- Trading at 20% discount to the sector with a superior dividend yield
- Concerns around buyback sustainability likely to be partly alleviated at upcoming CMD
- 1Y ATM IV at 3YPc7, favors early positioning in the name given strong upstream production, attractive valuation and likely oil price floor.
Since April's sell-off, TotalEnergies (TTE) has underperformed its peers and the broader market likely due to three factors: 1) political uncertainty in France, 2) low oil prices, and 3) concerns over buybacks. Current oil prices may challenge the buyback programme's sustainability without further leverage, but prices may have reached a long-term floor. Near-record-low speculative positioning, slowing non-OPEC supply growth and ongoing demand are likely to tighten OPEC+ spare capacity, supporting higher oil prices.
Management claims it can sustain buybacks even at USD50 per barrel, though likely below the current USD2bn quarterly rate with the 29 September Capital Markets Day, likely to partly alleviate investor concerns. Nonetheless, TTE projects over 3% upstream growth for 2025, with new projects boosting cash flows by c. USD1bn per barrel quarterly. With over 80% of its upstream production growth target sanctioned and 25% of investments allocated to Integrated Power, TTE aims for a 12% ROACE by as early as 2028.
In terms of valuation, it trades at a 20% discount to the sector, offering a superior dividend yield (7% vs 5% for SXEP) that management prioritises, albeit potentially at the expense of buybacks. With 1Y ATM IV at 3YPc7, TTE is attractive for adding delta via a limited-loss structure given the ongoing uncertainty. We recommend June26 56 calls at a net cost of 2.9% of the underlying (spot: 51.9, fut: 50.8). A longer-dated expiration is chosen as oil price recovery and buyback confidence may take time to materialise, but the depressed relative valuation and low volatility favour early positioning in the name.