The pressures, which were too strong, coming from all sides, from public opinion, the media, politicians and activist shareholders, got the better of TotalEnergies’ ambitions in Russia. Or, more accurately, in Russian oil. The French energy company “disengages from Russian oil but not completely from gas”, summarizes the analyst Ahmed Ben Salem, of the private bank Oddo BHF. After nearly a month of reflection and the release of majors such as BP and Shell of Russia, TotalEnergies announced, late yesterday afternoon, after the close of trading, that it was going to stop all purchases of Russian oil and petroleum products “by the end of 2022 at the latest.”
On the other hand, the French giant led by Patrick Pouyanné does not intend to completely stop its natural gas activities there, where it maintains its stake in Yamal LNG. “Its logic is to maintain its presence on Yamal, which is productive, but to stop financing its second Arctic 2 LNG project, which is under construction, and to no longer record in its accounts the proven reserves linked to this project, given that significant sanctions weigh on this project »explains Ahmed Ben Salem.
In a world committed to energy transition, which involves less oil and more gas (the cleanest of fossil fuels) and renewables, TotalEnergies has multiplied LNG projects in Russia, investing alongside Russian oligarchs who are now under sanctions. The group is a 19.4% shareholder in the natural gas producer Novatek, from which it receives dividends, and holds a 20% stake in Yamal LNG, a company majority-owned by Novatek and created to operate the Tambey-Sud gas field, northeast of the Yamal Peninsula, Siberia. It produces millions of tonnes of LNG each year. TotalEnergies also holds a 10% stake in Arctic LNG 2, a project, also led by Novatek, whose first delivery is scheduled for 2023.
40% of its global gas reserves
Recently, Patrick Pouyanné worked to minimize TotalEnergies’ exposure to Russia, which only counts for ” 3 to 5 %” of his income. Again this morning, at the microphone of RTL, the boss repeated that “Russia was 5% of our cash flow, it was 10% of our result, it’s important reserves but it turns out that they don’t bring in a lot of money. » For now. If TotalEnergies has invested tens of billions of euros in Russia (essentially in gas), making it the leading French investor in the country, it is because it expected a return on investment. Russia, until then, was the most strategic territory for the group. The country “accounts for 30% of its gas production [16,6% de l’ensemble de sa production d’hydrocarbures] and 40% of its global gas reserves”says one at the broker TP ICAP.
“I know how to replace [l]and oil and [l]e-diesel [russes, mais] gas, I don’t know how to do it. If I decide to stop importing Russian gas, I don’t know how to replace it, I don’t have any available. I have 25-year contracts and I don’t know how to get out of these contracts”justified Patrick Poyanné on RTL. “My competitors continue to take Russian gas because we have long-term contracts and we don’t know how to stop them, unless the governments decide on sanctions that allow us to use force majeure. If I stop Russian gas, I pay billions immediately to the Russians […]. [Et] without Russian gas, we shut down part of the European economy. » The world of LNG is booming, it showed growth of more than 10% per year between 2015 and 2019.
TotalEnergies’ decision not to completely disengage from Russian gas is “rational”believes Ahmed Ben Salem, at Oddo BHF, “to the extent that the group will no longer provide funds to Russia (stopping of oil purchases and the construction of Artic 2 LNG), on the contrary it will continue to collect and bring out the flows from the Yamal LNG project (approximately 1.5 billion euros in cash flow) and will preserve his stake since he has bet very big and that it is impossible to sell and that giving up these assets for free to Russian interests would be counterproductive. TotalEnergies prefers to wait rather than give away its assets worth around $18 billion [un peu plus de 16 milliards d’euros] free to Russians (only Atric 2 LNG is written off, the value is not announced and this represents approximately 8.4% of the group’s proven reserves). »
But Russia might not hear it with the same ear, the Kremlin might not let TotalEnergies wait quietly and, in retaliation, might decide to expropriate its share in Yamal LNG. The risk is there, according to the analyst, and “he could weigh in on the title. » That said, “on the stock market, the exit from Russia is almost integrated into the prices. The group has already lost more than $14 billion of its market capitalization, almost the value of its Russian assets. [environ 18 milliards pour rappel], a greater loss than that suffered by BP, which was more committed but whose presence in Russia was less strategic. »
Over 70% exposure to non-OECD countries
TotalEnergies was unable to take full advantage of the surge in oil prices. Since the start of the Russian offensive in Ukraine on February 24, French shares have even lost 7%, at 46 euros today, despite a rebound of 1.5% this week. Ahmed Ben Salem, at Oddo BHF, continues at this stage to recommend the purchase of TotalEnergies on the stock market, to aim for a target price of 60 euros, giving hope for an appreciation potential of 30%. “The fundamentals of the group remain intact in terms of cash flow, earnings per share and return of cash to shareholders”, he argues. In addition, the partial withdrawal from Russia “will reduce the media pressure”with certainly a positive impact among ESG investors (i.e. responsible investment according to environmental, social and governance criteria), without however canceling it.
The consensus remains largely buyer (60% according to Bloomberg, which lists nearly thirty analysts), despite some less positive notes in recent days. This Wednesday, James Hubbard, at Deutsche Bank, downgraded his advice from “buy” to “keep”, with a price target reduced from 53.5 to 48.1 euros, in a movement that also affects the Austrian OMV. “Russia’s invasion of Ukraine added risk and volatility to oil markets which were already clearly showing signs of growing underlying tightening. Based on inventory levels alone, we estimate that the price of Brent is currently justified at around $90 per barrel.”the current price therefore incorporates “an additional risk premium of around $20 a barrel. »
The current stock market valuation of TotalEnergies (whose stock has gained 3% since the start of the year, after a 26% gain in 2021) is cited by analysts who recently downgraded their opinion on the energy company. And, perhaps, another characteristic to the detriment of French compared to its competitors, which the war in Ukraine has placed in the spotlight: the excessive exposure of TotalEnergies to countries at risk, such as Mozambique, Iraq , Myanmar and Iran, in addition to Russia (exposure to more than 70% of exploration-production activity in non-OECD countries). All the more reason for the group to accelerate its development in renewable energies.