufacturer SunPower. And CEO Patrick Pouyanné had this to say at last year's analyst day:

There are debates about oil and gas companies, about [the] impact of climate change on us. We cannot elude the debate. ... I have a strong conviction that ecology goes with economy. ... For me as a CEO, [it's] important to be able to prepare [for] the future and to position the company for the future of oil and gas ... .

It is hard to argue with such thinking. Total is headquartered in the same city that hosted December's global climate conference. Before that, it joined with the likes of BP and Royal Dutch Shell to launch the Oil and Gas Climate Initiative, an effort to present a united front for the industry in the debate (and promote natural gas as a cleaner fuel than coal). So diversifying into renewables both shows willingness on Total's part and acts as a hedge against a possible future that doesn't exactly bode well for its main product. Certainly, the SunPower investment has been on a different track from oil so far.

Different Orbit
Indexed share and commodity price performance
Source: Bloomberg

What makes the Saft deal different is timing. When Total paid about $1.7 billion for its stake in SunPower in 2011, it was less than Total's positive free cash flow that year of $2.2 billion, according to data compiled by Bloomberg.

You may have noticed there's been an oil-price crash since then. Based on consensus estimates, Total's free cash flow this year is expected to be just $750 million. Over the past four quarters, Total's (negative) free cash flow was trailed only by Chevron among its global peers.

Feel the Burn
Free cash flow, trailing four quarters
Source: Bloomberg
Note: Cash flow from operations less capital expenditure.

Like all the oil majors, Total is selling assets and borrowing to fund its dividend, even as it has slashed capital expenditure. The chart below is unsustainable.

Sum Total
Total's net debt per share is climbing again as cash flow has fallen faster than spending
Source: Bloomberg

This is why it is odd that Total is paying out $1.1 billion for a medium-term business prospect now, and offering a 38 percent premium, to boot. The price of EUR36.50 a share isn't far short of Saft's all-time high hit last summer. Monday's announcement acknowledged it represented a "significant control premium compared to recent valuation multiples in the battery industry."

While Total's dividend yield has come down a bit amid the spring rally in oil, it is still north of 5 percent. And that rally looks shaky. 

The Payout Scale
Total's dividend yield is well below those of its European peers but still above 5%
Source: Bloomberg

Total aims to cover its capex from cash flow at $45 oil this year. It almost covered capex in the first quarter with oil averaging well below that, so Total is clearly making good progress on slashing costs. Yet Total is still borrowing to cover its dividend, even with half of it expected to be paid in scrip this year. Total aims to cover capex and a fully-cash dividend at $60 oil next year.

Buying Saft, therefore, can be taken as a sign of an oil company that is weathering the worst storm in a generation and essentially saying "We got this." If oil doesn't stage a sustained rally, though, it'll just be bad timing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net