Over 30 years ago our investment team first identified a quality company that excelled in leveraging its native French competitive strengths to profitably pursue new markets and regions. That company was Total SE (“Total”), with decades of expertise in oil exploration and production with strengths in refining and marketing. On March 31st, 1992 we initiated a position in Total and have held a position1 in various weights ever since.
Through the 1990s, Total maintained a disciplined approach to growth across exploration, refining, and marketing of petroleum and petrochemical products. With an entrepreneurial management team, energy sources other than oil were evaluated and Total made meaningful inroads into liquified natural gas (“LNG”), the cleanest of all fossil fuels. Acquisitions towards the end of the decade provided enhanced capabilities, firmly establishing Total as one of the global supermajors.
In the early 2000s, the global economy was buoyant, heightening commodity prices. Fuelled by record profits, Total reinvested meaningfully in their traditional oil and related businesses, in addition to continued expansion of LNG. Their acquisition of 60% of Sunpower, a U.S. based solar energy firm, was further evidence that Total was committed to pursuing profitable alternative energy investments alongside its core oil and gas operations. After peaking mid-June 2014, oil prices tumbled. A global mini-recession that occurred through 2015 ushered in a nearly three-year period with prices predominantly below $60/bbl. With its strong balance sheet and despite lower profitability from 2014 to 2019, Total’s long-term commitment to evolving to a more diversified, cleaner energy company was evident. This was in stark contrast to a number of other oil companies. Since 2015, Total has allocated more than 10% of its investments to renewables and electricity, more than any other major. Notably, between 2015 and 2019, Total made investments in excess of $20 billion, reducing the carbon intensity of the energy products it sells by 6%. In 2015, oil products accounted for 66% of sales, natural gas 33% and electricity under 1%. By 2019, oil products dropped to 55% of sales, natural gas 40% and electricity 5%.
Entering 2020, the COVID-19 pandemic forced governments worldwide into lockdowns by March. With economies shut down, oil prices tanked and even went negative for a very brief period in April. Despite a negative operating margin for Total in 2020, with their strong balance sheet they continued their pursuit of renewables, investing US$2 billion for the year. On a recent call with Patrick Pouyanné, CEO of Total, he stated that Total’s intended investment in renewables going forward would be US$2 billion to US$3 billion per annum. Total intends to increase its investments to renewables and electricity to more than 15% of total investments between 2021-2025 and increasing to more than 20% between 2026 – 2030.
Transitioning away from carbon-intensive businesses takes more than capital, it requires conviction, which Total has demonstrated for the better part of more than 20 years. They showed further commitment as the first major to announce that Scope 32 emissions will decline in absolute value by 2030 as they continue to advance the mix of its energy product sales portfolio. By 2030, they project that electricity, and particularly renewable power, will increase to 15% of sales, with natural gas at 50% and the balance of 35% for oil products. Total took another major step forward in 2020 in its response to the climate challenge by setting a new ambition to get to net zero emissions for its global business by 2050. In this way, Total intends to contribute to the Paris Agreement’s carbon neutrality objective for the second half of the century.
Interestingly, just before we “went to press” with this quarterly, Bloomberg’s Climate Transition Scores was released on March 24, 2021, scoring 39 of the most publicly traded oil and gas companies in their preparedness and ability to evolve into a net-zero world. For us, unsurprisingly, Total was at the top of the charts as shown in Figure 1.
Successful investing in the energy sector requires rigorous analysis, diligent monitoring, and a long-term perspective. Despite demand shocks, short-term due to the pandemic and longer-term as society pursues its lengthy transition to renewables, oil and gas will remain a necessary, although declining, energy source for the foreseeable future[ Oil 2021: Analysis and Forecast to 2026, March 2021 report issued by the International Energy Agency projects that global oil demand is expected to increase by 2026 by 4.4 mb/d over 2019’s demand, largely due to come from emerging and developing economies, underpinned by rising populations and incomes.]. With demand expected to peak sometime in the next 10-20 years, Total continues to emphasize LNG as the bridge-fuel while further developing meaningful solar, offshore wind, biofuels, hydrogen and other energy sources. Total has consistently demonstrated leadership in both intelligently commercializing fossil fuels and in possessing remarkable foresight in sourcing cleaner energy sources decades before various stakeholders began calling for drastic reductions in hydrocarbons. As such, they appear well-positioned to maintain global energy leadership when the long-desired goal for a carbon-neutral society is finally achieved. Perhaps most importantly, we believe this will be done profitably while retaining a strong financial position thus allowing us to maintain our conviction in the quality of Total.
1 In the context of Sprucegrove’s U.S. International Representative Portfolio. Duration of holding and actual weightings differ by mandate and account, including for some, zero holdings in Total during certain periods in the timeframe mentioned.
2 Scope 1 emissions relates to direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain (i.e. emissions linked to reporting company’s upstream and downstream activities).
This information is intended to provide insight into our disciplined investment process, consistently applied across all portfolios. Holdings examples may not apply across all accounts. Data is “as of” the date indicated and should not be relied upon as a complete or current listing of holdings (or top holdings) of the Representative Account. Holdings are subject to change without notice, and may not represent current or future portfolio composition.
The opinions, estimates and views expressed are on behalf of Sprucegrove, constitute Sprucegrove’s best judgement as of the date of this document and are subject to change at any time based on market or other conditions. Sprucegrove does not guarantee the accuracy, adequacy or completeness of any third party data. Any predictions, opinions, and other information contained in this report are subject to change and without notice of any kind and may no longer be true and accurate after the date this report was first completed and disseminated. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. In addition, any forecasts are based upon subjective estimates and assumptions about circumstances and events that may not yet have taken place or may never do so. While the information set out in this document has been prepared in good faith, no representation or warranty is given, and no responsibility is accepted, by Sprucegrove in relation to its accuracy or completeness.
The information provided herein should not be considered a recommendation to purchase or sell any particular security. The securities discussed herein are examples of Sprucegrove’s investment approach but do not represent an entire portfolio or the performance of a fund or strategy and in the aggregate may represent only a small percentage of portfolio holdings. It should not be assumed that any of the securities discussed herein were or will prove to be profitable, or that the investment recommendations or decisions made by Sprucegrove in the future will be profitable.
Any index information provided is for illustrative purposes only and is not intended to imply past or future performance. Please note an investor cannot invest directly in an index. Unless otherwise noted, index returns reflect the reinvestment of income and dividends, if any, but do not reflect fees, brokerage commissions or other expenses of investing.
The MSCI data is comprised of a custom index calculated by MSCI for, and as requested by, Sprucegrove. The MSCI data is for internal use only and may not be redistributed or used in connection with creating or offering and securities, financial products or indices. Neither MSCI nor any other third party involved in or related to compiling, computing or creating the MSCI data (the “MSCI Parties”) makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and the MSCI Parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to such data. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. [www.msci.com)
This material is for informational purposes only to provide general information and is not meant to be legal or tax advice for any particular investor, which can only be provided by qualified tax and legal counsel. Please read the constating documents carefully prior to investing. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal, and tax professionals before making any investments.
All data is in U.S. dollars, unless otherwise noted. Past performance is no guarantee of future results.