December 7th, 2022 | 09:50 CET
TotalEnergies, Saturn Oil + Gas, Shell - Energy shares as a booster for the portfolio
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
TotalEnergies - Debt radically reduced
The Energy Information Administration projects that oil consumption could increase by 2 million barrels per day next year. In addition, China could get its economy back on track with the easing Corona measures. Both of these are news that benefit oil majors like France's TotalEnergies. The current energy crisis is creating a favorable environment for TotalEnergies' success. The Company generated a substantial USD 17.8 billion in cash flow from operations in Q3. For the first 9 months, it was at USD 41.7 billion. At the end of the year, there should be about USD 56 billion, which should be about USD 39 billion in free cash flow.
This free cash flow can be used in a number of ways. Acquisitions, dividends, share buybacks, and debt reduction are possible uses. Last year, TotalEnergies had net debt of USD 24.3 billion. After three quarters of the current year, this figure has dropped to USD 5.0 billion, corresponding to a debt-equity ratio of 0.07. Competitors Chevron and ExxonMobil cannot keep up with this and are, in some cases, twice as high. The Company currently pays out a dividend of EUR 0.69 per share per quarter, which at current prices results in a dividend yield of around 4.8%. In the last two quarters, USD 2 billion was invested in share buybacks.
Overall, TotalEnergies comes to a free cash flow yield of about 26%. Analysts are getting more cautious after the stock's rise since late September. Three analysts recommend buying, five recommend holding, and one recommends selling. The price targets range from USD 59 to USD 94. On average, the price target is USD 71.81. Currently, the share is available for EUR 57.35. When looking at the valuation, the stock is trading at only about 4 times free cash flow, which is considered cheap.
Saturn Oil & Gas - Third quarter earnings jump
A look at Saturn Oil & Gas' latest corporate presentation shows that the target of 12,500 barrels of daily production has already been reached in early December. This represents a 5,365% increase in production since the first quarter of 2021. The Viking acquisition, completed in July, was a contributing factor. In the process, the Company acquired 4,000 barrels per day of production for CAD 260 million. With this transaction, production increased by 50% and sales by 53% and adjusted EBITDA by 179% within one quarter. Management played a large part in this, hedging 2,782 of the 4,000 barrels at USD 102.65 for 2022. For 2023, 2,882 barrels are hedged at USD 92.02. The Company will be debt-free by Q3 2024.
In Q3 2022, a record average production of 10,965 barrels per day was set. Oil and gas sales also reached record levels of CAD 105.7 million. Adjusted EBITDA was CAD 50.3 million. Adjusted cash flow for the three months ended September 30, 2022, was CAD 39.8 million, equivalent to CAD 0.69 per share. Extrapolated for the year, that is CAD 2.76. How can the share price only be at CAD 2.52? On the one hand, the significant drop in oil price is leading to selling pressure, and on the other hand, investors from the last bought deal are taking advantage of high share prices to sell their shares and keep the warrants. There are currently 59.8 million shares and 42.8 million outstanding warrants and options.
There are two scenarios for the stock between now and July 7, 2023. In the first option, the share price remains below CAD 3.20 until that date, at which point 27 million warrants expire. The proportion of existing shareholders in the Company increases, and the share price should then rise. Option 2, the share price is above CAD 3.20, and the warrants are exercised. In this case, the Company receives CAD 86.4 million and can pay off most of its debts as early as 2023. Provided there are no further acquisitions, a high dividend then beckons. Regardless of which scenario occurs, it will be positive for shareholders. Those who want to get a more detailed picture of the Company should not miss the presentation by CEO John Jeffrey at the 5th International Investment Forum on December 7 at 6 pm CET. Here investors will have the opportunity to address their questions directly to the CEO.
Shell - Profits bubbling up
Shell is an attractive option for investors who want to profit from the energy transition. With the goal of net zero emissions by 2050, Shell offers renewable energy sources such as solar, wind, hydrogen, biofuels and geothermal in addition to traditional fuels. Given the possibility of a Russian oil price cap driving up oil prices, Shell's strong free cash flow of nearly USD 30 billion YTD is a major advantage. Roughly 68% of free cash flow has been distributed to shareholders this year, with about 50% used to buy back shares and 50% distributed as dividends directly to shareholders.
Despite a turbulent economic environment with lower crude oil prices and higher gas prices compared to the second quarter of 2022, the Company reported adjusted earnings of USD 9.5 billion in the third quarter of 2022 with an adjusted EBITDA of USD 21.5 billion. In addition, investments were made in the acquisition of Sprng Energy, the stake in the North Field South LNG expansion in Qatar, and the acquisition of Shell Midstream Partners in the US. The Group is thus strengthening its portfolio as part of the energy transition. The dividend is around EUR 0.24 per share.
In addition, shares worth USD 4 billion are to be repurchased in the 4th quarter, making the valuation of the share even more attractive. Currently, one share costs EUR 27.18. That puts the dividend yield at around 3.5%. The Company's valuation can be considered favorable. On January 1, 2023, long-serving Ben van Beurden will step down and make way for Wael Sawan, who has been in charge of the Renewable Energies division since 2021. It will be interesting to see whether the new CEO will provide a breath of fresh air and what his goals are.
While the two oil majors, TotalEnergies and Shell, pay decent dividends, have share buyback programs and are trying to go green by investing less in oil production, Saturn Oil & Gas is a different story. The Company is still trying to grow and has significantly expanded production in just over a year and a half. In the process, it has consistently paid attention to ESG criteria. In the foreseeable future, the debts will be paid off, and then, at the latest, the stock will jump. At its current level, the Saturn share is the most undervalued of all three candidates.
Conflict of interest
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