French energy major Total SA (TTE.US) issued a second-quarter performance update on Thursday, indicating that overall group profitability is expected to rise, propelled by elevated oil prices and soaring refining margins. However, the integrated liquefied natural gas (LNG) segment is forecast to see a substantial decline in performance.
The company stated that its oil trading activities are "expected to remain at the same strong level as in the first quarter," a direct reflection of severe market volatility stemming from the conflict in the Middle East. The effective blockade of the Strait of Hormuz due to the war has tightened global crude supply, with the benchmark Brent crude averaging approximately $97 per barrel for the April-June quarter. This represents a surge of nearly 45% compared to the $67 per barrel average in the same period last year.
This price environment has delivered substantial profits for major Western oil companies, following similarly strong previews from peers like Shell and BP. Beyond trading, the downstream refining segment also benefited significantly. Total SA noted that refining margins increased, driven by tighter supply of refined products due to disruptions in the Middle East and Russia, leading to a "significant increase" in downstream performance and cash flow. The company also mentioned that some refining capacity was offline during the past three months due to high temperatures and maintenance.
The integrated power business also emerged as a bright spot. Total SA expects "strong growth" in cash flow for this division, primarily attributed to its acquisition of a 50% stake in a portfolio of European gas-fired power plants from EPH, completed in late April.
Areas of Concern and Outlook
In stark contrast to the robust performance of the oil segments, the integrated LNG business lagged significantly. Total SA cautioned that earnings for this segment are anticipated to "decline significantly," primarily due to a flat or declining European market, resulting in "poor performance" in gas trading. The LNG unit contributes roughly one-fifth of the company's overall results, and its weakness contributed to the stock falling as much as 1.7% in early trading, underperforming the broader European energy sector.
Upstream Performance and Production Adjustments
Despite the conflict, upstream profitability in the exploration and production segment is still projected to increase by approximately $1 billion compared to the first quarter. Total SA currently expects second-quarter hydrocarbon production to reach nearly 2.4 million barrels of oil equivalent per day, potentially supporting organic growth in line with its quarterly target of 4%.
Notably, the company substantially revised down its estimate of production losses related to the conflict. The latest estimate is a loss of about 210,000 barrels of oil equivalent per day, significantly lower than the 360,000 barrels per day estimated in the first quarter. This improvement is credited to production ramp-ups at offshore fields in the UAE and the gradual resumption of production in other Middle Eastern countries starting in June.
However, the company also noted that the positive impact of high oil prices on upstream results will be partially offset by accounting factors, as some of the increased production from the Middle East is effectively unable to be exported due to the Strait of Hormuz blockade.
Total SA is scheduled to release its full second-quarter financial report on July 23rd.