Morgan Stanley upgraded the shares of French energy firm TotalEnergies . That’s thanks in part to the the company’s “significant” growth potential, its strong balance sheet and an “ambitious strategy” for the energy transition, according to the bank. In a March 21 note, Morgan Stanley upgraded the stock from equal weight to overweight, raising its price target to 64 euros ($69) — representing nearly 16% upside. Morgan Stanley said TotalEnergies is the only major European energy company with an upstream business that can fund all the capital expenditure needed to realize its “significant growth potential.” On top of that, it can fund all shareholder dividends till 2030 and still have “substantial” free cash flow. Upstream oil and gas companies are involved in the process of extraction or production. “In addition, TotalEnergies has a clear and ambitious strategy for energy transition and one of the strongest balance sheets,” the bank’s analysts wrote, calling its balance sheet “close to debt-free.” In the report, Morgan Stanley assessed the energy production assets of major energy companies in the wake of several key events in 2022 — the Russia-Ukraine war, bad weather and disrupted supply chains — which highlighted the “fragility of global energy supply.” The bank found that the upstream portfolios of European major energy companies are strong enough to keep oil and gas production stable — at least till end of the decade. Morgan Stanley said TotalEnergies is one of few companies under its coverage of energy companies with growth potential, and estimates it has the ability to support 3.8% growth annually till 2030. “TotalEnergies is a high-quality firm with above-average return on capital, below average upstream production cost, and low quarterly earnings volatility,” said the bank. It added that the firm is the best-positioned among its peers to support shareholder remuneration while funding an energy transition, adding that it was the only major energy company that didn’t cut dividends during the pandemic. Its dividend yield is at around 5%, according to FactSet. “We like exposure to TotalEnergies as investor sentiment turns more bearish towards the equity markets in the coming months,” said Morgan Stanley, calling the stock “one of the most defensive plays.” The stock is up about 10% in the year to date, beating the French benchmark index CAC 40 , which has lost more than 3% in the same period. The upgrade comes as investors are flocking back to energy stocks after a dip in oil prices . In fact, last week saw the biggest inflows into energy since 2008, Bank of America equity analyst Jill Carey Hall said in a note Tuesday. — CNBC’s Michael Bloom and Tanaya Macheel contributed to this report.
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