Accelerating Energy Policies Will Undermine Fossil Revenues

Key Takeaways

• Persistent regulatory and market shifts toward renewables threaten long-term oil and gas revenues, raising risks of stranded assets and costly write-downs.
  
• High capital spending on renewables and rising legal and competitive pressures may constrain cash flow, erode margins, and increase financial uncertainty.
  
• Diversified growth in hydrocarbons and renewables, disciplined capital management, and digital optimization position TotalEnergies for resilient earnings and strategic expansion amid rising global energy demand.

Catalysts

A multi-energy company, produces and markets oil and biofuels, natural gas, biogas and low-carbon hydrogen, renewables, and electricity in France, rest of Europe, and internationally.

• Intensifying global policy action on the energy transition, coupled with accelerating regulatory pressure to reduce emissions, threatens to erode long-term oil and gas demand, exposing TotalEnergies to shrinking revenue streams in its core business just as it maintains significant upstream investment.
  
• The structural adoption curve of electric vehicles and ongoing shifts to renewables in global power generation risk permanently reducing demand for oil-based fuels, leading to declining asset utilization and a higher probability of stranded hydrocarbon assets; this could result in large asset write-downs and a negative impact on net income and book value.
  
• Substantial capital expenditure requirements to both grow and re-orient the business towards renewables may compress free cash flow and reduce the company's ability to sustain high shareholder distributions, particularly if renewable projects continue to yield lower returns compared to legacy fossil fuel assets, further pressuring margins.
  
• Escalating legal and reputational risks from historic emissions and potential climate litigation could introduce large, unpredictable settlement costs, weighing directly on earnings and increasing financial uncertainty in the coming years.
  
• Intensification of global competition in renewables, combined with projected overcapacity and lower pricing for LNG and polymers, may erode market share and compress unit margins for TotalEnergies, undermining both top-line growth and overall profitability despite ongoing operational optimization efforts.

TotalEnergies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TotalEnergies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TotalEnergies's revenue will decrease by 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 8.1% in 3 years time.
• The bearish analysts expect earnings to reach $13.0 billion (and earnings per share of $6.21) by about August 2028, up from $12.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 4.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

TotalEnergies Future Earnings Per Share Growth

Risks

• TotalEnergies is seeing robust production growth in both oil and gas, supported by the start-up of high-return, low-cost projects and ongoing expansion in LNG, which will structurally boost cash flows and underpin stable or rising revenues in coming years.
  
• Aggressive investments and farm-down strategies in renewables and integrated power have not only bolstered cash flows-now approaching $600 million per quarter-but are also unlocking incremental value and setting the stage for further diversification of earnings and improved long-term net margins.
  
• The company maintains a strong balance sheet with normalized gearing around 15 percent, high and sustainable shareholder distributions, and disciplined CapEx management, enabling it to weather commodity price cycles and support durable earnings and dividends.
  
• Digitalization and AI-driven operational optimization initiatives are expected to enhance asset performance, reduce costs, and drive operational efficiencies, which should translate to improved EBITDA margins and upward pressure on long-term earnings.
  
• Persistent global energy demand growth-especially from emerging Asia and Africa-combined with TotalEnergies' broad portfolio (including LNG and renewables), positions the company to capture secular tailwinds, supporting both top-line growth and stability in free cash flow.

Valuation

• The assumed bearish price target for TotalEnergies is €45.53, which represents two standard deviations below the consensus price target of €62.72. This valuation is based on what can be assumed as the expectations of TotalEnergies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €78.27, and the most bearish reporting a price target of just €37.54.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $161.3 billion, earnings will come to $13.0 billion, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €51.07, the bearish analyst price target of €45.53 is 12.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.