TotalEnergies SE (TTE) Earnings

Management highlights

• Overall Business Model Performance - The integrated, diversified model across oil, gas, and electricity value chains delivered strong results and cash flow by capturing favorable market conditions, with both upstream and downstream segments performing strongly simultaneously, an uncommon outcome. Integrated margins were ~$130 per barrel at the time of the call, with crude at ~$95 per barrel and refining margins at ~$35 per barrel. - Total cash generation for the quarter was ~$10 billion, allocated to three core priorities: deleveraging, shareholder returns, and disciplined capital investment. • Geopolitical & Operational Updates - The ongoing Middle East conflict has created extreme market volatility, with a rising risk premium for navigation through the Strait of Hormuz. Production curtailments impacted 5% of TotalEnergies' global production in early July, rising to 8-10% after conflict resumed, below the prior 15% guidance. Safety of personnel is the top priority. - Key project milestones achieved: First cargo from Energia Costa Azul LNG (Mexico) shipped to Asia; EPH transaction closed earlier than expected; approval of the Galp Mopane transaction in Namibia received, with deal closing imminent; Kingfisher project in Uganda is on track for September startup, with first production expected before end-2026. - Trading performance: Crude and product trading delivered a $500 million overperformance above baseline structural results for the second consecutive quarter. Gas trading underperformed in Q2 after a strong Q1: traders held bullish long positions on European TTF based on expected low inventory and reduced Middle Eastern supply, but prices declined through the quarter, leading to poor results. Gas prices have rebounded in July, and trading results have already started to recover. • Capital Structure & Shareholder Returns - Net debt reduced by $3.3 billion quarter-over-quarter, combined with a $1.2 billion working capital release, bringing the gearing ratio down to 13.1%, a 2.4 percentage point improvement QoQ. The company targets a gearing ratio of 10% and is on track to achieve this in 2026. - Interim quarterly dividend increased 5.9% to 0.9 euro per share, maintaining TotalEnergies' position among top dividend-growing companies. - Capital expenditure was $3.4 billion in the quarter, in line with the full-year 2026 net capex guidance of $15 billion. - Share buybacks were $1.5 billion in Q2, and the Board authorized a further $1.5 billion buyback for Q3.

Guidance

- Full-year 2026 hydrocarbon production growth (excluding Middle East impacts) is expected to remain around 3% YoY, in line with prior guidance. - Full-year 2026 net capex is maintained at $15 billion, in line with prior guidance. Small additional short-cycle upstream investments will not meaningfully change the annual capex range of $15-$16 billion. - Full-year operating cash flow guidance, based on the original $80/bbl oil, $15/mmBtu TTF price deck, is raised from $32 billion to $34.5 billion. If first half 2026 price levels ($90/bbl oil, $15/mmBtu TTF) hold for the second half, full-year cash flow would be in the $35-$38 billion range. - Average LNG selling prices for Q3 2026 are expected to be above $11.5 per boe, driven by lagged impacts of recent oil and gas price increases on LNG contract pricing. - The Kronos Block 6 gas project in Cyprus is on track to reach FID by the end of July 2026. The Venus project in Namibia is targeting FID by end-July 2026, with a short extension possible if final discussions with the government are not completed by then. Mopane (Namibia) appraisal will occur in H2 2026, with FID targeted for 2028. - Mozambique LNG is 45% complete, with first production from the first train targeted for 2029, in line with prior guidance. Papua LNG is targeting FID by the end of 2026. Suriname's deepwater project is 40% complete, with first production targeted for H1 2028, in line with prior guidance. The SATOP refinery (Saudi Arabia) is expected to return to full capacity by the end of Q3 2026. - The 40% payout ratio target is confirmed on an annual basis, with multi-year average payout already well above 40% in recent years. All 2030 free cash flow targets, including $2 billion in free cash flow from Integrated Power and over $10 billion in incremental free cash flow, are reaffirmed, with no changes to long-term targets.

Segment performance

1. Exploration & Production (E&P): Adjusted net operating income of $3.2 billion, up 25% quarter-over-quarter (QoQ); operating cash flow of $5.8 billion, up 27% QoQ. Hydrocarbon production grew 4% year-over-year (YoY) excluding Middle East conflict impacts, above the full-year 3% growth guidance. Average OPEX per barrel equivalent remained below $5. The Middle East conflict reduced production by ~210,000 barrels of oil equivalent per day (boe/d) in the quarter, below the prior 360,000 boe/d guidance, though physical lifting impacts were 350,000 boe/d, in line with guidance. This segment contributes ~32.7% of total adjusted net operating income. 2. Integrated LNG: Adjusted net operating income was $0.8 billion, down significantly QoQ, driven by underperformance of European gas trading. LNG production decreased 10% QoQ due to shut-in production in Qatar tied to Middle East conflict. The first cargo from the new Energia Costa Azul LNG project in Mexico was loaded and shipped to Asian markets, where TotalEnergies continues to secure long-term oil-indexed contracts with Chinese and Japanese clients. This segment contributes ~8.2% of total adjusted net operating income. 3. Integrated Power: Net power generation increased 28% YoY to 14.8 TWh, with renewable generation up ~15% YoY driven by installed capacity growth, and flexible gas-fired generation up 2 TWh following the earlier-than-expected closing of the EPH transaction. Operating cash flow exceeded $700 million, with 60% coming from production assets (renewables and gas-fired plants) and 40% from sales/trading activities. TotalEnergies remains on track to hit its full-year 2026 target of over 60 TWh of net generation. The EPH joint venture is expected to contribute 10 TWh of production and over $500 million in annual cash flow by 2026, in line with prior guidance. This segment contributes ~7.1% of total adjusted net operating income. 4. Refining & Chemicals: Adjusted net operating income increased $200 million QoQ to $1.8 billion; operating cash flow reached $2 billion. Refineries adjusted operations to prioritize high-margin diesel and jet fuel production to capture strong market conditions, and contributed to European/France supply security. Operational disruptions at the SATOP refinery (drone strike) and Port Arthur refinery (lightning strike) did not offset overall strong performance. This segment contributes ~18.4% of total adjusted net operating income. 5. Marketing & Services: Delivered its best quarterly results in at least 10 years. Adjusted net operating income increased 21% YoY to $500 million; operating cash flow was ~$850 million, up 19% YoY. Performance was driven by European summer seasonality and higher unit margins, particularly for lubricants. This segment contributes ~5.1% of total adjusted net operating income. At the company level, adjusted net income was $6 billion, up ~15% QoQ, and operating cash flow was $9.8 billion, the highest level since the end of 2022.

Risks & headwinds

- Sustained escalation of the Middle East conflict and ongoing closure of the Strait of Hormuz could lead to larger and longer-lasting production and lifting curtailments, currently estimated at 8-10% of total production, potentially rising back to 15% as initially guided. The conflict has already created extreme commodity price volatility, with crude prices dropping sharply while product prices surged in Q2, creating uncertainty for trading and planning. - EU sanctions on Russian LNG, specifically for Yamal LNG, remain unclear pending finalization of the new EU sanctions package. Uncertainty around legal language creates compliance risk for TotalEnergies' existing position. - Refining feedstock access could face limited pressure from persistent Middle East tensions, though TotalEnerg notes its Atlantic Basin refineries are largely supplied by non-Middle Eastern crude, with only limited exposure to sour Middle Eastern crude for diesel production. The SATOP refinery in Saudi Arabia remains at 70% capacity and has already been targeted by a drone strike, creating ongoing operational risk. - Sustained high commodity prices could lead to new windfall taxes or extensions of existing export taxes, particularly in Brazil where an export tax is currently facing legal challenges, and existing production sharing contracts already increase government take as prices rise, reducing margins for the company. - Implementation of European green hydrogen regulations is delayed at the national level, with only Germany having enacted clear supportive regulation, creating uncertainty for long-term green hydrogen refining projects that require government fiscal support to proceed. - Geopolitical fragmentation and potential breakdown of OPEC+ production discipline could lead to a sharp downturn in long-term oil prices, creating risk for higher-cost upstream projects.

Analyst Q&A

• Q: What is the status of the Namibia Mopane transaction and Venus FID, and what is the timeline for hitting the 40% annual payout target? /

  A: The Namibian energy ministry has approved the Galp Mopane transaction, and it will close imminently. The Venus FID is targeted for end of July 2026, with a short extension possible to finalize government negotiations, and management is reasonably optimistic it will be completed. The 40% payout target is set on an annual basis, and multi-year average payout is already well above 40% from prior years. Full-year cash flow is expected to come in above the initial $32 billion guidance, and any excess cash will be allocated to shareholder returns after hitting the 10% gearing target, which is expected to be achieved this year.

• Q: Could you update progress on the Uganda and Suriname projects, and what is your view on Chinese oil demand? /

  A: Uganda's Kingfisher project is ready for September 2026 startup, with first production expected before end-2026 and plateau production in 2027. Suriname's project is 40% complete, with first production targeted for H1 2028, on schedule. Chinese refinery runs dropped 3 million barrels per day between February and June due to voluntary government cuts to product exports rather than domestic demand destruction. Chinese refinery activity is expected to remain muted in July and August, and Chinese policy changes have absorbed ~4 million barrels per day of global supply, partially offsetting Strait of Hormuz outage impacts.

• Q: What is the status of TotalEnergies' position in Arctic LNG 2 and clarification on EU sanctions for Yamal LNG? /

  A: TotalEnergies fully impaired its Arctic LNG 2 stake in 2022 and suspended all activities after US sanctions were imposed in November 2023. Novatek has initiated discussions to transfer TotalEnergies' 10% stake to a Russian subsidiary, which has been authorized by the Russian presidency, and TotalEnergies expects the transfer to complete soon, closing the chapter on Arctic LNG 2. Final legal language for the new EU sanctions package is still pending, but current reports suggest it will clarify that EU tankers can carry Russian LNG for delivery outside the EU, which would preserve value for EU companies like TotalEnergies; management will comply fully with all sanctions once the language is finalized.

• Q: What is the magnitude of Q2 gas trading underperformance, and will Q3 see an offsetting overperformance? /

  A: The Q2 gas trading underperformance is approximately $800 million QoQ, which correctly reverses the Q1 overperformance of ~$500 million plus a further negative swing relative to baseline results. European gas prices have rebounded in July 2026, and the prior bullish positions that lost value in Q2 are now in positive territory. It is possible that Q3 will see an overperformance of similar magnitude to the Q2 underperformance, though final results will not be known until quarter-end in September.