Kevin Crowley & Alex Nussbaum
Monday, January 08, 2018
For Big Oil, the US tax overhaul is turning out to be a mixed bag, especially for companies that drill overseas.
(Bloomberg) — For Big Oil, the U.S. tax overhaul is turning out to be a mixed bag, especially for companies that drill overseas.
Two weeks after President Donald Trump and congressional Republicans passed a sweeping rewrite of the tax code that cuts corporate rates, drillers are finding other changes that are less of a boon. BP Plc and Royal Dutch Shell Plc offered a preview recently, saying they may write off as much as $4 billion in tax assets as a result.
Caps on debt-interest payments and cuts to deductions from previous years’ losses may hurt companies building capital-intensive projects with borrowed money. And other provisions, including time limits on expensing exploration, could hem in drillers with long-term projects, including Exxon Mobil Corp. and Chevron Corp. That may also give an edge to domestic shale production.
“This is an America First-type tax plan so oil and gas companies that have the majority of their business in the United States are going to do better than multinationals generally,” said Andrew Silverman, a Bloomberg Intelligence analyst in New York.
Cutting the corporate rate to 21 percent from 35 percent likely makes the legislation positive overall, according to Greg Matlock, America’s energy tax leader for EY, a global accounting and consulting firm. “But that’s tempered somewhat by several important provisions,” he said in an interview.
Those provisions include curveballs that could blunt or even eliminate the benefit for some sectors, including refining, BI said in a report Thursday. That’s added a tinge of uncertainty as the industry prepares to unveil fourth-quarter earnings later this month.
“We’re going to have to see what companies say in their earnings call to get a sense of how they see this new law,” Silverman said. “In some cases it may be surprising.” Here’s a look at how the overhaul may affect oil and gas businesses:
Writing Off Losses
One downside to the lower corporate rate: Companies with so-called tax assets — deductions from future earnings due to past losses — will see the value of those deductions reduced. Furthermore, the new rules allow businesses to offset no more than 80 percent of a year’s earnings, down from 100 percent previously, according to Steve Marcus, a Dallas-based tax partner at Baker Botts LLP.
As a result, Shell said it may take a charge of as much as $2.5 billion against its fourth-quarter results. BP put the impact at $1.5 billion, although both said they expect the tax bill to be a help in the long term.
“A number of the US E&Ps will experience something similar,” Leo Mariani, an Austin-based analyst at NatAlliance Securities LLC, said by email. This “is just a non-cash accounting charge and is a one-time hit to net income.”
By contrast, EOG Resources Inc. will post a one-time gain of $2.2 billion at its fourth-quarter results because of a net deferred tax liability, the Houston-based company said Jan. 4.
The law’s repeal of the alternative minimum tax for businesses will eliminate the ability to amortize exploration costs, according to Bloomberg Intelligence. Those costs will now expire, for tax purposes, if they’re not used to offset income the year they’re incurred.
That could favor shale explorers whose wells come online in a matter of months over more conventional drilling operations that may take several years to start producing oil and gas, Silverman said.
Brent crude gained 0.1 percent to $67.72 a barrel at 10:20 a.m. in New York, bringing the gain since July 1 to 41 percent.
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