TotalEnergies: Looking Beyond Q4’s One-Off Charges (NYSE:TTE)

Investment Thesis

TotalEnergies (NYSE:TTE) is a French multinational integrated oil and gas company. Even though natural gas prices have come down significantly in the past several weeks, TTE also has meaningful exposure to the strong and stable oil market.

Furthermore, despite TTE’s upcoming $6 billion worth of charges expected for Q4, investors would do well to look past this and think further afield.

What’s more, by my estimates, TTE’s dividend yield in 2023 could reach 6%. This is a balanced analysis to help investors think about the opportunity afoot.

TotalEnergies’ Diversification Discussed

The graphic that follows is a reminder of TotalEnergies’ operating segments.

What we see above are TotalEnergies’ diverse segments all contributing a considerable amount to its bottom line.

Furthermore, what we’ve seen in the past several weeks is a material amount of weakness in the gas market, with gas prices in Europe and the US falling on the back of the widely reported unseasonably warm weather.

Consequently, TotalEnergies’ iGRP (its Integrated Gas, Renewables & Power segment), which saw its operating income increase 130% y/y in Q3 isn’t likely to see an equally strong performance in the early parts of 2023.

In fact, in the early part of 2023, TTE’s iGRP is highly likely to end up posting negative y/y growth comparisons on its operating income line.

However, given that TTE also has a fair amount of exposure to Exploration & Production, together with the fact that the oil market now appears to be poised for near-term strength, this will ensure that TTE will still be able to post strong results, even though one of its largest business units, iGRP, is having to navigate significant headwinds right now.

To sum up the thesis, for investors that are bullish on energy, but don’t want to embrace the risks of a pure-play energy company, I argue that TTE provides investors with a nice healthy balance.

And this leads me to my next point, many one-off charges coming in Q4 2022 results.

Capping 2022 With Writedowns

2022 has been a strange year for energy markets. With plenty of tailwinds to its back, energy has been a winner.

That being said, TTE’s Q4 2022 bottom line will be weighed down by two important charges.

In the first instance, TTE is having to say goodbye to its 20% holding of Novatek. This will see TTE writedown its $4 billion stake in the Russian company. This figure was initially $3.7 billion but has now been updated.

Additionally, sources yesterday reported that TTE would see a $2.1 billion hit in Q4 2022 from EU and British windfall taxes.

This implies that in Q4 TTE will see approximately $6 billion worth of charges coming from its income statement.

Now, to be clear, even if we didn’t have a clear view of the total amount of charges we’d see this quarter, anyone closely following this space would have already known that some level of charges were coming and so this, I believe is already priced in.

So, now, we progress to the actual icing on the cake for this investment thesis.

Getting Paid With Dividends

By my estimates, when TTE reports its Q4 2022 figures, we’ll see its net debt fall below $5 billion. This will mean that its balance sheet is now in a strong position, and will allow it to continue to increase its dividend by the end of 2023.

While I don’t expect a large increase in dividends this year, a 5% jump would be more than enough to make this stock attractive.

Note above how TTE increased its dividend over time. Also, recall that when TTE exited 2022, it paid out EUR3.56 base plus special dividends.

This means that all together when all is said and done for 2023, I am inclined to estimate that EUR3.74 could be on the table for investors, which equals approximately 6.3% dividend yield.

The Bottom Line

TotalEnergies is well placed for a strong oil market, particularly given that its stock is cheaply valued.

On the one hand, I highlight that there are significant changes expected in the upcoming results. But on the other hand, investors would do well to look beyond this, and in the coming twelve months, over 6% dividend yield could be on the cards.

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