030619 030619 030619

A new golden age of oil refiners

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Oil refining is typically not a high ROIC business except for the Finnish based Neste, but the recent jump in crack spreads are causing revenue growth to soar to above 70% y/y and with crude oil supply remaining tight these refining margins will remain high for a considerable time period. The question is how long this new golden age of oil refining will last. As long as capital expenditures are not being raised considerably in the energy sector the market will remain tight for quite some time.


Oil refiners are seeing growth rates that would envy Silicon Valley

In our Friday’s equity note When growth stocks are no longer growth we highlighted how technology companies previously enjoying rapid growth rates are seeing growth grinding to a halt while classic low growth industries are suddenly where the growth is. The seven largest publicly-listed pure oil refiners (see table of companies with most exposure to the oil refining business) below are growing revenue on average of 73% over the past year compared to a previous pandemic growth winner Zoom Video growing only 21% y/y in its latest fiscal quarter. The reason is that crack spreads, the difference between the refined product and the price of crude oil per barrel, are galloping to the highest levels in 10 years across gasoline, jet fuel, and diesel; US east coast diesel price has hit highest level since early 1990. Our Head of Commodity Strategy, Ole S. Hansen, wrote about these dynamics in his Friday’s commodity note WCU: Fuel price surge lifts inflation and risks killing demand. The sanctions and self-sanctions on Russia are limiting supply of crude oil for oil refiners making it more difficult to meet demand.

NameMkt cap (USD mn.)Revenue growth (%)ROIC (%)5yr return (%)
Reliance Industries Ltd242,19857.07.0248.6
Marathon Petroleum Corp49,78067.67.9120.9
Valero Energy Corp47,58485.29.9135.1
Phillips 6642,90567.30.939.4
Neste Oyj33,83776.324.6267.3
HF Sinclair Corp8,70493.86.673.7
Ampol Ltd5,65160.713.236.6
Source: Bloomberg and Saxo Group
4_PG_1

The recent surge in crack spreads has not yet filtered through to 12-month rolling return on invested capital (ROIC) with only Neste and Ampol delivering ROIC above 10% and Neste being the only oil refiner delivering ROIC above 20%. Historically the oil refining business has not been a high ROIC on average, but given the energy crisis we could have an extended period that will turn onto a golden age for these oil refiners.

Oil prices are still not high enough to spur large investments

The Q1 earnings season has shown that none of the oil and gas majors are increasing their expected capital expenditures in 2022 focusing instead on buying back their own shares returning capital to shareholders. Many might wonder why oil and gas majors are not investing more in new oil and gas assets when the active Brent crude futures contract (July 2022) is trading at around $108/brl which is on par with prices observed in 2012-2013 before the big correction in oil prices in 2014-2015.

The issues behind lack of investments are many but some of the important factors are ESG mandates constraining financing for industries with high ESG risk scores such as oil and gas. Another factor is that the 5-year forward price on Brent crude is around $70.50/brl which is roughly a third below the current spot price and 25% below the average 5-year forward price in the years 2010-2013. Developing new oil and gas assets require a lot of investments and time to be profitable and the regulatory environment is currently not supporting oil and gas majors investing a lot in new assets. Finally, the industry is finding itself in a dilemma as the current energy crisis might sow the seeds for a recession or lower demand in the future, so oil and gas majors may be reluctant to invest too much when the macro volatility is as high as it is.

4_PG_2
Source: Saxo Group
4_PG_3
Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.