TotalEnergies

Total's second quarter continued first-quarter trends of Middle East disruptions underpinning higher oil and gas prices, wider refining margins, and strong trading results, which offset the impact of lost volumes. This resulted in adjusted earnings rising to $6.0 billion from $3.6 billion in 2025.

Why it matters: The quarter continued to show that Total remains a net beneficiary of the current situation, given its ability to capitalize on high prices, wide refining margins, and volatility, even as it remains one of the most exposed to Middle East disruptions among integrated oils. Headline production was down 4% year over year because of the Middle East disruptions, but up 4% excluding them. Production losses increased to 210 mboe/d during the quarter from approximately 100 mboe/d in the first quarter. Full-year growth is expected at 3% excluding disruptions. Refining & chemicals reported improved results on strengthening European refining margins even as refinery throughput fell due to planned and unplanned outages as well as the decision to maximize distillate production. Oil trading results were strong, but weak gas trading weakened on a bearish European market.

The bottom line: Our EUR 77 (USD 90) fair value estimate and no-moat Rating remain unchanged, leaving shares fully valued. The resumption of hostilities has caused shares to rally in the last month back toward our fair value estimate. The quarter demonstrates why. Even as it may lose volumes, Total more than makes up for it with higher prices. Also, a strong rally in European gas prices could turn around its gas trading business, which lagged in the second quarter. Total left its buyback rate unchanged at $1.5 billion for the third quarter. However, its first half payout ratio was only 33%, suggesting it will increase payouts later in the year to reach its guidance of more than 40%. This should not be difficult given the price environment and relatively low debt level (13% gearing).

Total has reduced share repurchases from $2 billion per quarter to $1.5 billion to ensure that gearing remains below 20%. With lower oil prices, peers are likely to follow suit. Total's payout targets remain the top among peers. It estimates a 50% payout ratio in 2026 if oil prices are about $70 per barrel.

We are increasing our fair value estimate to $90 per share from $74 after updating our model with the latest financial results, most recent strategic and financial guidance, and updated oil and gas prices.

Our fair value estimate corresponds to a forward enterprise value/EBITDA multiple of 4.3 times our 2026 EBITDA forecast of $44.8 billion. It is derived using Morningstar’s standard three-stage discounted cash flow methodology. With this methodology, a terminal value is derived based on our assumptions about long-term earnings growth and the return on new invested capital. This valuation methodology also more explicitly incorporates our moat rating, which reflects how long we expect a given firm to deliver excess returns on invested capital, as indicated by discounted cash flow analysis.

In our DCF model, we assume Brent prices of $85/bbl in 2026 and $78/bbl in 2027. Our long-term oil price assumption is $65. We assume a weighted average cost of capital of 7.9%.

We model production of 2.75 million barrels of oil equivalent per day in 2030, implying about 2% annually through 2030, in line with management’s guidance.

We expect downstream, chemical, and marketing earnings to deliver strong near-term results, given the Middle East war-related disruptions before reverting to midcycle levels later in our forecast. Contributions from new low-carbon and integrated power investments steadily add earnings growth through our forecast. We model capital spending at the midpoint of management's guidance at about $16 billion through 2030. Management estimates that Total will earn $5 billion in cash flow from the integrated power business in 2030, which we include in our model.

While Total has demonstrated improvement across its integrated portfolio and holds some cost-advantaged assets, it does not earn an economic moat, in our opinion, as its assets fall short of delivering sufficient excess returns at our long-term oil price assumption of $65/bbl.

Total’s upstream portfolio delivered returns on capital employed of only 6% during 2015-19, below average compared with other integrated firms, as greater exposure to natural gas weighed on margins and high spending levels expanded its capital base. However, Total's upstream portfolio is in a better position today, thanks largely to cost reductions and portfolio high-grading. A new wave of high-margin projects combined with reduced capital spending should bolster free cash flow growth and improve returns. The returns improvement should be modest, though, assuming $65/bbl oil, leaving them well below historical levels when oil was $100/bbl, unless oil prices exceed our midcycle estimate.

New LNG volumes will largely drive production growth during the next five years. Although future growth in Russia is off the table, Total has a large set of brownfield and greenfield opportunities to increase LNG supply, including Qatar, the US, Mexico, Nigeria, Mozambique, and Papua New Guinea. Combined with third-party volumes, Total can use its global footprint and trading operations to maximize value. Given the uneven and uncoordinated pace in renewable power additions and coal and nuclear plant closures, as well as geopolitical events, dislocations in power supply and demand can be expected to occur, resulting in elevated gas prices. Total, which has made natural gas a centerpiece of its energy transition plan, will be able to capitalize on recurring imbalances.

Total’s downstream segment has struggled in the past, as its refining assets were primarily located in Europe, where structural challenges, including overcapacity, susceptibility to low-cost imports, and lack of a cost advantage, weighed on margins and returns. However, we expect returns to strengthen. Total has made strides in restructuring its portfolio and closing or converting uncompetitive facilities to renewable diesel, which (along with stronger market conditions) has improved returns over the past several years. It still holds about 70% of its refining capacity in Europe, which remains challenged long-term, particularly due to higher natural gas prices, but these are higher-quality facilities. Over time, Total plans to reduce petroleum refining capacity by closing or converting it to biofuel processing. Total also has a large chemical portfolio, with about half of its capacity in the Middle East and North America, which provides feedstock cost advantages.

Total has also shifted more investment to its marketing and services segment, which is less capital-intensive and has less volatile earnings. As a result, returns have improved to an average of 30% during the last five years, compared with 10% during the previous five-year period. Total also plans to leverage these assets to expand its EV charging and retail offerings, ultimately reducing petroleum-related cash flow in Europe.

Over the next five years, Total plans to allocate about 25% of its capital spending to energy transition businesses, primarily renewable power generation, thereby lifting its gross capacity to 100 GW in 2030 from 34 GW in 2025. Total expects to deliver returns on capital employed of at least 10% in the near term, as it did in 2025, and at least 12% by 2030, comparable with the returns of its oil and gas business.

It drives returns by developing assets with leverage, then later farming down its stakes, and recycling that capital into new projects. The projects are also attractive because they are tied to long-term power purchase agreements, which provide steady revenue and cash flow. However, the company is moving more toward a model that combines renewables with flexible assets such as batteries and gas-fired plants to provide stable baseload power for the high-demand data center and AI sectors.

Acquisition of a flexible power portfolio from EPH has accelerated the segment's growth and firmed up its financial maturity, putting it on a path to be free cash flow positive as early as 2026 or 2027. Management contends that its integration of gas-to-power provides a structural competitive advantage, acting as a hedge for its gas business while enabling the company to capture value across the entire electricity chain. This, in a way, replicates how integrated oils once used oil production and refining.

Returns to date suggest the strategy is value accretive, with Total demonstrating strong capital discipline in project selection and effective integration of storage and power trading. However, it remains to be seen whether the model is sufficiently differentiated to consistently earn excess returns that might be accretive to its moat. It's noteworthy, though, that Total has found a way to make renewable power generation investments work where peers have failed.

We have also considered Total’s environmental, social, and governance risks in our moat rating. However, most are not probable or material enough risk to factor into our rating. Total’s primary ESG risk stems from carbon emissions in its operations and from the use of its products, as well as from emissions, effluents, and waste generated in operations, such as oil spills and poor community relations.

The risk from carbon emissions is most likely to materialize through a carbon tax that raises the prices of end products for consumers, reducing demand over time and threatening Total’s core business. However, even if carbon taxes gain wider adoption over time, any meaningful impact on hydrocarbon demand would likely take more than a decade to materialize. Given the extraordinarily high energy prices in Europe, windfall taxes have become a greater risk. However, we see these only occurring at elevated prices, which means earnings will already be well above midcycle levels.

Although investing in the energy transition, Total remains committed to hydrocarbons and expects to increase production through mid-decade, including new LNG and oil projects.

Total will be able to capitalize on greater global gas demand and price volatility with the expansion of its LNG portfolio model through new equity and third-party volumes.

Management’s introduction of an attractive shareholder return target and commitment to dividend growth set clear expectations for investors.

Total’s strategy of growing hydrocarbon production in the interim while investing in decarbonization for the long term is unlikely to satisfy investors looking for one or the other.

Investment in renewable power generation holds risks as it’s a highly competitive space and is unlikely to generate material free cash flow for the next five years. It requires the use of leverage and farm-downs to lift returns.

Total has invested heavily in LNG projects, but natural gas demand could fall sooner than expected, given rapid renewable power adoption, stranding those assets.