ii view: oil major Total strengthens green transformation

French wind power adds to the UK and Korea, but is the dividend still the true investor focus?

Enters floating offshore wind sector in France

Renewables director Julien Pouget said:

“This announcement once again demonstrates the Group's ambition and willingness to innovate in the field of renewable energies. Floating offshore wind is a very promising segment in which Total notably brings its extensive experience in offshore projects. Together with our partner Qair, we have the necessary resources to meet the technological and financial challenges that will determine our future success. I am delighted that Total can contribute to the emergence of this new sector in France. “

ii round-up:

French oil & energy giant Total SE (EURONEXT:FP) today entered the offshore wind sector in France as it took a 20% stake in a wind farm located in the Mediterranean Sea.

The Eolmed floating farm is off the coast of Gruissan, along from Monpeller, and is majority owned by Qair its historical developer. 

The farm adds to Total’s existing wind projects in both the UK and South Korea and strengthens its position in the emerging floating offshore wind sector in which it wants to be one of the world leaders.

Like rivals BP (LSE:BP.) and Shell (LSE:RDSB) in addressing climate change concerns, Total previously outlined plans to become carbon neutral by 2050. Also like BP and Shell, it is now pursuing a strategy to become a broader greener energy company – plans which it detailed back in late September. 

Growth in production of Liquid Natural Gas (LNG) and electricity now sit at the heart of its strategy. A planned one-third increase in production over the next decade is expected to come half from LNG and half from mainly renewably generated electricity. 

Against the backdrop of reduced fuel consumption under Covid-19 lockdowns and reduced air travel, the Brent crude oil price is down by just over a third year-to-date to a little over $41 per barrel. Total shares have fallen by around 40%, BP and Shell shares have more than halved in 2020.

In late July, Total declared a second-quarter dividend of 66-euro cents per share, unchanged from the first quarter, although marginally lower from the 68 cents paid in the fourth and final quarter of 2019. 

Within its September strategy update, Total expressed its confidence in the company’s fundamentals and confirmed that the dividend is supported at $40 per barrel. Both BP and Shell have this year cut their dividend payments. 

Beyond serving the dividend, Total’s priority is to bring group gearing below 20%. It stood at 23.6% in late June. Shell’s came in at nearer 30% and BP’s over 30% earlier in 2020.  

Total’s third-quarter results are scheduled for 30 October. 

ii view:

Total is active in more than 130 countries and employs around 100,000 people. This latest move to expand its low carbon energy business is clearly sensible against a backdrop of continued climate change concern, plus generally lower energy usage under the pandemic. Gas, renewables and power accounted for less than a fifth of overall group revenues during 2019. 

For UK investors, and with the shares priced in euros, buying into the company direct takes on the additional risk of currency movements. Despite recent management assurance, concerns regarding a possible cut or rebasing of the dividend persist. A historical dividend of nearly 9% compares with US rival Chevron's (NYSE:CVX) at around 6.5% and Shell’s forecast yield nearer to 5%. 

But Total looks to have entered this Covid crisis in better shape than many. Lower gearing, or borrowing, than BP or Shell potentially gives it more financial flexibility. In all, while Total remains under the cosh given the pandemic and some degree of caution is still warranted, the company appears to offer a plausible choice for UK investors seeking an overseas alternative. 

Positives: 

• Attractive dividend payment (not guaranteed)
• Lower gearing than UK rivals Shell and BP

Negatives:

• Uncertain Covid-19 outlook
• Competition in renewable energy is increasing

The average rating of stock market analysts:

Strong buy