Big Total Return through 2028 on TotalEnergies

Erik@YWR on TotalEnergies SE (TTE-PAR | totalenergie)

4/26/2025

Summary

TotalEnergies SE (Ticker: TTE.PA) presents an attractive opportunity for long-term value investors seeking a combination of income, capital appreciation, and margin of safety. Trading at EUR 52 per share, TotalEnergies offers a compelling valuation at 9.8x 2024 earnings with a 6.2% dividend yield, and management's clear strategic vision supports strong cash flow generation across energy price cycles. Under the disciplined leadership of CEO Patrick Pouyanné, TotalEnergies is transforming into a diversified, low-carbon energy major, targeting $25 billion in annual free cash flow by 2030. If achieved, this would represent 18% of today's market capitalization, implying substantial total return potential.

Thesis

1. A Unique Business Model: Integrated Power TotalEnergies stands apart from its oil major peers by aggressively building an Integrated Power business targeting deregulated electricity markets like Texas, Germany, the UK, and Brazil. Their model combines: Ownership of renewable assets (solar and wind) Dispatchable gas turbine generation Battery storage Sophisticated power trading operations This "asset mix" allows TotalEnergies to provide stable, premium-priced electricity supply and to profitably arbitrage volatile spot power prices. Integrated Power is forecasted to deliver a return on capital employed (ROCE) improvement from 10% in 2024 to 12% in 2028, and free cash flow is expected to grow at a 15% CAGR over the next four years. 2. Diversification: A Resilient Business Model TotalEnergies' earnings base is diversified across: Oil and Gas Exploration: 45% of expected 2025 operating profit Integrated LNG: 25% Integrated Power: 12% Refining and Chemicals: 12% Marketing and Services: 6% This diversification enables cash generation even under lower energy price scenarios (Brent > $50/barrel), providing a strong margin of safety. Unlike pure-play oil companies, TotalEnergies can sustain dividends, reinvestment, and share buybacks without dependency on high oil prices. 3. Management Excellence CEO Patrick Pouyanné has steadily executed a multi-year transformation, building the world's third-largest LNG portfolio and laying the groundwork for Integrated Power. Strategic patience and discipline have been key differentiators. In addition, Pouyanné has instilled a return-focused capital allocation strategy, consistently targeting high ROE and ROCE projects and returning excess cash to shareholders. 4. Strong Financial Position TotalEnergies has a low net debt position of $10 billion, giving it balance sheet strength to navigate commodity cycles and fund growth. It has also committed to returning capital to shareholders through: A dividend of EUR 3.2/share (6.2% yield) A $8 billion buyback program, equivalent to 6% of shares outstanding Shareholder returns are a key management priority, enhancing total return potential. 5. Attractive Valuation and Upside Potential TotalEnergies' valuation is compelling: 2024 P/E: 9.8x Dividend yield: 6.2% Target total shareholder return by 2028: 64% Assuming: EPS grows from $5.32 in 2025 to $7.62 in 2028 P/E expands modestly to 10x by 2028 We derive a 2028 price target of EUR 75/share (+44% upside), plus an additional EUR 10.2/share in dividends over the next four years. Projected Return Breakdown: Price appreciation: EUR 23 Cumulative dividends: EUR 10.2 Total: EUR 33.2 = +64% on the current share price Importantly, this return scenario assumes only moderate energy prices (~$60–80 Brent).

Risks

1. Commodity Price Volatility Although TotalEnergies is diversified, it remains partially exposed to global oil and gas price fluctuations. A sustained collapse in Brent crude prices below $50/barrel could pressure free cash flow and dividend sustainability. 2. Execution Risk in Integrated Power The Integrated Power business is relatively new and carries execution risk. Building and operating renewables portfolios, balancing intermittent generation with gas and battery dispatch, and trading volatile electricity markets requires significant expertise. 3. Regulatory and Political Risk Energy companies are subject to heightened political scrutiny, particularly regarding carbon emissions, windfall taxes, and regulatory approvals for projects. Regulatory changes could impact profitability in oil, gas, and renewables. 4. Currency Risk As a euro-denominated stock with global operations and dollar-linked commodities, TotalEnergies' earnings can be influenced by EUR/USD exchange rate fluctuations. 5. Competitive Pressures While TotalEnergies has a first-mover advantage in Integrated Power among major oil companies, new entrants or aggressive competition in renewable energy and trading markets could erode future returns.

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