- Total’s controversial stance on Russia is dragging down its stock
- Having outperformed over the last decade, TTEF’s fundamentals remain strong
- It is key to the EU’s transition away from Russian energy
TotalEnergies (EPA:) is falling behind in a market that has been energy-dominated for the last two quarters. The stock is down 11.5% year to date (YTD) while its EU peers, BP (LON:) and Shell (LON:), are up 2.4% and 10.2%, respectively.
Total’s underperformance has much to do with its stance on Russia and little to do with its health as a company. The group is the only EU and company still present in Russia, which has spooked some investors into selling the shares.
Sentiment aside, Total maintains an outstanding record of operational performance, has a management team that’s as strong as it gets, and is well positioned to navigate the EU energy crisis in the long term. The asymmetry between sentiment and fundamentals presents an interesting opportunity.
Total’s Russia Strategy
TotalEnergies was heavily involved in Russia before the invasion of Ukraine, holding a 20% stake in the Yamal Project, a 19.4% stake in Novatek, and a 10% stake in the Arctic LNG 2 Project. Following the invasion, it chose to hold these investments, unlike its EU peers, which sold their Russian assets in a matter of days. The group’s current position remains that it will remain in Russia but will not provide capital for new projects. The controversial move attracted significant media attention, with Ukrainian President Volodymyr Zelenskyy appealing for the company to reject the €440 million in dividends it was set to receive from Russia, or to use them for the reconstruction of Ukraine. Some shareholders—especially institutional investors—sold out over the Russian backlash, and uncertainty still surrounds the stock.
The group’s long-time CEO Patrick Pouyanné, renowned for his ability to navigate politics in service of Total’s commercial goals, isn’t one to make a fuss over nothing. It was recently revealed that Total’s choice to remain in Russia was directly backed by French president Emmanuel Macron and considered a strategic move by the French Government. Upon closure of the conflict, Total will be able to:
- sell those assets at a higher price than its competitors who sold at a loss;
- or continue operating in Russia.
That decision will depend on how EU-Russia relations stand after the war. Either way, what seemed like a loss might turn out to be a win.
Strong Operational Performance And Management Team
Since his appointment as CEO in 2014, Pouyanné and his team have done an exceptional job at improving TotalEnergies’ operations and profitability. Despite declining revenue, Pouyanné managed to grow Total’s net income margin every year from his appointment to just before COVID. Free cash flow has also compounded >9% between 2012 and 2021. The result is that the group’s total shareholder returns are the best of any of the five supermajors over the last ten years.
EU Energy Crisis Long-term
The Ukraine War marks a structural shift in the European energy market, as EU members will no longer be able to rely on Russia as a supplier of cheap gas. The continent has almost managed to replace Russia’s ∼40% share of gas imports by relying on alternative producers, mainly the US. Of course, this solution can only be temporary, as it comes at a price and with its fair share of problems.
For now, the US and other non-EU providers are benefiting, but in the long run, solutions will have to be European. TotalEnergies—a key supplier on the continent—will surely play a big role given (among other factors) its assets in Nigeria and Algeria, two of the countries expected to fill Russia’s natural gas supply gap.
In the meantime, the French energy company has already agreed to lease one of its two Floating Storage Regasification Units (FSRU) to Deutsche ReGas. Unlike new terminals, which take years to build, FSRUs can be online in a matter of months. The French government is in talks to lease the group’s second unit. These two new deals alone—among the first following Europe’s energy realignment—are estimated to bring in >€1 billion in annual revenue, as FSRU rates are up ∼55% since the beginning of the War.
At the same time, Total is investing billions of dollars in clean energy projects further aligning its goals to those of the EU. RBC Capital Markets values Total’s low-carbon business at $35 billion, $11 billion more than Shell’s in a distant second place.
Source: RBC Capital Markets, Financial Times
The stock currently trades at a 5.8x price to earnings multiple (last twelve months): an almost 5-year low which doesn’t seem representative of the solidity and growth prospects of the business. There is surely room for multiple expansions. Aside from the possible upside, which analysts estimate at 35%-40%, TotalEnergies also pays 5.6% dividend yield.
It is clear that the Total brand suffered greatly following the company’s decision to keep its Russian assets. But those assets may prove useful in the future, and it is only a matter of time before investors realize it and get over the stigma surrounding the name. As a leader in renewable energy and owner of key natural gas assets, Total is also bound to play an important role in the EU’s long-term solution to the current energy crisis.
While all oil majors have outperformed in these last three quarters, TotalEnergies remains behind. I think it is bound to catch up.
Disclosure: The author does not currently hold a position in TotalEnergies SE. This article is written for informational purposes only. It does not constitute a solicitation, offer, advice, counseling, or an investment recommendation.
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