Securing Oil-Indexed LNG Contracts Will Bring Stable Future Revenue Streams

Key Takeaways

• TotalEnergies is enhancing its LNG and integrated power sectors, indicating potential revenue growth and more stable, predictable revenue streams.
  
• Strong reserve replacement and innovative safety improvements suggest improved future earnings, operational efficiency, and reduced risks.
  
• Safety risks in battery storage and lower LNG prices, alongside operational and policy challenges, could impact TotalEnergies' earnings, margins, and revenue stability.

Catalysts

A multi-energy company, produces and markets oil and biofuels, natural gas, green gases, renewables, and electricity in France, rest of Europe, North America, Africa, and internationally.

• TotalEnergies is expanding its integrated power pillar significantly and expects to reach a cash flow from operations above $2.5 billion, which indicates strong potential for future revenue growth by 2025.
  
• The company's upstream production is expected to grow 3% per year through 2030, anchored by major projects in oil and LNG, implying potential revenue and earnings growth from increased production volumes.
  
• TotalEnergies is further derisking its LNG business by securing new contracts indexed to oil prices, potentially leading to more stable and predictable revenue streams which may also improve net margins.
  
• By maintaining a strong reserve replacement ratio and low production costs, TotalEnergies strengthens its production capacity and operational efficiency, which suggests an improvement in future earnings and profitability.
  
• TotalEnergies is focused on innovative safety improvements in its battery energy storage systems, which could reduce operational risks and potential cost liabilities, thus potentially enhancing net margins and protecting revenue streams.

TotalEnergies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TotalEnergies's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.1% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $16.8 billion (and earnings per share of $8.02) by about February 2028, up from $15.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $19.5 billion in earnings, and the most bearish expecting $13.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Oil and Gas industry at 14.6x.
• Analysts expect the number of shares outstanding to decline by 4.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

TotalEnergies Future Earnings Per Share Growth

Risks

• TotalEnergies faces potential fire and explosion risks in its battery energy storage systems, which could lead to safety incidents that impact operational continuity and drive up costs, negatively affecting overall net margins.
  
• Lower average LNG prices and reduced market volatility in early 2024 negatively impacted gas trading results, which could pose a risk to future earnings from this segment.
  
• Operational issues, like those experienced in some refineries in France and the U.S., could continue to harm downstream cash flow and margins if not resolved.
  
• The potential for legislative and political changes, such as in U.S. renewable energy policies or European gas infrastructure, could impact strategic investments and revenue projections, creating uncertainty in earnings forecasts.
  
• Relying on high reserve replacement strategies could lead to capital overextension or shifts in market dynamics, potentially affecting revenue stability and shareholder returns.

Valuation

• The analysts have a consensus price target of €69.736 for TotalEnergies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €90.78, and the most bearish reporting a price target of just €60.27.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $218.0 billion, earnings will come to $16.8 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €58.88, the analyst price target of €69.74 is 15.6% higher.
  
• 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.