Total still relies heavily on oil despite the surge in renewable energies
At the beginning of this year, the French oil company Total changed its name to TotalEnergies. In summer, TotalEnergies presented itself to the world with a clever advertising campaign boldly but not mistakenly asserting that “Energy is life … Energy is reinventing itself … The energy giant Total hydrocarbon producer is transformed and has become TotalEnergies “with a new stylish logo. This event made us think of both Shakespeare (“What’s in a name?”) And greenwashing at the same time. Examining the new TotalEnergies brand (ticker symbol TTE) from a financial analysis perspective provides insight into how long this new business transformation actually takes.
TTE is a large company with a capitalization, both in debt and equity, of 185 billion dollars. Therefore, it will take a lot of potential investment in renewable energy to make TTE a mere producer of oil and gas. Over the past few years, TTE has spent around $ 15-20 billion a year on capital expenditures while claiming annual depreciation and amortization expenses of roughly the same amounts. In other words, TTE has spent enough money to simply maintain its reserve position, replacing a steadily shrinking reserve base with newly discovered reserves. Going forward, the company is still planning capital spending of around $ 15 billion per year, of which perhaps $ 3 billion will now be spent on investments in renewable energy and other production projects. (By comparison, Enel, the Italian utility, with a smaller capital base of around $ 120 billion, plans to spend $ 8 billion a year on renewables.)
If TTE management follows through and spends only enough on new reserves and plans to compensate for the declining value of old reserves and factories (wells dry up after a while), it is unlikely that in five years, TTE’s existing activity is much larger than it is today. Perhaps somewhat different in its mix of activities, but not significantly bigger. (This investment, of course, could be more or less profitable depending on oil prices and product line.) So, unless management changes direction again, growth here must come from non-investment. oil and gas, long term. However, these new, greener businesses will only add about 2% per year to the investment base. ($ 3 billion a year in additional investment does not quickly advance the needle of a $ 185 billion giant.) Management will argue that it can amplify the contributions of new companies by selling shares to the public or to others once in business. That is, they can choose to capitalize the expected new “green” income streams and collect cash as soon as possible. This, of course, brings initial benefits but makes the long run less attractive. Our best guess is that TTE does not receive more than 10-20% of its net income from these new activities within five years, unless it sharply increases proposed spending for new projects, significantly reduces spending by oil and gas, or maybe both.
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In summary, we don’t know what Shakespeare would have said about the name change, but spending $ 3 billion a year doesn’t sound like simple greenwashing either. The problem for energy investors today is whether TTE’s new policies will actually make a big difference. An investor worried about the decline of oil and gas will not buy shares of TTE, despite the substantial and growing investments in green energy, as these do not represent the proverbial hill of beans in terms of overall economic activity. TTE. The investor looking for an oil and gas game will certainly not buy TTE for its still modest operation in renewables.
Some companies are considering separating from oil, gas and coal operations, selling them to other companies, or giving them to shareholders in order to reduce the company’s carbon footprint. This does not reduce the production of greenhouse gases, but simply hands the problematic assets to an often less scrupulous owner. But a complete split or split between legacy oil and gas and green investments would allow management to focus on very different lines of business and could reduce pressure from increasingly vocal militant shareholders who are now doing pressure on large pension funds and other large investors. We doubt TTE plans to part with its oil and gas business, although renewables may become valuable enough to be monetized at some point in the future. So if they remain fairly insignificant from the overall business perspective for the foreseeable future, what is the point of these new ventures?
In our view, TTE’s management would argue that its new corporate orientation contributes to reducing greenhouse gas emissions. This is literally true although another company, perhaps a company more specifically dedicated to these new ventures, would likely have made many of those same investments. As a result, TTE’s involvement here is likely to make little difference in the overall picture of emissions. And there is no shortage of investors looking to invest in renewable energy. Some people, in fact, have even argued that renewables will become even less economically attractive because of all the relatively recent money from the big oil companies now quickly entering the field to appease investors. TTE could say that renewable investments are part of its strategy to reach zero emissions by 2050. But the actual reductions TTE is talking about in its oil and gas operations also do not require specific investment in new production. energy by TTE. TTE could also claim that renewables will provide a decent and stable return, so why not invest? It’s a good strategy, better than making bad investments.
In the end, it feels like many oil company executives want to appear as though they are trying to help solve one of the great pollution problems of our time regardless of their initial guilt. They also don’t want to look and look like cave dwellers. But at the same time, they don’t seem to want to do anything that requires tough decisions about what’s left of their core business, oil and gas.
By Leonard S. Hyman and William I. Tilles
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