A few years ago I sold ExxonMobil (XOM -0.88%) for tax reasons and replaced it with TotalEnergies (TTE 0.58%), a move that I'm still quite happy I made. With oil and natural gas prices recovered from 2020 lows, however, investors need to think about downside protection in the highly volatile energy industry. And then there's the clean energy future to worry about. I think TotalEnergies is strongly positioned to deal with both issues.
Preparing for the future
Investors have a habit of getting caught up in market moves, to the upside and downside. Oil plunged during the early days of the coronavirus pandemic as demand for energy waned. At that point it seems like investors thought energy prices would never recover. They did, rising to over $100 a barrel just a couple of years later as demand came back. Integrated energy stocks fell sharply and recovered, as you would expect. Smaller, more-focused energy producers witnessed even larger stock price swings.
Today energy prices are still fairly high and energy companies are posting material profits. Exxon, for example, reported that adjusted earnings per share more than tripled year over year in the first half of 2022. TotalEnergies net income increased 92% year over year over the same time span. That makes it seem like Exxon is doing much better, but there's other factors to consider here.
Most notably, Exxon isn't pushing as hard on the clean energy front as TotalEnergies. Clean energy isn't as profitable as oil when oil prices are high, so that's a drag on TotalEnergies' business. But if you look over the long term, the biggest threat to an oil company is renewable power. Thus, TotalEnergies' willingness to embrace this disrupting technology makes the long-term picture far more clear. At this point, management is putting a third of its capital budget into the clean energy space, which is a testament to its commitment to become an even more material clean energy player.
This too shall pass
The interesting thing here is that peers BP and Shell have also made material commitments to clean energy. Only they did so in the difficult oil market of 2020 and paired those strategic announcements with dividend cuts. TotalEnergies, which announced its clean energy intentions at roughly the same time, is making this transition without having to cut its dividend. It seemed risky not to reset the dividend in 2020, but with oil prices now recovered, that shareholder-friendly move looks like a no-brainer.
And yet there's a fact that has to be addressed -- oil prices are highly volatile. The news is good today, which has investors excited about energy stocks. But energy prices will eventually fall again. That's the typical pattern in the energy sector. It's one of the reasons why more conservative investors should favor integrated energy stocks, since their diversified businesses tend to provide some offset to volatile energy price swings. However, even for TotalEnergies, the good times are not going to last forever.
Which is why it's important to note that the company expects to have zero net debt by the end of 2022. That basically means that it has enough cash to pay off substantially all of its debt, putting TotalEnergies in a fantastic position balance sheet wise. Moreover, as it looks to transition its business toward cleaner alternatives, it has upgraded its oil drilling assets. The company's breakeven oil price is now less than $25 per barrel. That means oil could fall materially and TotalEnergies will still be able to profitably produce the vital fuel.
All in, TotalEnergies probably isn't the best way to play oil's ups and downs. And it probably isn't the best way to play the clean energy revolution. However, it is, in my opinion, one of the best ways to play the transition from today's energy market to the one that will exist in the long-term future. And I get to collect a hefty 5.1% dividend yield along the way (note that foreign taxes have to be paid on the dividend, since TotalEnergies is French).
I view TotalEnergies as something of a punt in a volatile sector to which I want some exposure, but where I also want to limit my risks. And while other energy stocks have performed better amid rising oil prices, I'm just as happy knowing that I don't have to keep my eye on the changes taking shape on the clean energy side of the industry because management has that covered for me. If you are a conservative income investor looking for energy exposure, that's a strong combination.