Should I invest in TotalEnergies?
The last few months have seen an explosion in energy prices. From gas to oil, the cost of commodities has risen unrelentingly over the past year. The cost of gas in Europe, for example, has risen almost fivefold in one year, while the cost of a barrel of crude oil has increased by more than half.
While this increase is a blow to consumers and a major contributor to the explosion of inflation in Western countries, it is also a boon for energy companies. Among them, France's TotalEnergies has been one of the big winners on the financial markets in recent months. The company presented record results in its latest earnings report. But does this mean it is worth investing in the world's fourth largest private oil and gas producer? Let's take a look.
How is TotalEnergies' share price evolving?
If you had invested in Total a decade ago, on 1 January 2012, you would have made a tidy profit as the company's share price has risen by around 30% since then. This means that if you had invested €1,000 in Total back then, it would be worth around €1,300 today. A decent performance, but still well below that of the benchmark index of the largest French companies: the CAC 40. Over the same period, the CAC 40 has risen by more than 120%.
If, in the long term, investing in Total does not seem to have been a particularly brilliant idea, it is quite different if we focus on a shorter time frame.
Since September 2021, Total's share price has risen by a staggering 40%, compared with just 4% for the CAC 40. But how does this surge in the oil company's share price reflect in the company's accounts?
How TotalEnergies makes money
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2021 was certainly a good year for Total. The French energy giant benefited fully from rising commodity prices, which enabled it to announce record results in its latest earnings report, published on February 10, 2022. The company's adjusted net profit (net profit minus items such as oil inventories and financial interests in other companies) reached $20.2 billion in 2021, more than three times its amount a year earlier.
This spectacular increase is driven by two of the company's business segments. First, oil exploration and refining, which accounts for half of Total's revenues and whose adjusted net profit has been multiplied by 4.4 between 2020 and 2021 thanks to the increase in oil prices. Secondly, with the Integrated Gas, Renewables & Power business, which includes the exploitation and distribution of natural gas as well as the production of electricity from renewable energy sources. Between 2020 and 2021, Total's profit from this business, which accounts for around 30% of its earnings, has increased 3.5 times.
However, TotalEnergies, which says it wants to devote an increasing proportion of its business to renewables, does not detail how much of its Integrated Gas, Renewables & Power profit comes from renewables and how much is due to gas revenues. It is fairly easy to imagine that the growth of this part of the company's business is very much driven by the huge increase in gas prices over the last year and much less by renewables.
A clean future for TotalEnergies?
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In May 2021, Total changed its name to TotalEnergies. This reflects a change of strategy for the company. From now on, Total no longer wants to focus solely on fossil fuels, but wants to invest in electricity and renewable energies to make them one of its growth vectors. This is a strong statement from a historic oil company, but it also raises many questions. Among them: greenwashing.
In a 2021 report, the NGOs Greenpeace and Reclaim Finance denounced a certain hypocrisy from the company, whose investments are still mainly directed towards fossil fuels. Indeed, Total has announced that it has spent 20% of its investments in renewable energies by 2021. The two NGOs also reveal in their report (in French) that in 2020, the group produced 447 units of fossil fuels against only 1 unit of renewable energy.
However, the energy group intends to scale up its gross renewable electricity capacity. It went from 1.7 gigawatts in 2018 to 35 gigawatts in 2021 (one gigawatt can supply the electricity consumption of a city of about 800,000 people). The company plans to move its renewable energy capacity to 100 gigawatts by 2030.
Although Total wants to invest more and more in renewable energies in the future, its present is still closely linked to fossil fuels and its turnover relies heavily on the evolution of their prices. What will happen when the price of gas and oil falls? Will Total's share price also fall? For the time being, financial analysts are not too worried about the company's future. Out of 24 analyses compiled by Market Screener, 18 consider the company's stock to be a buy.
Ultimately, investing in Total amounts to making two bets. The first is that the company will continue to benefit from high oil and gas prices for a long time to come. The second is that the fossil fuel giant will eventually make a successful transition to renewable energy. The decision to invest, as always, is yours.
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