The decision to limit global warming has a significant impact on energy companies. On the one hand, the world still needs oil, and will have it for a long time to come. On the flip side, well, oil companies clearly have to move with the world around them, or they risk becoming obsolete as the world slowly moves towards cleaner sources of energy. In this context, here is why Shell (NYSE: RDS.A) (NYSE: RDS.B) and TotalEnergies (NYSE: TTE) are two of the main oil stocks that investors can buy over the long term.
The balancing act
Shell and TotalEnergies are both integrated oil giants. This means they have assets across the energy sector, from drilling for oil and natural gas (upstream) to moving those fuels (halfway), to turning fuels into products. chemicals and their refining into gasoline and jet fuel (downstream). This diversification provides balance to their portfolios and helps smooth the volatility inherent in energy markets since downstream often benefits when oil prices are low. As a result, an integrated oil major is probably the best way to invest in the energy sector for more conservative investors.
Shell and TotalEnergies, meanwhile, have seen the writing on the wall regarding the world’s shifting towards cleaner alternatives. Both have a long history of investing in power generation, renewables and charging stations for electric vehicles. They recognize that they have to adapt to the world, or they risk being left behind. However, this is a balancing act because oil and natural gas are not going to suddenly stop being used. This transition will take time.
For example, by 2040, the percentage share of oil in global energy production will likely decline by a few percentage points while natural gas will increase by a single percentage point. However, due to the increasing demand for energy in emerging markets, the total demand for energy is expected to increase. Thus, the total amount of oil and natural gas used will likely increase even if their combined percentage share decreases.
This is actually the opportunity here. Basically, Shell and TotalEnergies can use their cash cow energy operations to fund acquisitions and capital investments that will help them adjust to a cleaner future. But these two oil companies are not the same.
Dividends or dividend growth?
For income-seeking dividend investors, TotalEnergies and its 6.4% dividend yield (the highest of its major energy peers) is probably the best option here. When oil prices plunged in 2020, thanks to economic shutdowns used to slow the spread of the coronavirus pandemic, it was the only oil major to announce the price point (average $ 40 per barrel) at which it could maintain. its dividend.
He has made it clear that he understands how important the dividend is to his investors and that he will transition to cleaner alternatives while doing everything in his power to maintain the dividend. With energy prices rebounding from their lows, the company’s plan to triple the size of its “electron” business has not changed, but it has suggested that dividend increases are a possibility. However, investing in the business and maintaining a strong balance sheet are both priorities. This means that investors shouldn’t expect regular increases in dividends, which makes TotalEnergies suitable for investors looking to maximize the income they generate today.
At the other end of the spectrum is Shell, with a yield of around 3.7% (the lowest of its closest peers). This is in part because Shell cut its dividend in early 2020, around the same time it announced its intention to shift its business model towards cleaner alternatives. This was a major reset, but one that the company said would allow it to return to dividend growth over time. And Shell wasted little time on that front, actually increasing its dividend for the first time in 2020, with a few more hikes in 2021.
Shell is therefore fundamentally a way to play the energy transition away from oil while also benefiting from dividend growth. It’s unclear exactly what rate of dividend growth investors should expect here – originally the call was for slow and steady, which seemed logical. However, the most recent increase was 38%. Don’t expect this to happen again as this was likely a second reset (in reverse) as the energy market stabilized fairly quickly and kept Shell moving forward. fairly quickly in consolidating its balance sheet. Essentially, look for low to mid single-digit dividend growth as Shell uses oil profits to fund clean energy investments. But for dividend-growing investors, it’s probably a solid compromise.
It would be nice if we could flip on a clean energy switch and stop using oil and natural gas, but that’s just not possible. However, ignoring the ongoing energy transition doesn’t make sense either. For dividend investors, Shell and TotalEnergies are ways to take advantage of the still strong demand for oil while hedging your clean energy bets. Shell tends to grow dividends, while TotalEnergies is a solid, high yield option.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.