In our last Q2 analysis, we conclude that TotalEnergies’s (NYSE:TTE) next catalyst was the new strategy update scheduled for the 27th of September, emphasizing that: “this could review upwards the total shareholder remunerations”. We are almost one week ahead of the release and today, we are commenting on what we might expect and also the latest company development.
Starting from the stock price evolution year-to-date, Total underperformed its oil EU peers namely BP (BP) and Shell (SHEL) by respectively 17.8% and 21.8% and also its US counterparts such as Chevron (CVX) and Exxon Mobil (XOM) by 55.9% and 37.9%. Why?
Here at the Lab, our internal team thoughts are mainly due to two uncertainties: shareholder remuneration and Total’s strategy ex-Russia (and CAPEX development).
What are we expecting?
Our internal team forecasts that the new presentation will simplify the company’s capital allocation policy. In addition, looking to the presentations, there is no clear explanation of shareholder remuneration, it is still declared with a “surplus from cashflow”. This coupled with a change in dividend payments such as Shell and BP that are currently paying in US dollars will earn more approval from the investor’s community. This will result in a more alignment in Total payout without FX fluctuation for the company’s current and future shareholders.
Regarding CAPEX and Russia, we already investigated the company’s exposure in a previous publication. As a memo, Russia was accounting for 5% of Total’s capital employed which was approximately $6.5 billion with an operating cash flow of 1.2 billion in the first half-year results. The Russian hub was key for the French company and even if there is no commitment to deploy new capital in the country, Total has lost some optionality on its medium-long term targets. Forecasting the numbers, we expect that the CAPEX guidance will be at the high end of its range (approximately $16 billion). From MICRO to MACRO, after years of sluggish global oil investments and given the urgency to replace Russian barrels, supply constraints can realistically keep commodity prices at high levels, even in a scenario of moderate demand destruction. Since 2014, following the oil price decline, CAPEX was kept at a minimum pace. This will support Total too.
In addition, there is another theme that supports a scenario of greater investments in the oil sector. To face the competition from renewable energies, oil players will be forced to make more investments. Therefore, instead of cycles characterized by huge expenses to increase capacity and then bring down the price, there could be a lasting cycle characterized by gradual and sustained growth in investments.
Conclusion and Valuation
In the latest news, we should report an inquiry from Le Monde (a French journal). According to them, TotalEnergies allegedly sold kerosene to the Russian air force. The government of Paris, pressured by the opposition, showed indignation and distanced itself. The French public company denies it but in the meantime, it sold its stake in the joint venture protagonist of the scandal. This adds another risk to Total’s investment case – the reputational one. Concerning the valuation, we maintain a target price of €60.00 per share based on the 2023 EV/Debt-adjusted cash flow. The company is currently trading at 5x versus an average of more than 6.5x, in the mean time, investors might enjoy a tasty dividend per share with a promising upside schedule for next week.