Total S.A. (TOT)

June 20,2008

An Alberta court has ruled that French super-major Total SA paid fair value when acquiring Deer Creek Energy Ltd., quashing claims by a dissident investor group that the company should have paid far more for the junior oil sands company.

Total bid $31 a share for Calgary-based Deer Creek in 2005, but New York hedge fund Paulson & Co. refused to tender its 16-per-cent share to the offer. It argued a fair value for the company was up to $200 a share, and launched a court action under so-called dissenter's rights to seek a higher price from an arbitrator.

Those claims were thrown out yesterday. In a ruling at the Court of Queen's Bench of Alberta, Honourable Madam Justice B.E. Romaine said that Total had paid a fair price for the company.

TOTAL is also well positioned in the downstream and chemicals businesses. Though refining operations are subject to frequent ups and downs, the near- to medium-term outlook remains positive. The company's refining assets generate good cash flow, as the break-even point has been significantly brought down through cost cutting and efficiency enhancing initiatives. Being the largest European refiner, TOTAL is well positioned to capitalize on the robust refining environment in the U.S. through exports. In the marketing business, TOTAL has emerged as the largest player across the six major markets in Europe (France, United Kingdom, Germany, Benelux, Italy, and Spain), and is the second largest in the growing African market. In China, the company recently entered into a joint venture with Sinochem for the creation of a 200-station network in northern China, where the two companies are already partners in the Dalian refinery. TOTAL is also well positioned in the global liquefied natural gas (LNG) market, with interests in six liquefaction plants worldwide. Also, the company holds interests in three LNG regassification terminal projects. This ensures a steady marketing channel for the company's substantial natural gas reserves worldwide.

TOTAL has consistently produced above-average results in terms of production growth, reserve replacement ratios as well as finding and development (F&D) costs. While most of its super major peers are finding it difficult to achieve any upstream growth, TOTAL is producing robust upstream growth performance. In the 1999 to 2006 period, the company achieved a compounded annual production growth rate 3.3%. This impressive growth momentum continued in the 2006. TOTAL's five-year average reserve replacement ratio and F&D costs are some of the best in the industry. Given the company's strong pipeline of development projects, we remain confident that the annual production-growth target of 5% through 2010 will be easily achieved. The company has a total of 19 currently-underway development projects (nine of them TOT-operated) that are projected to commence production by 2008. Major projects that are projected to drive production growth beyond 2008 include: the Kashagan field (Kazakhstan), Dolphin (Qatar), the Surmont Heavy Oil project (Canada), as well as a number of recent discoveries in West Africa. Capital expenditures are projected to average about $10 billion per year in the 2004 to 2008 period.

TOTAL's strong upstream growth and competitive cost structure, coupled with the favorable commodity-price environment, has enabled it to generate substantial amounts of cash. In 2005, the company produced roughly 16 billion in operating cash flow and spent roughly 12 billion on capital expenditures, of which 71% went to upstream activities. The remainder of 2006 looks favorable thanks to the strong commodity-price environment. Given such strong cash flows, the company continues to return capital to shareholders. In 2006, the company paid 5.06 billion in dividends and bought back roughly 4.2 billion worth of its own stock. TOTAL's current per share dividend has roughly doubled in the last four years and given the company's stated target of achieving a 50% payout ratio (compared to the current payout ratio of about 44% level), prospects for further dividend growth remain positive.

A number of company-transforming acquisitions over the last few years have made TOTAL an oil and gas super major, joining the ranks of such heavyweights as Exxon Mobil, BP, ChevronTexaco, and Royal Dutch/Shell. These transactions included the 1999 acquisition of Belgium-based Petro-Fina for $11 billion and the 2000 acquisition of its French rival, Elf Aquitaine, for $49 billion. The portfolio of assets resulting from the successful integration of these companies enabled TOTAL to easily weather the industry downturn in 2001 and 2002, and has positioned it to benefit from the current favorable macro environment.

TOTAL has one of the best production-growth profiles among the oil majors, characterized by an upstream portfolio having above industry-average exposure to faster growing hydrocarbon producing regions of the world. While most of its peers are going through the painful process of reducing their exposures to the maturing North American and North Sea regions, TOTAL is advantageously positioned on this front. With only about a third of its current volumes coming from these regions, compared to the peer group median of about one-half, TOTAL's upstream assets have lower natural decline rates and longer productive lives. We believe that this represents a significant competitive advantage for TOTAL over the other super majors. This is evident in TOTAL's positive upstream growth prospects and attractive returns, due to its low-cost base. Additionally, TOTAL's strong balance sheet gives it the flexibility to continue returning capital to shareholders through increased dividend payouts and share buybacks, while maintaining a strong capital expenditure program.

Total has been growing rather steadily in the past few years, thanks to revenue from its "upstream" operations: Oil exploration, oil production, coal mining interests and liquefied natural gas. These upstream operations help out as oil prices trend upward, providing solid income. Upstream projects that have been providing more money to Total include oil fields in Angola and plans to increase its stake in the Canadian heavy oil market with a bid for Synenco. Additionally, Total engages in "downstream" activities that bring in revenue: refining, shipping, trading and marketing. This means that Total can enjoy the revenue from pumping the oil, and then get additional revenue from such practices as shipping it.

Another aspect of Total is its diversification. The company produces fertilizers and petrochemicals and makes specialty chemicals for a variety of markets. Total is also involved in performance polymers and products that are made from petroleum. The fact that Total pumps its own crude for these purposes help cuts costs while providing revenue streams.

Those concerned about Total's environmental record may want to look twice, as Total has been fined for oil spills in the past, however the company did start a sea turtle conservation project, and the company has introduced a petroleum based fuel called Evolution that is supposed to produce lower emissions and increase fuel efficiency in cars. For some investors, these attempts at reform in environmental practices justify investing in the company. Some may argue, though, that such attempts are "greenwashing" and the harm Total does with its myriad energy and chemical production interests outweighs the good.

Ultimately, it is up to individual investors to decide whether they think Total is a "good" investment (according to whatever standards they use). From a strictly bottom line standard, though, Total looks fairly solid. But this could change if oil prices volatility and tougher environmental standards come into greater prominence.