TotalEnergies: A Balanced Multi-Energy Company With Strong Growth Prospects (NYSE:TTE)

TotalEnergies (NYSE:TTE) is one of the world’s largest integrated energy companies, with operations in oil and gas, renewables, electricity, and chemicals. Since my last article, the stock has rewarded investors with 10.17% returns. The stock is trading at a five-year-high, although its financial performance is weaker than FY2022. FY 2022 saw energy companies make record sales and profits due to elevated oil pricing. Although the stock has seen major upward momentum, the company continues to trade at an attractive price-to-earnings ratio relative to its industry peers. I believe the company’s balanced portfolio strategy that it has been following since 2017 makes it well-positioned to benefit from the growing demand for low-carbon energy while maintaining a profitable and diversified portfolio of energy assets. Although the market is challenging, TotalEnergies continues to show forward-moving strengths through a strong financial position that allows it to make huge acquisitions while rewarding investors and reinvesting within the company. Therefore, I maintain a bullish stance on this stock.

Benefiting from a balanced portfolio

TotalEnergies has a clear and consistent strategy that balances the growth of its diverse energy portfolio with the return of capital to its shareholders. The company has not reduced its oil production, but rather diversified its sources of energy and increased its output of electricity, which will be mainly from renewable sources in the future. In 2021, the company changed its name from Total to TotalEnergies, to reflect its ambition to become a leader in the energy transition and a top five player in renewable electricity production.

TotalEnergies has experienced a decline in its top and bottom line in the TTM. However, the company’s energy production and sales strategies that it has implemented since 2017 position it well to benefit from the current and future market conditions. TotalEnergies has a strong position in natural gas and LNG, which are expected to play a vital role in the energy transition and meet the growing demand for clean and flexible energy.

The company has been optimising its upstream operations, reducing its break-even point, and expanding its presence in strategic regions and markets. In 2023, the company plans to invest over $2 billion in electricity and renewables, which will account for 20% of its total investment budget. By 2030, the company aims to have 100 GW of gross renewable energy generation capacity, up from around 9 GW in 2021.

While the company invests in renewables, it also benefits from its position in the gas and oil industry. The price of gas has equilibrated above the long-term average, which is significantly benefiting the company in that business segment. Additionally, 2022 was expected to be an outlier year for oil pricing. Therefore, it is important to compare it to 2021, which was seen as a new normal year with slightly elevated prices. This year again indicates a new normal, with slightly elevated prices compared to 2021 and higher than what stood as the average for a long time. This is clearly benefiting the exploration and production segments.

Financial overview

TotalEnergies is expected to report weaker performance than FY2022. However, if we exclude the prior year as an outlier, we can see that the company’s top and bottom lines are still trending upward. Additionally, the company has been committed to rewarding its investors through its dividend and share buyback program.

If we look into the company’s profits by segment in Q3 2023 versus Q3 2023 over the nine-month period, we can see that net operating income across all segments have declined. Looking at the breakdown, we see that the majority of the company’s operating income is from its exploration and production, which represents 25% of its revenue. Additionally, 21% of profits stem from refining and chemicals. Integrated gas constitutes 24% of the profits, while renewable and power sources, including highly profitable gas power stations, contribute 7%. Moreover, 6% of profits arise from marketing and services, mainly their petrol stations, accounting for 23% of the revenue.

Investors should take into account the effect of high oil prices on the prior year’s earnings, which were inflated. This will help them properly evaluate the current trailing twelve months’ earnings.

TotalEnergies is committed to providing significant returns to its shareholders through a strong dividend program and well-planned share buybacks. The company’s dividend of $0.67 per share offers an attractive yield of 3.77%, which demonstrates its focus on rewarding shareholders. TotalEnergies is also planning a $2 billion share buyback program, which further highlights its dedication to maximizing shareholder value and optimising its capital structure. The company’s recent $6.1 billion stock repurchase in Q3 2023 aligns with its goal of achieving a full-year buyback target of $9 billion.

Valuation

TotalEnergies is ranked as the 6th largest energy company in the world. When compared to its peers in the industry, namely BP (BP), Shell (SHEL), Chevron (CVX), and Exxon Mobil (XOM), TotalEnergies has an attractive forward price-to-earnings ratio (FWD P/E) of 7.01, which is lower than its American peers Chevron at 11.42 and Exxon at 11.11. This indicates that TotalEnergies is undervalued relative to its peers. Moreover, TotalEnergies has a price-to-sales ratio (P/S) of 0.74, which is below one, indicating that investors are paying less for every dollar sold. This is a positive sign for investors, as it suggests that TotalEnergies is generating more revenue per dollar invested. In addition to these metrics, TotalEnergies has been making significant strides in the renewable energy sector. The company aims to have 100GW of gross renewables capacity by 2030. This is a positive sign for investors, as it suggests that TotalEnergies is well-positioned to capitalise on the growing demand for renewable energy.

Risk

As an investor, it is important to be aware of the risks associated with TotalEnergies. The company operates in various regions, which exposes it to geopolitical risks that can impact its overall performance. Unforeseen events like geopolitical tensions in regions like the Middle East can disrupt operations or access to resources. Another risk to consider is market volatility and fluctuations in energy prices. TotalEnergies operates across diverse sectors, and any changes in energy prices resulting from global demand shifts, geopolitical events, or regulation changes can significantly impact the company’s performance. The market is also highly competitive, and TotalEnergies is taking on consolidation actions within the renewable sector through acquisitions. If TotalEnergies decides not to engage in consolidation or strategic mergers/acquisitions in response to industry movements, investors may question the company’s growth strategy and its ability to compete and expand in the long term, especially in the upstream sector.

Final thoughts

Since 2017, TotalEnergies has consistently invested in renewable energy while maintaining a balanced portfolio that leverages its oil and refinery assets. Despite market fluctuations, the company has delivered strong top and bottom-line results and has a significant cash balance to continue growing and adapting to the changing energy environment. In addition, TotalEnergies continues to reward its investors through its share buyback and dividend program. Though cautious of industry risks such as price volatility, competition, regulatory pressures, and geopolitical tensions, its strategic position within the current market conditions and its investment in the future indicate the potential for growth. Therefore, investors may want to take a bullish stance on this stock.