TotalEnergies SE (TTE, Financial) is a French integrated oil and gas company. The stock has traded up by more than 21% year-to-date as oil and gas prices have risen globally. The company is also attempting to pivot towards a higher renewable energy mix in an attempt to reach zero carbon emissions by 2050. I think the stock is undervalued in its current form and hasn't priced in its growth prospects yet.
Undervalued relative to the commodity boom
You generally see a strong correlation between the stock prices of oil and gas companies and crude oil prices; however, the price of TotalEnergies seems to lag rising commodity prices.
Furthermore, gas prices have risen by an astronomical amount as well during 2021, and you'd have expected more of a reaction to the rising prices from the stock, something more along the lines of Devon Energy (DVN, Financial) or Chevron (CVX, Financial), which have risen by 186% and 38%, respectively, this year.
The stock is also underpriced relative to its historical averages, indicating that there's room for multiples expansion. TotalEnergies' price-earnings ratio is trading at a 24.71% discount to its five-year average, and its price-sales ratio is sitting at 0.85, well below the overvalued benchmark of 2.00.
Furthermore, the TotalEnergies' projected three to five year earnings per share growth rate stands at 37.72%, indicating that this could be a long-term value play.
Renewable energy exploits
In recent news, TotalEnergy and Daimler (XTER:DAI, Financial) have signed an agreement to commence a hydrogen ecosystem development partnership, which would see TotalEnergies develop and operate over 150 hydrogen fueling stations in Europe. This partnership builds on the solid renewable energy base Total has been working on.
In 2020, the company gathered a foothold in the solar space by acquiring 2.2 gigawatts worth of solar projects in Texas and buying 20% in Adani green energy limited. TotalEnergies has a target of developing 35 GW worth of solar projects by 2035 and has committed $3 billion dollars to do so.
The consequence of TotalEnergies' pivot to a better energy mix, which aligns with long-term global goals, will provide systemic support to the stock itself even though the tangible results may take time to reflect.
Final word
TotalEnergies is working on converting to 40% renewable energy by 2040 and plans to be 100% carbon neutral by 2050. Even if we don't look at its attractive long-term prospects, it is undervalued at the moment based on its fossil fuels business alone, since it is lagging surges in recent oil and gas prices.
