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Online Extra: TotalFinaElf: Taking a Run at the "Supermajors"


When discussing what his company is worth, TotalFinaElf CEO Thierry Desmarest likes to trot out two sets of comparisons. In 1990, he recalls, today's cross-border energy giant was just Total-CFP, a lumbering, old-style oil company that was 34% owned by the French government. Its market capitalization was around $3 billion. Today, TotalFinaElf's market cap is nearly $110 billion. And since 1995 -- in the five and a half years that Desmarest has been in command -- the total real return to shareholders has been 30% a year. A nice job if you can do it, as they say in just about every language.

Juicy numbers like that underscore two things. One is the shortsightedness of those investors -- which means, most investors -- who largely banished Big Oil from their portfolios in the mid-1990s. Oil, after all, was the poster boy industry of the Old Economy at a time when investors were fleeing to the wilder shores of high tech. Two is the fact that TotalFinaElf (TOT

) has been an "exceptionally strong performer, probably the only growth story in the sector in Europe in the 1990's," according to Morgan Stanley Dean Witter oil and gas analyst Irene Himona.

The key question now is whether the biggest player in continental Europe's oil business can continue pumping out above-average returns. In oil, after all, it's a lot easier for a smaller company like the old Total -- with the few hundred thousand barrels a day it was producing a decade ago -- to double in size than for an integrated major that produces two million barrels daily or more. TotalFinaElf's current output of 2.1 million barrels a day more than qualifies it as one of the the top majors of the oil patch, even if the company still trails the industry's three so-called "supermajors" -- ExxonMobil, BP Amoco, and Royal Dutch Shell. So it could be tough for Desmarest to replicate in this decade the company's performance in the 1990s.BOOSTING OUTPUT. If anyone can make it happen, though, perhaps Desmarest can. For starters, there isn't much danger that TotalFinaElf's earnings -- or its share price -- will stay stagnant. The company's aggressive moves in 1999 to swallow Belgium's PetroFina and then, just months later, homegrown rival Elf Aquitaine, mean plenty of merger synergies can still be reaped. Throw in high crude-oil prices and healthy refining margins, and TotalFinaElf will likely come up with more than $1 billion in free cash flow this year -- even after last year's 40% dividend hike and around 1.9 billion euros in share buybacks.

Morgan Stanley, for one, estimates that TotalFinaElf is already on track to double its net income in the 1999-2003 period -- and in making that prediction it assumes an oil price of just $18.50 a barrel, down from the current $30. Merrill Lynch, which rates TotalFinaElf one of the top global oil stocks, thinks the company can do even better. "It is one of the class acts in the global oil sector," says Merrill's latest note on the subject.

A key measure of performance as Desmarest pursues this goal will be whether he can keep his pledge to increase production by an average 6% a year -- without new acquisitions. He has a good shot. Thanks in particular to the Elf acquistion, TotalFinaElf has an extremely well-balanced portfolio, with reserves stretching from the North Sea, where it's one of the few producers increasing output, to West Africa, Venezuela, and Iran. "They've got exposure to all the hot spots," says Himona.

Hot spots in more ways than one, it seems: TotalFinaElf has been particularly successful at going after oil in areas that are politically off-limits to big U.S. production groups. It's now the premier foreign group in Iran -- where U.S. oil companies are forbidden by law to operate -- and is a big player in Burma. It's also readier than any other major oil company to enter Iraq the minute United Nations sanctions are lifted. The U.S. has tried at various times to put TotalFinaElf on a blacklist for its dealings with unsavory regimes, but has backed off after considerable lobbying by the French and other Europeans. Still, hawks in Washington may try to have a go at TotalFinaElf.FRUSTRATED AMERICANS. Desmarest shrugs it all off. "American companies have come to more or less the same conlcusion as we have, that the best future opportunities are in developing countries," he says. "So it's a little bit frustrating for our U.S. colleagues to remain off-limits. One-third of the world population is under one or another kind of American sanction."

If TotalFinaElf can keep up the pace, the payoff should be handsome for shareholders. Its stock, which trades at around 10 times next year's projected cash flow, is still valued slightly below ExxonMobil and Royal Dutch Shell. The reason: market sentiment that big is better in the oil patch. Still, says MorganStanley's Himona, the company has "already closed a lot of the gap" with the other big oil groups, and it could draw even with them in profitability by 2003.

So even if TotalFinaElf's total annual returns are just half of what it clocked in the 1990s -- which is a reasonable assumption -- it's likely to be a safer play than many other investments in a world where it's no longer possible to blindly depend on tech. By John Rossant in Paris


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