TotalEnergies: The Upstream Future Is Bright

TotalEnergies (TTE) is probably one of the more "risk-on" majors that I follow. But taking those risks appears to have paid off big time for this company. Management has for some time reported a lot of major discoveries (mostly offshore). But it is probably time to put this major on an investors radar because it will not take that many years before some of these major finds begin production. Even for a company the size of Total, several of these projects are likely to prove to be significant.

It can take anywhere from five to seven years for a discovery to become a producing, cash flow positive entity. If that discovery is in a place like Suriname where there was no industry before, it could take a while longer.

Investor Update On Discoveries

Management recently updated investors on discoveries. As shown below, Total has a "hot hand" that has attracted attention for some years now when it comes to major discoveries. The cash flow from these major projects is years away. But investors may want to get in on this early as there is no telling when the market will think things are far enough along to warrant a higher stock price.

Of the original presentation, The Suriname and the Namibia discoveries are attracting the most attention. That is probably because both have the possibility of becoming the most significant discoveries in the portfolio. The Suriname discovery will likely to progress to production by 2028.

That has many neighboring leaseholders waiting on results. John Hess, CEO, Hess Corporation (HES) has mentioned several times in both "road shows" and answering questions, that this discovery appears to be gassier than is the case with the Exxon Mobil (XOM) established production in neighboring Guyana. Nonetheless he also thinks the odds are good that this discovery will indeed increase the area of oil and gas deposits tremendously. Time will tell if those comments prove out.

The big deal here is that the neighbors are waiting on results as several of the partners in Guyana also have blocks in Suriname to explore and potentially develop with some acreage that could be "on trend" with the Total discoveries and therefore thought of as potentially lower risk exploration.

Total also has another major discovery in Namibia. Namibia is one of the more modern countries in Southern Africa with a very well-developed infrastructure that far exceeds the typical country on the continent. The government itself is likewise amazingly stable. Therefore, this major development has far more going for it than is the case for much of the continent before even the first production begins. One of the appraisal wells was not commercial. But that happens in this business until the field is "figured out".

Diversification

Like any major, Total is involved in most parts of the world. It also goes to places where other industry players would likely not be. Total has, for example, a very long history in Iraq and is also in Nigeria. When I see names like that, I become very thankful for diversification.

Offsetting some of those areas are activities in Europe and of course the United States.

Costs

Total has transformed the cost structure tremendously since I first covered this company years ago. One of the big changes is a far lower cost structure.

As a result of this, like Exxon Mobil, there are now continuing goals to lower costs and increase company profitability. This could end up allowing consumers a long period of time of cheap energy. These periods happened before (like in the 1980's for example). All the cost savings I report throughout the industry appear to indicate that another low-cost period is on its way.

As indicated in other slides, management has tremendously improved the debt rating over what it once was. Combine that with the exploration proficiency and this will be a formidable company within a few years if it is not already.

Finances

Finances have improved tremendously from a few years ago. The company has noted that the debt rating is now an "A" and management has a goal to get that to "AA".

The dividend is backed by a very low level of debt and a decent cash balance. If the company were to cut the dividend (although the presentation above strongly hints that will not happen) that dividend cut would likely be restored as conditions causing such an action abate.

Many times, the difference between a dividend cut made by a strong company like this one and one that is in financial hot water, is that the dividend cut by a stressed company is likely to not be restored anytime soon.

The projects the company has on its plate combined with the financial strength and cash flow guidance shown above would lead an investor to believe that this company will head towards a growth and income play. Such a company would have a total return, including the dividend in the (probably) low teens long-term.

Total management, like Exxon Mobil management is transforming from a basically stagnant performance to something far more dynamic in the future. The above guidance is of course subject to industry conditions and likely will be adjusted along the way.

Large companies do not generally make a fast switch from just a dividend entity to a growth and income play. But it is very clear that this company has some very profitable plays on its plate.

It is also clear that a company that goes for an "AA" rating is also evaluated on the performance throughout the business cycle. More than the ability to repay debt is part of that evaluation. Generally, companies in a commodity industry like this one, are not successful just "staying put". Usually. some growth is needed to maintain that "AA" rating that management is going for. That growth often means that the change necessary to preserve the competitive place (which in this case is pretty high) will take place. Generally, that does not happen when a company tries to "tread water".

Green Energy

Just about any European company will have a presence in renewable or green energy. This one is no exception.

Management mentioned the specific plans in both the second quarter press release and the conference call about the renewable energy division growth prospects. This particular strategy will vary a fair amount from any guidance because there is no telling when particular goals can be acted upon, or countries decide when to help fund major projects. This before politicians have a change of heart. Overall, this one is the most unpredictable beyond a very short term. Europe in general is a lot more committed towards renewable energy than the United States. That can be good or bad depending upon your personal beliefs.

The key is that Total management is examining the various proposals and making sure that the company makes money on this venture. The main business is clearly going to be oil and natural gas (and related products).

The chemicals divisions of the integrated majors really do not get any credit for the materials made by these divisions that goes towards the green revolution. Therefore. this company has some tight criteria to own businesses that do count has migrating towards the green revolution (in this case renewable energy as in electricity).

Management has so far been successful in making sure that relatively small division is profitable.

But the major consideration for me, is that oil and gas are going to be the lion's share of the business. Much of the time, many of these groups that are "gung-ho" on renewables end up settling for a transition that heads first to natural gas because natural gas often is a fuel that reduces pollution up to 20%. It definitely is not the end of the transition. But right now, it is a logical next step that most (even if grudgingly) accept.

Key Takeaways

This company is heading towards a period of growth and income. It is heading in that direction with a vastly improved balance compared to when I first reviewed this company a few years back.

Management has some darn good upstream projects on its plate and likely has supporting projects from other divisions as well.

Because of all these projects, the dividend is likely to do very well long into the future. Currently the company is suitable as an income play for those investors that feel the dividend return is decent. But that will change for the better over the long-term (probably sooner rather than later). At the very least it is probably time to do some due diligence on this major because a lot has changed. As a strong buy, this company is suitable for a wide variety of investors.

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