Tickers in this Article: TOT, XOM, CVX, APC, SU, STO
Some investors and commentators treat the international oil majors as an undifferentiated mass, suggesting that investors need only follow dividend yields and/or PE ratios to find the best bargains at a given point in time. Total (NYSE:TOT) offers a good example of why that's not a very good approach. While Total's aggressive exploration program could offer some upside to production and profits down the road, the company's leverage to high oil prices and lower margins/returns underline a riskier business model that ought to trade at some discount to peers.

Mediocre Results For The First Quarter
Like Exxon Mobil (NYSE:XOM), Total delivered first quarter results that weren't too bad on the whole, but showed weakness in the crucial upstream operations.

Overall operating profits fell 15% from the year-ago period and 1% from the fourth quarter. Upstream profits fell almost one-quarter from the year-ago quarter and 1% from the December quarter, coming in slightly weaker than the Street expected on higher production/technical costs. At just over $16 per barrel of oil equivalent (BOE) produced, Total does not compare favorably to Exxon or Chevron (NYSE:CVX) on upstream profitability this quarter.

Downstream profits were meaningfully better than expected, though still down almost 10% sequentially. Total saw better margin capture in its refinery operations, despite weaker utilization rates.

SEE: Oil And Gas Industry Primer

Production Still A “Show Me” Story
There are three details that most investors pay particular attention to when evaluating oil majors – per-barrel profitability, cash returns on investment, and production growth. As already mentioned, Total didn't do great on the first metric, and production growth too is still an issue of some debate here.

Production fell 2% from the year-ago level and 1% from the prior quarter. Oil production was slightly weaker, falling 3% and 1% respectively. Total's European operations continue to shrink (production down 21%), and the company's sizable investments in Africa have still not paid off consistently yet (production was down 2% this quarter).

We'll have to see what the future brings. Like virtually all integrated majors, Total is looking to increase production by 2% to 5% a year over the next five years. Much of that is anticipated to come from Africa (home to over 40% of the company's reserves), but as recent dry wells in Kenya from partner Anadarko (NYSE:APC) demonstrate, there's still execution risk in the exploration plan. Likewise, it's well worth noting that Total's production costs are quite high – if oil prices remain below $100 a barrel, Total will either have to cut its dividend, cut back on its capex, or increase its asset divestiture program.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies

Where's The Appeal?
I'm not sure that Total really jumps out as a good integrated major in any particular way. The company isn't as globally diverse as Exxon Mobil or Chevron, nor does it have attractive specialty expertise like companies like Statoil (NYSE:STO). I think that's relevant given that a significant percentage of future production growth is going to come from unconventional and otherwise technically challenging projects.

Although, like Royal Dutch Shell (NYSE:RDS.A, RDS.B), Total has made a big bet on LNG, I'm not sure that the company's cost basis is likely to make that an especially appealing position. Moreover, with recent setbacks in its oil sands project with Suncor (NYSE:SU) and dry holes at some development partners, the company's higher-risk exploration program is showing some of that risk.

The Bottom Line
Even if investors assign a discounted valuation multiple to Total, the shares end up looking meaningfully undervalued. Whereas Exxon and Chevron look as though they could be underpriced by 5% to 10%, Total looks substantially cheaper. The trouble is, there's ample risk to go with that undervaluation, so investors have to ask themselves how confident they are that Total can meet the technical and financial challenges of the coming years and deliver solid earnings and cash flow. While I'm tempted to think that Total's undervaluation is a little too extreme relative to those risks, I wouldn't put all of my energy eggs in Total's basket.

At the time of writing, Stephen D. Simpson owned shares of Statoil.

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