Total Is Still Betting Big On Oil Despite Renewable Push

Early this year French oil company, Total, changed its name to TotalEnergies. In the summer, TotalEnergies introduced itself to the world with a slick advertising campaign claiming boldly but not incorrectly that “Energy is life…Energy is reinventing itself… The hydrocarbon producing energy giant Total is transforming itself and has become TotalEnergies” including a stylish new logo. This event made us think both of Shakespeare (“What’s in a name?”) and greenwashing at the same time. Looking at the newly branded TotalEnergies (ticker symbol TTE) from the perspective of financial analysis provides some insight into how long this new corporate transformation might actually take.

TTE is a large company with a capitalization, both debt and equity capital, of $185 billion. Consequently, it will take a lot of prospective investment in renewables to transform TTE away from being simply an oil and gas producer. In the past few years, TTE has spent approximately $15-20 billion per year in capital expenditures while claiming annual depreciation and amortization expenses of roughly the same amounts. In other words, TTE has been spending enough money to simply maintain its reserve position, replacing a constantly diminishing reserve base with more,  newly discovered reserves. Looking forward the company still projects capital spending of maybe $15 billion per year of which perhaps $3 billion will now be dedicated to investments in renewables and other generation projects. (In comparison, Enel, the Italian utility, with a  smaller capital base of about $120 billion, plans to spend $8 billion per year on renewables.)

If TTE’s management follows through and only spends enough on new reserves and plan to offset the declining value of old reserves and plants (wells do go dry after a while), there’s not much likelihood that in five years TTE’s existing business will be much larger than today. Maybe somewhat different in its business mix but not substantially larger. (That investment, of course, could be more or less profitable depending on oil prices and product mix.) So unless the management changes directions again the growth story here has to come from non-oil and gas investments, over the long term. However, these new, greener businesses will only add about 2% a year to the investment base. ($3 billion a year of incremental investment doesn’t rapidly move the needle on a $185 billion corporate behemoth.)  Management will argue that it can amplify the contributions of the new businesses by selling shares to the public or others once in operation. That is, they may choose to capitalize the new, “green” expected income streams and collect cash upfront as soon as possible. That, of course, brings profits upfront but makes the long term less attractive. Our best guess is that TTE receives no more than 10-20% of its net income from these new businesses within five years unless it sharply ramps up proposed spending for new projects, substantially lowers spending on oil and gas, or maybe both.

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In sum, we are not sure what Shakespeare would have said about the name change, but spending a substantial $3 billion per year does not look like mere greenwashing either. The problem for today’s energy investors is whether TTE’s new policies actually will make much of a difference. An investor worried about the decline of oil and gas will not buy TTE stock, despite the substantial and growing green energy investments because the latter do not amount to the proverbial hill of beans in terms of the overall TTE business. The investor looking for a play on oil and gas will certainly not buy TTE for its still modest renewables operation.

Some companies are contemplating hiving off oil, gas, and coal operations, selling them to other companies or giving them to shareholders in order to reduce the corporate carbon footprint. That does not reduce greenhouse gas output but instead simply hands off the problem assets to a frequently less scrupulous owner. But a full corporate separation or spinoff between legacy oil and gas versus green investments would allow management to focus on very different lines of business and may reduce pressure from increasingly vocal shareholder activists who are now pressuring large pension funds and other major investors. We doubt TTE plans to spin off its oil and gas business although maybe renewables will become valuable enough to monetize at some point in the future. So if they remain fairly insignificant from an overall corporate perspective for the foreseeable future what is the purpose of these new ventures?   

TTE’s management, we believe, would argue that its new corporate direction helps to reduce greenhouse gas emissions. This is literally true although another firm, perhaps one more specifically devoted to these new ventures, would probably have made many of those same investments. As a result, TTE’s involvement here will likely make little difference incrementally to the overall emissions picture. And there is no shortage of investors seeking to put money into renewables. Some people, in fact, have even argued that renewables will become economically even less attractive because of all the relatively recent big oil company money now quickly entering the field to appease investors. TTE might say that renewable investments are part of its strategy to reach zero emissions by 2050. But the real reductions that TTE talks about, from its oil and gas operations do not require specific investment in new energy production by TTE, either. TTE could also argue that renewables will provide a decent and steady return, so why not invest? That’s an okay strategy, better than making bad investments. 

In the end, we get the feeling that many oil company managers want to give the impression that they are trying to help solve one of the great pollution problems of our era regardless of their initial culpability. Nor do they want to look and sound like troglodytes, either. But at the same time, they don’t appear to want to do anything that requires tough decisions about what remains their principal business, oil, and gas. 

By Leonard S. Hyman and William I. Tilles

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