Who will step up to the ROCE plate?

2023 Supermajor ROCE report cards

The Gist: (1) Integrated Oil put up a 12% return on capital employed in 2023, 2% above the LT average but differentiation is needed to drive relative ROCE outperformance in the future. (2) Industry ROCE should remain at or above long-term averages (~10%) since the industry is not spending (yet). (3) High-cost reserves, whether obtained through drilling or M&A, negatively impact ROCE, however, reserves are currently being acquired at a comparatively low cost.

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2023 results are in the integrated oils, also known as the supermajors, achieved a 12% return on capital, surpassing their long-term average of 10% by 2%, with only ENI remaining to report its results.

ExxonMobil claimed the top spot at over 16%, while Shell lagged behind at under 8%, with other companies falling within the 10%-12% range.

ENI 10% is annualized 1H23 results.

For fellow accounting nerds like myself, my calculations for returns on capital diverge from the companies' disclosed figures because I incorporate impairment charges accrued during the year into the numerator and cumulative impairment charges into the denominator of the ROCE equation.

According to GAAP, management is mandated to recognize these impairment charges when specific market conditions are met, typically during an energy price collapse. However, the economic truth is that these assets still exist, so the capital should be retained on the books. This approach has gained prominence through the contributions of Stern & Stewart (HERE), pioneers of the Shareholder Value concept.

ROCE stands as a pivotal metric within the large-cap oil & gas sector, having propelled relative share price outperformance for decades, as demonstrated below.