TOTAL ENERGIES: PREPARED FOR THE UNKNOWN

Donald Rumsfeld, who held just about every major Federal Government cabinet post over a decades long career in government and business, is renown for the following observation:

“Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.”

Many people would say that one of the “Unknown, unknowns,” of the Rumsfeld era was Rumsfeld himself; his competence as Secretary of Defense is very much up for debate among historians. However, Rumsfeld may have fared better as an investor. His philosophy is quite useful when we evaluate companies that exist in rapidly changing industries. Those that can quantify and measure knowns and unknowns are those who will benefit from change, rather than be destroyed by it. Total Energies may just be one of those companies. In a rapidly changing world Total may be better positioned, and better priced, than its peers.The advantage will fall to the investor who best masters the known knowns, the known unknowns, and most importantly, the unknown unknowns. 

By The Sick Economist 

Total Energies, SE, is a global energy powerhouse. Although it is based in France, Total has operations all over the world. The company has traditionally focused on oil and gas, but today the firm also has a rapidly growing renewable energy portfolio. In a world of sky high valuations (the average Price to Earnings ratio of the S&P 500 today stands at 28, a historical high) Total stands out for a bargain basement P/E ratio of just 7. Companies valued at this low multiple of earnings are typically close to going out of business. Total, however, appears to be quite robust. 

The company’s total debt is just $54 billion compared to total assets of $279 billion. The firm pays a meaty 5.5% dividend, but that dividend represents just 36% of the company’s total profits. In fact, the company’s net profits have been growing steadily for years. Most analysts would say that  Total Energies is in a very comfortable financial situation.  So why is the stock market valuation so low? 

In one word: change. With the advent of renewable energies and electrification, the world of energy is changing. And change is scary to investors. But sometimes change is good. Let’s examine the facts. 

The Known Knowns 

There are two facts that we know for sure. First, the world of energy is evolving. Second, the world of energy is growing. Growth is attractive, but change is scary. But the company best positioned to manage change, will also be the company best positioned to benefit from all of that growth. 

After a century of almost exclusive reliance on fossil fuels, primarily coal for electricity and petroleum for mobility, renewable energy and electrification is changing the game. Lately, more than half of all cars sold in China, the world’s largest auto market, came with a plug. Even in the United States, close to 10% of new car sales were electric this fall. 

Big change is also happening in the world of electricity generation. Great Britain, the pioneer of 19th century coal that powered the Industrial Revolution, just closed its last coal fired plant. In Germany, more than 50% of all energy now comes from renewable sources.  

On the surface, these facts would seem to bode poorly for a company whose traditional bread and butter is oil. But, at the same time, we are witnessing another “known known” that could represent massive opportunity .

The AI revolution is generating ravenous demand for energy of all types. For decades, electrical generation was generally a stagnant business. But, suddenly, a growing cornucopia of data centers just can’t get enough electricity. This provides impressive growth opportunities for the right kind of power providers. Is Total Energies the right kind of power provider, or just a dinosaur providing yesterday’s energy sources? 

The answer lies firmly embedded in the realm of the “known unknowns.” 

The Known Unknowns

So it’s a known known that the world is transitioning away from fossil fuels towards more renewable sources of electricity. But the big known unknown is: just how quickly is this happening? 

Experts present wildly different visions of just how this energy transition will play out. The International Energy Agency (IEA) sees oil use peaking in the year 2030, with demand dropping precipitously thereafter. OPEC, on the other hand, sees oil consumption continuing to grow all the way until 2050. Many experts provide viewpoints somewhere in between. 

A simple examination of the facts also yields conflicting results. Even though electrification is advancing much faster in China than in other places, China still sells a huge number of  “plug in hybrids,” which still require some oil on a regular basis. Plug in hybrids, and also just regular battery/gasoline hybrids, both of which require oil to some degree or another, are also popular in the United States, currently outselling pure electric vehicles. And of course, oil is a key ingredient in many, many of the plastics, lubricants and industrial chemicals that we all use every day. So, oil demand is likely to stagnate and eventually drop, but it’s far from clear how quickly that will happen.

The picture with electricity generation is not much more clear. As discussed above, renewables have advanced quickly, and coal use has shrunk dramatically, but natural gas, especially liquified natural gas, continues to make up a very large part of global energy generation. In fact, after Europe “kicked the habit” of gas piped in from a belligerent and shunned Russia, LNG has experienced something of a bonanza. 

It’s also unclear exactly how “dirty” natural gas is, or how “dirty” it will be. Although the fuel source does generate some carbon emissions, it is widely believed that gas emits much less than coal. Additionally, new technologies are on the cusp of widespread commercialization that might dramatically shrink the carbon footprint of natural gas. 

Therefore, this leaves the forward thinking investor with a vague and hazy picture of the future. We know that change is happening, but it’s unclear the speed and scope of the change. 

This is where Total Energies really shines. Unlike many other oil supermajors, Total boasts a diversified revenue stream, with a concrete plan to further diversify as we move through time. Currently, only about 50% of Total’s revenue come from oil. An additional 40% comes from Natural Gas, and about 10% comes from renewable energy production such as solar farms and windmills. By 2030, the company plans to grow its green energy portfolio to at least 20% of revenue, with oil accounting for only 40% of revenue. By this date, the firm’s total carbon emissions will have been reduced by 25%, and the carbon emissions that emanate directly from it’s industrial operations will have been reduced by 40%.  The company plans to quadruple its renewable energy generation by 2030. Of that, the power sources are nicely split between wind, solar and batteries. A lot of this growth is far away from the onerous regulation and socialist policies of Europe. In fact, Texas and India are Total’s fastest growing markets.  

So it seems like Total is very well positioned to profit from today’s energy realities while also preparing for tomorrow’s opportunities. But still, we see that rock bottom PE ratio of just 7, and wonder: what are the risks that are scaring away investors? 

The Unknown, Unknowns

Most dividend investors, the kind of people who are traditionally attracted to energy stocks, dread unknowns. They recoil from change like a vampire recoils from the light. But given the fact that energy needs just keep growing, these fearful traditionalists could create opportunity for the more level headed investor. 

What if the energy transition occurs much quicker than we thought? What if a new kind of car battery debuts tomorrow that offers drivers a thousand miles on a single charge? What if China somehow succeeds in quintupling its solar panel production overnight? What if radial leftwing governments ban all fossil fuels with little warning?

In all of these kinds of situations, Total is the best positioned of any major energy company. The business has what analysts call a “fortress balance sheet,” which allows the firm to benefit from maximum resilience and safety. 

As mentioned before, the company only has modest debt compared to its massive assets. And investors who buy today are buying at the right price. At just seven times annual earnings, as long as the company remains profitable for the next seven years, every year after that represents pure profit for today’s investors. 

Total has also locked in a very low cost of operations. Lately oil prices have been low due to weak demand out of China. Whether this is purely temporary based on the current economic malaise that China is enduring, or whether this is the beginning of a more long term slide in prices due to falling demand, Total is prepared. As long as oil prices remain above $50 a barrel, the company estimates that it will still be earning enough profit to maintain its substantial dividend.  Oil prices have floated between $70 and $80 a barrel of late. 

Total’s low debt load would mean that the firm still has substantial power to step up investments in renewable energy if the transition away from oil and gas proceeds more quickly than planned. In fact, a sustained period of low prices could actually equal big opportunity for a company like Total, which will benefit as weaker players drop out of the market. 

And the unknown of unfriendly governmental policy? Total is just French in name. As mentioned before, the company has operations in dozens of different countries, and most of the growth is in energy hungry, growth oriented jurisdictions, not in Europe. 

Donald Rumsfeld may not have been a very good Secretary of Defense. But Warren Buffet is renowned as one of the best investors of all time. And he coined a famous maxim, “Be greedy when others are fearful, and fearful when others are greedy.”  Right now, too many mainstream investors are fearful of the energy sector in general, and fearful of Total Energies in specific. It just may be time for the wise dividend investor to get a little greedy.