In 2020 I sold ExxonMobil (XOM -2.78%) and bought French energy giant TotalEnergies (TTE 1.10%), then known just as Total. There were tax reasons for the move, but also a desire on my part to own an oil stock with a better defined clean energy plan. Halfway through 2021, I still think TotalEnergies is the best option for investors in the oil space. Here's why.
Knowing where you stand
With the world starting to reopen for business, oil demand has picked up again. That's been good for all of the energy sector's major players. However, it could obscure some of the important takeaways from events in 2020.
For example, TotalEnergies repeatedly noted that it recognized the value of dividends to its investors and promised that it would be able to support the dividend so long as oil averaged around $40 per barrel. European peers Royal Dutch Shell (RDS.B) and BP (BP -0.38%) both cut their dividends in the face of market adversity. And while Chevron and Exxon each held the line, they didn't provide the "line in the sand" for investors to monitor that TotalEnergies did.
Image source: Getty Images.
With oil well above the $40 level today, investors are paying attention to upside dividend potential and not downside risk. But both are important, given that oil is a highly volatile commodity prone to swift and often dramatic price swings. In fact, in early 2020 the price of oil plummeted at least partly because of a rift within OPEC that just happened to coincide with the pandemic. Although that situation was resolved, OPEC is again seeing troubling infighting today as the industry recovery gains steam, a fact that could easily derail oil's price gains.
Thus, TotalEnergies' dividend stand in 2020 still provides an important downside marker to monitor. Hopefully it won't be needed, but the world is not back to pre-pandemic normal yet. And even if it does get there soon, there's still energy sector risks that could upend things in a very bad way. If you believe in safety first, TotalEnergies has a leg up on other dividend options in my opinion.
Changing with the times
But that statement really has to go hand in hand with TotalEnergies' efforts on the clean energy front. Chevron and Exxon simply haven't been as active here. In fact, TotalEnergies has been buying electricity-related assets for years, building up its experience in what will be an increasingly important business in the years ahead. Effectively, it has been using its core oil and natural gas operations to slowly shift its portfolio along with society's move to get green.
The pace of change has picked up notably over the past year, with TotalEnergies clearly outlining its plans to adjust with the times. Specifically, the oil giant expects its "electrons" division to grow from 5% of its business to 15% between 2019 and 2030. However, it also plans on growing its carbon business, with expansion in its natural gas operations and contraction on the oil side.
BP and Shell are more aggressively shifting away from carbon, and Chevron and Exxon have yet to really outline major clean energy plans. I like the strong "all of the above" theme at TotalEnergies as well, since energy transitions take time to enact and the world's demand for power remains high.
But here's the thing: TotalEnergies is clearly willing to be flexible. At a recent industry conference, the company's CEO stated that it would work to align itself with more aggressive clean energy standards if they were enacted by the EU. You could argue that the company wouldn't be given a choice in the matter. But the fact that TotalEnergies is taking a realistic approach in an environment that is quickly changing gives me an additional layer of comfort.
Exxon, as a counterpoint, has fought the idea of change to the point where dissident shareholders were able to get three outside board members elected. I expect TotalEnergies' willingness to work with the broader community on the clean energy front will lead to better, or at least less contentious, outcomes.
TTE Dividend Yield data by YCharts
And all of that comes with a fat 7.3% dividend yield that's well above what is being offered by its peers. To be fair, I don't expect TotalEnergies to increase the dividend anytime soon as it focuses on paying down debt. However, a high current yield is a good enough offset for that in my eyes, given that I am reinvesting the dividends.
Not perfect, but...
TotalEnergies won't be right for everyone, but I think it provides a good balance of risk and reward in an industry that's facing major changes. The end goal for the company is really to ensure that it remains a viable business over the long term and manages to continue to reward investors with generous (and consistent) dividends along the way. That's something that I think Shell and BP have failed to do.
And while Exxon and Chevron have continued to pay dividends, they aren't nearly as far along with regard to adjusting their businesses to a changing world. So, all in, TotalEnergies is still my top oil pick.
