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.