TotalEnergies Says Iran War Price Spike Will Boost Q2 Profit, LNG Business Falls

TotalEnergies said its second-quarter earnings boost is coming from war in the Middle East pushing oil and gas prices higher, allowing the French energy giant to cash in.

In a trading update published Thursday, July 16, ahead of its full earnings release, TotalEnergies said nearly every division will show improved results from the first quarter, according to Reuters reporting carried by Global Banking & Finance Review. Downstream results and cash flow should climb sharply, helped by better refining margins, petrochemical margins, and oil trading, Morningstar reported.

The numbers are stark. Brent crude averaged around $97 a barrel during the April-to-June quarter, according to Reuters, up 45% from $67 a barrel a year earlier. This followed the U.S.-Israeli war on Iran, which led Iran to effectively shut the Strait of Hormuz and disrupted global oil supplies.

TotalEnergies is not the only one benefiting. Shell and BP both flagged strong trading profits in the same stretch, Reuters noted. When a chokepoint like Hormuz gets squeezed, the majors with global trading desks tend to win.

Upstream Gains, LNG Losses

TotalEnergies expects upstream earnings to rise by about $1 billion from the first quarter, driven by production resuming across several Middle Eastern countries and increasing in the United Arab Emirates, according to Reuters. Total hydrocarbon production is projected to hit nearly 2.4 million barrels of oil equivalent per day for the quarter.

The company also said the war's drag on its own upstream output eased. It now estimates the Iran war cut production by 210,000 barrels of oil equivalent per day, down from the 360,000 boed hit it flagged for the first quarter.

But higher prices come with a caveat. TotalEnergies said the earnings benefit will be partly offset by accounting effects, since a chunk of the increased Middle East production couldn't actually be exported because of the Strait of Hormuz disruption. Producing more oil doesn't help much if you can't ship it.

The LNG business is the one weak spot. TotalEnergies said earnings there will be sharply lower, citing what it called an underperformance in gas trading amid a broadly flat to declining European market, according to Reuters. That's a notable gap given that European benchmark gas prices were still up 0.9% at 55.03 euros a megawatt-hour as of mid-July, per Morningstar's market data. Rivals apparently did better: JPMorgan analysts noted in an investor report cited by Reuters that UK peers fared better on LNG trading than TotalEnergies did.

Market Reaction Was Not a Celebration

Despite the profit upgrade, TotalEnergies shares fell 1.9% to €69.28 as of 0801 GMT on the day of the announcement, according to Reuters. That was a steeper drop than the 0.7% decline in the broader European energy sector that day.

JPMorgan analysts called the trading statement "fundamentally fine" but flagged the LNG miss as a drag, according to the same Reuters report. Analysts also floated the possibility that TotalEnergies could raise its share buyback program to $2 billion from the previously stated $1.5 billion, though that hasn't been confirmed by the company.

Zoom out and the stock is still up about 25% year-to-date, per Reuters, so investors aren't exactly panicking. One bad quarter for LNG trading isn't erasing a year of war-driven price gains across the rest of the business.

The Uncomfortable Reality

Energy majors are posting windfalls because a war disrupted a critical global shipping chokepoint. That's good for TotalEnergies shareholders and bad for anyone paying for gasoline or heating in a country dependent on imports.

The Commerce Department's June retail sales data offers perspective. U.S. retail sales grew just 0.2% in June, down from 1% in May, a slowdown Morningstar attributed partly to cooling gasoline prices during the Iran ceasefire period. Gas station sales fell 5.3% for the month. That suggests the price spike TotalEnergies is profiting from didn't hold steady everywhere, and a ceasefire, even a partial or temporary one, can knock prices back down fast.

Whether that ceasefire holds and whether the Strait of Hormuz reopens fully to exports will determine if TotalEnergies' third-quarter update reads the same way. TotalEnergies is scheduled to release its complete second-quarter earnings report in the coming weeks, which will show whether Thursday's preview numbers hold up against final results.