From Todd Royal: A few days before Christmas, the U.S. House and Senate passed the most comprehensive tax reform plan since 1986. Upon signing the bill, President Donald Trump called it “an incredible Christmas gift for hard-working Americans.”
But Trump’s allies in the GOP Congress gave an incredible end-of-the-year gift to energy companies.
Defenders believe a windfall of exploration, production and investment will emanate from energy companies in 2018, while critics say it will lessen renewable energy at the expense of the environment by unleashing further fossil fuel exploration.
American businesses in general will reap billions in tax savings from the cut in the corporate income tax rates from 35 percent to 21 percent, but with the treatment of capital expenditures lessening business tax exposure, this is a particular boom for energy companies.
Exxon Mobil (NYSE:XOM) Vice President of Investor Relations Jeffrey Woodbury said, “The first things that are being funded [after the tax cuts are implemented] are our dividends and our investment program.” Though EM had a negative tax rate last year, in previous years they have paid as high as 33 percent diminishing investor returns.
The renewable energy industry had to fight efforts to eliminate their tax credits, but eventually avoided proposals that would have been tough for U. S. solar and wind to remain profitable. In the final version of the bill, production and investment tax credits were left in place, ensuring renewable energy will continue to grow at taxpayer expense. The electric vehicle industry was also spared, thanks to the retention of the $7,500 tax credit when an electric vehicle (EV) is purchased.
But to the dismay of environmentalists, the bill opened up portions of the politically-charged Arctic National Wildlife Refuge (ANWR) to oil exploration. It was a make-or-break issue for the tax bill to clear the senate, since Alaska Senator Lisa Murkowski said that was the only way she would vote yes.
The biggest benefit overall for the energy industry is the cut in the corporate tax rate. Barclay’s equities analysts calculated:
“The 14 percent point cut in the corporate tax rate will add $1 billion to the profits of the U.S. oil and gas exploration production firms, equivalent to a $1 a barrel increase in oil prices, and the tax cut could add five percent to the earnings per share of Exxon Mobil and Chevron.”
For capital-intensive companies (and the oil and gas industry qualifies for this designation), lowering the effective corporate rates and expensing provisions–in which companies can expense 100 percent of their investment over five years–is a dramatic impact.
Oil refiners will also see new corporate profits from the plan. Pavel Molchanov, energy analyst at investment firm Raymond James, believes the corporate rate cut is most beneficial for independent oil refiners. He estimates the earning per share for refiners “will jump by an average of 23 percent.” Integrated multinational oil companies like Exxon Mobil, Shell and Chevron will also see new profits since they own oil refineries. International earning will also be taxed differently, and at lower rates, further assisting large energy firms.
Oil investors were also rewarded with additional benefits for master limited partnerships (MLPs). This corporate vehicle is popular with oil pipeline companies and renewable energy projects. It’s been used by Energy Transfer Partners (NYSE:ETP)–owner of the Dakota Access and Rover lines–and uses “pass-through entities”, meaning taxes aren’t paid at the partnership level; only investors pay the applicable taxes. Under the previous U.S. administration, pass-through rates investors paid were the same as their personal income rates, but the new tax bill slashes the pass-through rates to 20 percent. Another boom for the energy industry.
The power of the energy industry was also evident in the new tax bill when congress didn’t eliminate the Renewable Fuel Standard, the oil depletion allowance and tax breaks for intangible drilling costs by independent firms, or the 15 percent tax credit for enhanced oil recovery.
Utility companies did well by having their corporate rates cut and being allowed to fully expense capital investments that will save billions. Industry lobbyists also convinced the GOP-led congress to preserve their tax-saving ability by deducting their state and local taxes.
“Due to the regulated nature of the electric power industry, this is a huge win for customers as the drop in the corporate rate is mostly flowed back to them over time in rates,” The Edison Electric Institute said in a statement.
Many claims will be now be tested to prove whether these tax breaks and elimination of tax burdens will benefit American energy companies and their constituents. A recent Monmouth poll showed 50 percent of Americans believe their personal taxes will go up under tax reform. So it’s no wonder the majority of Americans believe the bill is bad for them and that energy companies will use the benefits only to enrich themselves and shareholders.
Whatever the case, nothing creates job and opportunities the way oil and natural gas exploration does at this time. Disaster has been foretold for this bill. Now let’s see what takes place for energy companies in 2018.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) closed at $37.18 on Friday, down $-0.44 (-1.17%). Year-to-date, XOP has declined -9.64%, versus a 21.71% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of OilPrice.com.
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