Fund manager reveals one global energy stock to buy right now
Total Energies is one energy stock investors should own right now, according to Brian Arcese, portfolio manager at investment firm Foord Asset Management. Arcese, who manages the absolute return Foord International Fund , singled out the French oil and gas giant over its strong cash flows and balance sheet. Additionally, Total Energies , which also has renewable energy operations, trades at a low valuation with a high forward dividend yield (predicted payouts) of about 5%, according to the fund manager, which would provide resilience during a recession. Total shares are trading at a significant discount compared to shares of Exxon Mobil, Chevron Shell, and BP on a forward price-to-earnings ratio basis at 6.8x, according to FactSet data. The oil major is listed on the New York and Paris stock exchanges. While Total is not among the 10 largest investments in Arcese’s fund, Foord Asset Management is an investor in the stock. TTE YTD line Why invest in energy stocks now? Arcese told CNBC Pro Talks that around 15-20% of Foord’s equity portfolio is allocated to commodity and energy stocks. He sees these companies as an effective real-time hedge against lingering high inflation, which is not his base case scenario for the medium term. “The economic growth or inflation can continue for longer than we expect. So, it’s not only direct investments in commodities that can offer that hedge against inflation persisting, but equities as well,” he said in front of a live audience at INSEAD’s business school campus in Singapore . Commodities are typically held by investors to hedge against consumer price rises. Additionally, Arcese believes the transition to clean energy will take longer than anticipated making oil and gas stocks a better investment now. The portfolio manager explained that as interest rates have increased, financing wind and solar energy projects has become much more expensive in the current market environment. “We’ve seen many companies have significant challenges in meeting the kind of commitments that had been made prior,” the fund manager said. Earlier this month, developers canceled two offshore projects in the U.S. at a cost of $5.6 billion as rising production costs ate into profits. “It’s great to invest in companies that are renewable only. But the economics need to make sense for the company to exist over a long enough period to actually make the energy transition come to fruition,” he added. Prior to joining Foord, Arcese was at Morgan Stanley and helped grow its flagship international equity fund from inception to having $3.5 billion in assets under management. What do analysts say about TotalEnergies? Equity analysts at UBS investment bank have forecast a “stable” 11% distribution yield for the stock next year, which includes share buybacks. They also expect shares to rise by 12.5% over the next 12 months to 71 euros per share. Scotiabank analysts have a hold-equivalent rating on the U.S.-listed stock with a price target of $68, where the stock is currently trading. The investment bank believes that while the company is progressing well on its long-term investments, the share price currently captures much of the potential upside if the oil price remains below $92 a barrel for the rest of this year. “Robust integrated power results and efficient project execution will give management confidence to advance the transition-oriented strategy and we do not expect a strategy adjustment similar to BP and SHEL,” said Scotiabank analysts led by Paul Cheng on Oct. 27. Similarly, RBC Capital Markets analysts said the previous quarter was “uneventful” for TotalEnergies and reiterated their “sector perform” rating – or hold at other investment banks. RBC expects the Paris-listed shares to rise by 10% to 70 euros per share. “Given the strong run TTE has had, we see better risk-reward elsewhere in the sector and maintain our Sector Perform rating,” they said.
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