Total Energies (WKN: 850727) ranks second in terms of sales volume in Europe. However, the French group is currently my first choice. After all, it has large oil reserves and very low production costs.
The environment for oil companies could hardly be better at the moment. Putin’s war against Ukraine is driving up prices. Just two years ago, the conditions in the market were completely different: the fall in commodity prices caused a lot of problems for oil, copper and silver producers. TotalEnergies also groaned under him.
At the end of April 2020, the price of oil stood at USD 21.50 per barrel. TotalEnergies and many other oil companies were making losses at the time because their production costs were higher than the selling price of crude oil.
How to correctly value raw material stocks
The fair value of these shares always depends on the evolution of the prices of raw materials. Nothing will change about it. If you are looking to invest in TotalEnergies shares or any other resource company, you should be aware of this.
The price of Brent oil is currently at US$117.64 per barrel. A few weeks ago it was almost 130 US dollars. Now that the Saudis are ramping up production again, the price has corrected again. This shows us fools once again how wildly commodity prices can fluctuate. I can well imagine the around US$95 mark as the average oil price for the year at this point.
This mark is also a key part of my assumption when evaluating TotalEnergies stock. The task is to determine where TotalEnergies shares stand if the price of oil is really close to $95.
TotalEnergies is floating in a huge sea of oil
The group scores with the useful life of its reserves. Based on the previous annual production volume, these will last another twelve years. The company has the advantage here of any company I have seen in this industry.
TotalEnergies claims that its production costs are around US$18 per barrel. This not only includes the cost of transporting the black gold to the surface. Development costs are already included here. Pure production costs are even below US$6 per barrel and therefore not even half of production costs.
TotalEnergies’ low financing costs are no coincidence. The group owes this to the favorable geographical location of its oil and gas deposits. Deposits are located in easily accessible places. Therefore, both the development and the subsequent promotion are not as expensive as in some of the competing sites.
TotalEnergies stock is really worth that much
To determine the fair value of the stock, I make the following five basic assumptions:
Production costs are US$18 per barrel.
Annual production remains at the current level of 1,029 million barrels.
The average price of oil is 95 US dollars.
TotalEnergies’ capital expenditures, or CAPEX for short, are $15 billion per year.
The free cash flow multiplier is exactly 10.
After deducting CAPEX, my free cash flow is approximately $64 billion per year. If this investment theory works, the fair value of the share will be the equivalent of 190 euros. At the current price of EUR 46.69 (as of March 25, 2022), the upside potential is huge.
The dividend is also impressive.
TotalEnergies currently pays its shareholders EUR 0.66 every quarter. Extrapolated to one year, it is 2.64 euros per share and corresponds to a dividend yield of 5.7% at the current price.
The article Your 4X Opportunity in Commodities: Get Huge Oil Stocks in Your Deposit with This Cheap Stock was first published in The Motley Fool Germany.
Henning Lindhoff does not own any of the aforementioned shares. The Motley Fool does not own any of the shares mentioned.
Motley Fool Germany 2022