For a book project we are working on, we conducted a common size analysis of Total

SAs (TOT) financial statements. We figured it would be something worth passing along
here.
Totals common-size statements are presented below. The first step in conducting a
common-size analysis is to review both the common-size income statements and
common-size balance sheets to look for changes and trends that warrant further review.
Once the trends are identified, explanations should be sought. Managements discussion
of financial performance and the financial statement footnotes are good starting points,
provided the reader maintains a healthy skepticism of managements explanations.
These internal perspectives should be balanced by external sources such as industry
reports, economic data, peer company financial statements and news reports. We
present a common-size analysis of Total below including an initial assessment, income
statement analysis and balance sheet analysis.
click to enlarge




Initial Assessment
Totals horizontal common-size income statement is presented in Exhibit 1. Revenues
grew 22.8% in 2005 and 39.2% cumulatively between 2004 and 2006. Totals horizontal
common-size balance sheet is presented in Exhibit 3. Total assets increased by 22.3% in
2005 and declined slightly in 2006 for a cumulative increase of 21.3%. Assets grew at
about the same rate as sales in 2005, but fewer assets produced a higher level of sales
in 2006, indicating that Total used its assets more efficiently that year.
In Totals Form 20-F filed with the U.S. Securities and Exchange Commission,
management notes that the average oil market environment in 2006 was marked by
higher oil prices, with the average Brent oil price increasing 19% to $65.10/b from
$54.50/b in 2005. They further disclose that Oil and gas production in 2006 was 2,356
kboe/d compared to 2,489 kboe/d in 2005, a decrease of 5% due principally to the
impacts of the price effect (1) (-2%), shutdowns of production in the Niger Delta area
because of security issues (-2%) and changes in the Groups perimeter (-1%). Excluding
these items, the positive impact of new field start-ups was offset by normal production
declines at mature fields and shutdowns in the North Sea. This explains the apparent
productivity increase: rather than producing more petroleum with fewer assets the
company produced less. However, due to higher oil prices the revenue from the
production more than offset the decline in quantity. By comparing output rather than
revenue we see that output declined 5% and assets declined less than 1%. By this
measure, efficiency actually decreased rather than increased. Since management has
control over production but not commodity prices, this may be a more appropriate
measure.
Income Statement
An examination of Totals vertical common-size income statement, presented as Exhibit
2, shows that the while the company was profitable the entire time net profit margin
declined steadily from 9.5% in 2004 to 9.2%in 2005 and just 7.9% in 2006. Investors
will want to know if this trend is more likely to continue or to reverse. To do this we
analyze the components of the income statement.
Excise taxes declined steadily throughout the period, which increased net revenue
available to the company. Whatever caused the decline in profit margin had to overcome
this positive effect. Purchases offer a partial explanation. Rising crude oil prices hurt
operating margins for the refining and retail businesses. However, while this expense
grew substantially faster than sales during the three years (48.8% compared to net
revenue growth of 39.2%) it does not account for the entire decline in net margins. In
fact, Figure 5-1 shows that operating income as a percentage of sales increased in 2005
and the decline in 2006 still left the income from operations higher than it was in 2004.
Instead, we see that the decline in net profitability was due to non-operating items:
specifically other income and an increase in income taxes.
Turning to the 20-F for information, we learn that the biggest reason for the decline was
a one-time gain recognized in 2004: The gains (losses) on sales of assets included a
pre-tax dilution gain on the Sanofi-Aventis merger of 2,969 M in 2004. Without the
gain in 2004, other income would only have been 0.1% of sales, and the apparent
decline in margins would not have occurred.
With regard to income tax, the effective tax rate has been rising relative to pre-tax
income, with the major factor being the difference between French tax rates and foreign
tax rates. In particular, The Venezuelan government has modified the initial agreement
for the Sincor project several times. In May, 2006, the organic law on hydrocarbons was
amended with immediate effect to establish a new extraction tax, calculated on the same
basis as for royalties and bringing the overall tax rate to 33.33%. In September, 2006,
the corporate income tax was modified to increase the rate on oil activities (excluding
natural gas) to 50%. This new tax rate will come into effect in 2007.
Some expenses can be crucial to a companys future success. For example,
pharmaceutical companies rely heavily on research and development. Improved margins
due to lower R&D spending may actually be bad news. For oil companies, the equivalent
of R&D is exploration costs expenses related to trying to find new sources of oil. Totals
exploration costs were fairly stable as a percentage of revenue.
Another industry-specific expense is depletion, which is the counterpart to exploration
and the equivalent of depreciation for fixed assets. When new oil discoveries are made
an estimate of the total available oil is added to assets. The depletion charge represents
the amount used up each year from the resources.
For forecasting future net margins, we would probably want to use the more recent
years as a guideline. Tax rate increases should be considered permanent, and the 2004
net gain appears to have been a one-time event.
Balance Sheet
Note that Total presents its balance sheet with long-term assets and liabilities above
current assets and liabilities. This presentation is fairly common outside the United
States.
Remember that revenues grew 22.8% in 2005 and 39.2% cumulatively between 2004
and 2006. Total assets increased by 22.3% in 2005 and declined slightly in 2006 for a
cumulative increase of 21.3%. When reviewing common-size balance sheets, particular
attention should be paid to individual items that are not in line with this trend.
Assets
Beginning with long-term assets, intangible assets rose faster than sales or total assets
while tangible assets (property, plant and equipment) grew slower. By their nature
intangible assets are difficult to value, and subjective judgment is involved. Investors
should always investigate the composition of intangible assets. Looking at Note 10 in
Totals 20-F we find that the increase in 2005 was mostly due to acquired mineral rights.
Assuming the valuation was performed appropriately this is a valid asset. In 2006
acquisitions of other companies resulted in the change. Rapidly growing intangible assets
and slow-growing property and equipment indicates the company may be pursuing a
buy versus build strategy. In aggregate, long-term tangible and intangible assets
amounted to 43.9% of total assets in 2004, 42.3% in 2005 and 43.1% in 2006 a fairly
constant proportion. Equity and other investments also stayed fairly consistent as a
percentage of assets.
Hedging instruments of non-current financial debt declined as a percentage of assets.
However, looking further down the balance sheet we see that the non-current debt
increased in both absolute and percentage terms. It is possible that the company
reduced the amount of overall hedges, or that the hedges declined in value (which would
normally be offset by a similar change in the fair value of the hedged liability.) The
discussion in the 20-F reveals losses is limited to the change between 2005 and 2006, so
it is necessary to refer to the 2005 20-F to learn about the large decline between 2004
and 2005. In doing so, we find that currency and interest rate swaps lost value.
Currency and interest rate movements were of a favorable direction, so any currency
and interest rate hedges were unfavorable. Although the amount of debt changed
year/year it is possible to gauge the overall impact by comparing debt maturing in
specific years. For example, in 2004 Total had $2,241 million of bonds issued that
mature in 2008. In 2005, the amount of 2008 maturities was similar at $2,256. However,
the fair value of interest and currency swaps on the 2008 maturities had fallen from
$398 million to $117 million. Similar declines were seen across other maturity dates.
From 2005 to 2006 there was a decline in other non-current financial assets. Note 14
of the 20-F explains that the company used up some deferred tax assets during the year.
As discussed in Chapter 3, deferred tax assets represent differences between earnings
reported to shareholders and earnings reported to the tax authorities. Assets arise when
book earnings are lower than tax earnings, frequently because of tax loss carry-forwards.
As the company earns money in future periods it can use these carry-forwards to offset
current period taxes. By contrast, deferred tax liabilities arise when the companys
reported book earnings are higher than reported tax earnings. This can be caused by use
of accelerated depreciation for tax purposes, for example, and represents a tax payment
that has been recognized in the income statement but not yet paid. Looking further
down the balance sheet, we see that deferred tax liabilities grew in both years, though at
a slower rate than either sales or total assets. As a result, they declined as a percentage
of assets from 7.2% in 2004 to 6.8% in 2006. In aggregate, non-current assets declined
from 62.0% of total assets in 2004 to 59.3% in 2006.
Turning to current assets, both inventories and accounts receivable grew faster than
sales or assets in 2005, but declined in 2006. Over the entire two-year period
inventories grew faster than total assets but slower than sales. Since sales are made
directly from inventory and often result in accounts receivable, the comparison to sales
indicates that working capital was efficiently managed in 2006.
Prepaid expenses and other current assets rose faster than assets and in line with sales
for the entire period. Investors frequently devote special attention to the other
category because changes there sometimes indicate earnings management since such
assets arise when more earnings appear on the income statement than are collected in
cash. Here the 20-F doesnt help, as Note 16 provides a table breaking the category
down further but the drivers of the change remain classified as other.
Cash and equivalents declined considerably. Half of the decline in 2006 was due to
currency issues. Current financial assets were up sharply over the two years, which also
contributed to the cash decline. According to the 20-F, Certain financial instruments
hedge against risks related to the equity of foreign subsidiaries whose functional
currency is not the euro (mainly the U.S. dollar). They qualify as net investment
hedges. Changes in fair value are recorded in shareholders equity. The fair value of
these instruments is recorded under Current financial assets or Other current financial
liabilities. Given that the latter category declined considerably, favorable changes in
the value of such hedges would seem to be a likely explanation for both shifts.
Liabilities
Totals long-term liabilities grew just 7.1% in 2005 and declined in 2006. As a
percentage of total assets they fell from 18.8% to 15.6%. The main driver of the overall
decline was a reduced liability for employee benefits. Looking at Note 18 in the 20F, we
find that the expected future obligation has been reduced by approximately 900 million
between 2005 and 2006. Specifically, the reduction was due to actuarial gains and losses,
which reduced the reported obligation by 1.15 billion but merely reflect actuarial
estimates. In addition, currency translation adjustments reduced the expected future
liability by 900 million. Investors might want to ignore these adjustments or make their
own adjustments to reflect their arbitrary and possibly unsustainable nature. Without
these two adjustments the liability would have increased rather than decreased. Non-
current debt increased 25.6% cumulatively, which was faster than the growth in total
assets but slower than the growth in sales.
Short-term borrowings increased substantially, particularly in 2006. This resulted from a
larger portion of the non-current debt coming due in 2007.
Accounts payable ballooned in 2005 but were reduced in 2006 such that cumulative
growth was in line with the growth in sales and assets. The large increase in 2005 could
have been resulted from an unusually large amount of purchases late in the year. Other
current liabilities grew at a slower rate than sales or assets in both periods.