A Total petroleum refinery in France.
(Photo by Damien Meyer/AFP via Getty Images)
Oil majors may not be the most obvious choice for renewable energy-focused investment, but that may be changing.
On Wednesday, the chief executive of Royal Dutch Shell announced that the group would accelerate its plan to cut greenhouse gas emissions, two weeks after a Dutch court found the oil major partially responsible for climate change. Meanwhile, BP is building out offshore wind energy in the U.K., and both Exxon Mobil and Chevron face intense pressure from shareholders to pivot towards a low-carbon future.
And now, French oil major Total is an attractive bet for investors looking to capitalize on the shift toward renewable energy, said John Gerdes, managing director of equity research and trading firm MKM Partners.
MKM initiated coverage of Total on Wednesday, giving the stock a buy rating and a target price of $70, calling it a “consummate global, low-carbon evolving, integrated energy company.”
Total’s U.S.-listed shares—the company’s stock is also traded on the Euronext and is a component of the Paris CAC 40 index—are currently trading around $48.50. So, if Gerdes and the team at MKM are right, shares in the oil major are heading for 45% gains.
Total stock is up more than 15% so far in 2021 and more than 26% over the last year.
“Our economic analysis assumes more than 20% of capital spending is directed toward renewables/electricity and 15%-20% is allocated to [liquified natural gas] investment,” the MKM report said.
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Gerdes noted that Total intends to invest around $100 million per year in natural carbon sink projects, and approximately $100 million in carbon capture storage.
MKM’s bullish view on Total comes despite its expectation that the oil major’s upstream gas production in 2021 will be 1% less than in 2020—versus the company’s guidance of stable volumes.
Gerdes said that Total should generate around $26.4 billion in free cash flow in 2021, implying a dividend cover of 1.5x. Moreover, Total should generate around $66.7 billion of free cash flow between 2021 and 2025, which is 50% to 55% of its market capitalization.
