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Is TotalEnergies The Perfect Energy Transition Play?

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·14-min read
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Back in June, France's biggest energy company, Total SE, finalized a name change to TotalEnergies SE (NYSE:TTE), signaling a new phase in the company's plan to transition to net zero. Total proposed the name change during its full-year 2020 earnings call in February, saying it plans to sharpen its focus on renewables, LNG, and electricity, while oil product sales would drop from the current 55% to 30% of overall revenue by 2030.

"Our ambition is to become a world-class player in the energy transition. That is why Total is transforming and becoming TotalEnergies," CEO Patrick Pouyanné said in a statement after the latest name change.

One of the world's seven "supermajor" oil companies, Total is a multinational integrated oil and gas company based in France. Following net-zero pledges by its fellow European peers, in 2020, the company announced plans to reach net zero for its global operations by 2050 (in mt CO2e). The company also aims for a 60% or more reduction in the average carbon intensity of the energy products used by its customers by 2050 (Scopes 1, 2, 3).

However, Total not only appears to be in a position to handle the transition better than most but is also a potentially better dividend income stock than U.S. supermajors Exxon (NYSEX:XOM) and Chevron (NYSE:CVX) or even than its European brethren BP Plc (NYSE:BP) and Shell (NYSE:RDS.A).

Strategic Investments

TotalEnergies' core operations include upstream (exploration and drilling) as well as downstream (refining and chemicals). However, the company is now reworking its portfolio to focus on its best oil investments while expanding its footprint in renewables and electricity, including cleaner-burning natural gas. Total says it plans to spend roughly half its annual capital spending budget of $13-$15 billion on growth businesses over the next four years, with the majority of those funds earmarked for natural gas and renewable power.

Despite its commitment to lower fossil fuel production over the next decade, Total is not afraid to make bold but smart calls that we think can pay off big dividends in the near future.

For instance, TotalEnergies and Italy's Eni S.p.A (NYSE:E) have announced plans to invest billions of dollars in Libya as the OPEC nation emerges from a decade of conflict and civil war.

"I want to contribute to Libya's comeback," TotalEnergies. Some may see more boldness than wisdom in TotalEnergies' decision to partner with Libya. I don't. Where they see risks, I see the opportunities," Chief Executive Officer Patrick Pouyanne recently told an energy conference in the capital, Tripoli. 

Total plans to put $2 billion into Libya's Waha oil project, which will boost production by around 100,000 barrels a day, he said. The French company will also work to raise output at the Mabruk field and help build 500 megawatts of solar power to feed the local grid. Libya boasts some of the lowest oil production costs among the Arabian and North African producing nations.

Readers should also note that TotalEnergies dodged a big bullet by making highly strategic investments in the U.S. shale patch, something that has helped the company avoid the massive asset writedowns like Exxon’s writing off of $20B in assets.

In fact, it's unlikely that Total will start selling its rich oil fields any time soon.

The company has announced that, in partnership with ConocoPhillips (NYSE:COP), it will buy Hess' (NYSE:HES) 8.16% stake in Libya's Waha Oil and invest to improve production.

Indeed, Total's oil production is steadily rising.

In its third-quarter earnings call, Total reported Q3 revenue of $49.07B (+80.3% Y/Y) and GAAP EPS of $1.71. The company reported that hydrocarbon production was 2,814 thousand barrels of oil equivalent per day (kboe/d) in the third quarter 2021, up 4% year-on-year.

Total also said, given the outlook for OPEC+ quotas and seasonal gas demand in the fourth quarter of 2021, it expects fourth-quarter 2021 hydrocarbon production to be in the range of 2.85-2.9 Mboe/d.

Robust Dividends

Meanwhile, TotalEnergies (NYSE:TTE) remains  a robust dividend payer, with a current dividend yield 6.4%. The company recently updated its dividend outlook, saying that oil prices averaging above $50 per barrel could lead to dividend increases.

Even better in our opinion, Total's high dividend is adequately supported thanks to the company's superior coverage ratio compared to its peers. Although dividends by the company would be subject to a withholding tax of 15%, investors can get a deduction for amounts paid in foreign taxes.

In the final analysis, TotalEnergies' commitment and efforts to change its portfolio while continuing to expand its core business, as well as its excellent business track record and high, sustainable dividends, make it an attractive energy transition play for long-term investors.

Other companies to watch as Big Oil becomes Big Energy:

Exxon Mobil (NYSE:XOM) is one of the largest oil and gas companies in the world. It was founded by John D. Rockefeller Sr. in 1870, with a goal to produce kerosene for lamps, which led to it becoming an integrated oil company that would go on to be one of the most powerful corporations ever built, shaping global events from WWII onward. Today, over 80 different subsidiaries are owned by ExxonMobil Corporation alone. 

ExxonMobil is one of the few Western energy companies to invest in developing Guyana’s burgeoning oil industry. By the end of 2020, when global oil companies were tightening their belts and learning to live in a sub-$50 per barrel world Exxon announced it was focusing capital spending on offshore Guyana. That decision is paying off in spades for Exxon.

Aside from the considerable drilling success and exploration upside to be unlocked in the Stabroek Block, operations are proving to be highly profitable. And it hasn’t stopped there. Exxon is also developing the Payara oilfield in the Stabroek Block, located to the north of Liza one at a water depth of around 2,000 meters. The Payara field is expected to break even at $32 per barrel, highlighting the operations’ considerable profitability in an environment where Brent is selling for over $85 per barrel.

More importantly, a combination of low breakeven prices for the oilfields in the Stabroek Block and a very favorable production sharing agreement with Guyana’s government, with a low royalty rate and the means to recover development costs, makes Guyana a highly profitable jurisdiction for Exxon. 

Chevron Corp. (NYSE:CVX) is an American multinational energy corporation with headquarters in San Ramon, California and has been operating for more than 110 years. It was founded on September 6, 1879 by Benjamin Silliman Jr., Charles Noyes and John D. Rockefeller as the Standard Oil Company of Ohio which became part of a monopoly that controlled 90% of all oil production in the United States. In 1911, it changed its name to Standard Oil Co. (Ohio). It later merged with other companies into a new company called Chevron Corporation which expanded from the US to several other countries around the world including Canada, Algeria, Angola and Nigeria. 

Chevron Chairman and CEO Michael Wirth recently expressed optimism about the oil price trajectory, saying that he sees "a fair amount of support" after prices spiked above $80 a barrel in recent weeks.

Wirth noted that oil prices have been making strong gains in a seasonally weak October period, which normally sees a lull in demand. "The fact that we've seen prices actually strengthen at a time when they typically weaken, suggests that there's a fair amount of support in the market," he said.

For the long-term outlook, Wirth noted that the rising demand for green energy has made it more difficult to develop new supplies of oil and also increased pressure on companies to return excess cash to shareholders in the form of dividends and buybacks rather than spending it on new exploration and drilling.

ConocoPhillips (NYSE:COP) was founded by two oil pioneers in 1917, and has since grown to be one of the largest energy companies in the world. They are committed to delivering a diverse range of products that meet society's needs for food, transportation, power generation, home heating oil and more.  

ConocoPhillips is dedicated to working with others in industry and government to provide responsible development of resources while minimizing environmental impact.   ConocoPhillips also strives to make sure their employees feel valued as they work towards success together.

A couple of months ago, Bank of America upgraded ConocoPhillips shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.v According to BofA analyst Doug Leggate, ConocoPhillips looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major." 

Leggate ConocoPhillips shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70." Best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery. But BofA is not the only Wall Street punter that's gushing about ConocoPhillips.

Crescent Point Energy Corp. (NYSE:CPG; TSX:CPG) is an oil and gas company based in Calgary, Alberta. The Company's shares are traded on the Toronto Stock Exchange under the symbol CPG. Crescent Point holds interests in over one million net acres of petroleum and natural gas rights in Saskatchewan, Manitoba, North Dakota, Utah, Colorado and Montana.

Crescent Point Energy explores, develops, and produces light and medium crude oil and natural gas reserves in Western Canada and the United States. The company's crude oil and natural gas properties, and related assets are located in the provinces of Saskatchewan, Alberta, British Columbia, and Manitoba.

Crescent Point shares once traded above $45 per share and even paid out a generous dividend, compared to the current $5.15 share price. 

Unfortunately, the 2014 oil price meltdown left the company battling plunging cash flows and high debt levels leading to heavy dividend cuts–and the shares have never fully recovered. Even after this year's 120% gain, Crescent Point shares are trading 80% below 2014 levels.

Thankfully, the ongoing oil price rally has allowed Crescent Point to start generating healthy cash flows and make several strategic acquisitions. That said, this stock is likely to remain volatile, and any setbacks in the near future could send the shares crashing again.

Cenovus Energy (NYSE:CVE; TSX:CVE) is one of Canada's largest oil and gas producers. It was formed in 2001 following the merger of Petro-Canada and Pacific Petroleums. Cenovus Energy develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States and the Asia Pacific region. The company operates through Oil Sands, Conventional, and Refining and Marketing segments.

Cenovous Energy shares have shot to a 52-week high after J.P. Morgan upgraded the shares to Overweight from Neutral with a C$14.50 price target (45% potential upside), citing progress on execution of last year's takeover of Husky Energy (OTCPK:HUSKF). Cenovus shares remain undervalued, and with WTI now above $80/bbl for the first time in four years, the company is in a great position to generate enough free cash flow to buy back its ConocoPhillips' stake.

A subsidiary of Exxon Mobil Corporation, Imperial Oil Limited (NYSE:IMO; TSX:IMO) is a Canadian company that produces and refines petroleum products, including gasoline. It has operations in Canada, the United States and elsewhere. Imperial Oil  is an integrated oil company that produces and sells crude oil and natural gas in Canada. As of December 31, 2020, the company Upstream segment had 138 million oil-equivalent barrels of proved undeveloped reserves. 

A few months ago, Imperial Oil announced plans to move ahead with the production of renewable diesel at a new complex at its Strathcona refinery in Alberta. The facility is expected to produce ~20K bbl/day of renewable diesel when it is completed in 2024, which the company says could reduce emissions in the Canadian transportation sector by 3M metric tons/year. The company says the renewable diesel will be produced from blue hydrogen, involving natural gas reforming accompanied by carbon capture and storage.

By Alex Kimani for Oilprice.com

**IMPORTANT! BY READING OUR CONTENT YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ CAREFULLY**

Forward-Looking Statements

This publication contains forward-looking information which is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ from those projected in the forward-looking statements. Forward looking statements in this publication include the plans of TotalEnergies SE (the “Company”) to transition to net zero in carbon emissions; the intention of the Company to become a world-class player in the energy transition; the Company’s plans for a 60% or more reduction in the average carbon intensity of the energy products used by its customers by 2050; that the Company will handle the energy transition better than its competitors; the plan of the Company to focus on its best oil investments while expanding its footprint in renewables and electricity, including cleaner-burning natural gas, including plans to spend approximately half its annual capital spending budget of $13-$15 billion on growth businesses over the next four years, with the majority of those funds earmarked for natural gas and renewable power; the Company’s plans to invest billions of dollars in Libya, including investment of $2 billion into Libya's Waha oil project, expected to boost production by around 100,000 barrels a day; the Company’s plan to raise output at the Mabruk field and help build 500 megawatts of solar power to feed the local grid; that the Company will not start selling its rich oil fields any time soon and will partner to buy Hess' (NYSE:HES) 8.16% stake in Libya's Waha Oil and invest to improve production; that the Company’s oil production will continue to rise; that the Company will continue to pay dividends in the future; and that the Company is an attractive energy transition play for long-term investors. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information.  Risks that could change or prevent these statements from coming to fruition include that the Company’s plans to transition to net zero in carbon emissions may not occur as anticipated or at all; the Company may fail to become a world-class player in the energy transition movement; that the Company may be unable to achieve its planned reductions in average carbon intensity of the energy products used by its customers; that the Company may fail to handle the energy transition better than its competitors; the Company’s business and operational plans, including planned investments and acquisitions, may not occur as anticipated or at all; that the Company may not pay dividends in the future as expected or at all; and that the Company may fail to become an attractive energy transition play for long-term investors. The forward-looking information contained herein is given as of the date hereof and we assume no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.

DISCLAIMERS

This communication is for entertainment purposes only. Never invest purely based on our communication. We have not been compensated by TotalEnergies SE but may in the future be compensated to conduct investor awareness advertising and marketing for NYSE:TTE. The information in our communications and on our website has not been independently verified and is not guaranteed to be correct. Price targets that we have listed in this article are our opinions based on limited analysis, but we are not professional financial analysts so price targets are not to be relied on.

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