TotalEnergies Defies the Trend: Low-Carbon Investments Prove Profitable

In an era marked by the hesitancy of numerous oil and gas conglomerates to fully embrace the energy transition, TotalEnergies is unmistakably conveying a profound message: investment in low-carbon energy can indeed yield substantial profits. The company’s recent decision to elevate the target return on capital employed (ROCE) for its “Integrated Power” division, encompassing renewable energy sources, from 10% to 12% at the close of September has garnered widespread attention from investors. Amidst a landscape still predominantly dominated by fossil fuels, TotalEnergies is demonstrating a sustainable pathway forward.

The conundrum of relinquishing the coveted title of “king of oil,” a source of staggering profits and hefty dividends for shareholders, presents a complex dilemma for many oil and gas majors. Some, such as Shell, have opted to persist in oil production, prioritizing profitability, albeit leading to resignations among employees disheartened by what they perceive as an environmental backtrack. A few major players, instead of committing to an unequivocal transition, seem resolute in extracting every last lucrative drop of hydrocarbon.

Nonetheless, TotalEnergies’ recent financial results, unveiled to shareholders on September 27, furnish compelling evidence that investments in low-carbon energy can be a highly lucrative endeavor. While the company remains far from abandoning hydrocarbons, its accomplishments in the realm of renewable energy have instilled a newfound confidence among long-term investors.

In the third quarter, TotalEnergies elevated its target ROCE for the “Integrated Power” division, encompassing non-oil and gas activities, from 9.9% to 10.1%. A higher ROCE signifies an augmented ability to generate profits relative to the capital invested. However, it’s crucial to note that the ROCE for oil stands at an astonishing 18%, with liquefied natural gas (LNG), a highly polluting fossil fuel, boasting an even more substantial 24% ROCE. TotalEnergies intends to intensify its endeavors in the LNG sector.

The “Integrated Power” division incorporates not only renewable energies but also hydrogen, CO2 capture and storage, and fossil gas-fired power plants. Analysts contend that the inclusion of fossil gas-fired power plants doesn’t significantly skew the picture, as this sector has exhibited stability for several years. The real growth, he asserts, is emanating from renewable energies.

Several factors underpin TotalEnergies’ success in the renewable energy sector. The company instituted investment guidelines for renewables as early as 2017, allocating between 1.5 and 2 billion dollars annually, positioning itself ahead of competitors. Strategic acquisitions, including Direct Energy, SunPower, and Saft Batteries, have further solidified its position, with a preference for solar power over offshore wind power.

While many companies that ventured into offshore wind power are grappling with inadequate negotiated prices, TotalEnergies remains discerning in its approach. Furthermore, its robust financial standing enables it to secure loans at more favorable interest rates than some competitors, consequently reducing the overall project costs. Approximately 30% of its electricity is sold at spot prices on power exchanges, affording the company the opportunity to capitalize on escalating prices and market volatility.

TotalEnergies appears to be outpacing its competitors in the realm of renewable energy. For instance, BP aspires to achieve up to 8% ROCE on renewables, excluding debt effects, while Shell sets its sights on returns exceeding 10%, though it has yet to reach this target. Nevertheless, an industry-wide shift toward the imperative energy transition is indisputable.

Presently, the oil and gas sector trades at a price-to-cashflow ratio four times higher than that of renewable energies. This lower ratio suggests diminished market confidence in the company’s prospects. TotalEnergies, nonetheless, intends to funnel $4 billion annually into its Integrated Power division and aims to achieve positive net cash flow by 2028.

However, it’s imperative to acknowledge that TotalEnergies, while a leader among oil majors in low-carbon investments, remains heavily reliant on fossil fuels, with investments in oil and gas exceeding $12 billion by 2022—three times more than in renewables. In comparison, Shell invests six times more, BP invests 14 times more, and Equinor invests a staggering 32 times more in fossil fuels, according to a recent report by the NGO Reclaim Finance.

TotalEnergies’ voyage towards a sustainable energy future represents a monumental stride in the right direction. While challenges continue to abound, the company’s steadfast commitment to profitable low-carbon investments serves as an encouraging exemplar for an industry in the throes of transformation.

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