Billions from tax cuts supercharge fossil fuel sector
By Kevin Crowley, David Wethe and Alex Nussbaum, Bloomberg
Feb. 3, 2018 at 7 p.m.
Oilmen, wildcatters and particularly refiners are reaping billions in gains from President Donald Trump's tax overhaul, helping boost the staying power of old-style energy even as the world searches for cleaner fuels.
The tax adjustments come as crude prices have rallied 54 percent since June. Together, the price rise and the new tax code have supercharged the oil industry in ways that could test the resolve of money managers who've vowed to divest from companies that have powered the world's economic engines for two centuries. The top four refiners last week reaped $7 billion in gains, led by a $2.7 billion jump announced Friday by the biggest, Phillips 66.
Meanwhile, the tax overhaul appears to be a mixed bag for solar purveyors and wind farms. They could face higher borrowing costs because the federal tax credits they retain probably won't be as attractive to large banks that now have lower tax liabilities.
"Oil is a resilient industry and it isn't going away any time soon," said Irving Levine, who manages $120 million as CEO of Copley Financial Services Group in Fall River, Massachusetts. "Tax reform, in the long run, only increases their profitability."
Icing on the cake
While corporate America has praised Trump's tax cuts for creating jobs and reviving flagging industries, its the icing on the cake for industries that revolve around oil. Crude prices are at levels last seen in 2014 and everyone from supermajor oil titans to family-owned businesses were already gung-ho on U.S. oil and gas.
The tax windfall? Simply an added bonus.
ExxonMobil Corp., the world's largest publicly traded producer by market value, on Monday praised the "pro-growth business climate here in the U.S." as it announced plans to spend $50 billion over five years and triple production in the Permian Basin.
For Murphy Oil Corp., a much smaller driller than Exxon, the overhaul makes it easier to repatriate foreign cash and will "significantly lower tax in the future" on drilling in the Gulf of Mexico and Texas shale fields, said John Eckart, the Eldorado, Arkansas-based company's chief financial officer, on a conference call Thursday.
"We have great returns with the 21 percent rate and compete internationally well now," he told analysts on a conference call. "So it's a big help for us this tax reform, very positive."
Refiners are among the biggest winners from the reforms.
For Phillips 66, Valero Energy Corp., Marathon Petroleum Corp. and Andeavor, the four biggest independent oil refiners, the U.S. tax code overhaul has been more profitable than their actual business. They posted one-time tax gains of $7 billion combined in the fourth quarter, matching their net incomes for all of 2016, according to data compiled by Bloomberg.
Marathon's board was so enthusiastic it approved a 15 percent dividend increase. Even without the tax gain, Phillips 66 beat earnings estimates by 19 cents. It's an extra boost to an industry already riding high from fat margins after from turning raw crude oil into fuels and strong worldwide demand for gasoline and diesel.
Boost to asset values
For U.S. explorers, the law should mean a $190 billion boost in asset values, researcher Wood Mackenzie said in a estimate released Tuesday. That will more than compensate for other changes in the law that could limit deductions for past losses or encourage individual states to raise fees on local production.
ConocoPhillips and EOG Resources Inc. are among those that posted one-time tax gains, while Shell and BP have indicated the overhaul was a negative for them. These are non-cash elements to earnings and all companies have said that in the long term the reforms will be positive.
"Going forward, of course, it's very positive," Ben van Beurden, chief executive officer of Royal Dutch Shell Plc, said in a Bloomberg TV interview on Thursday. The $10 billion Shell plans to spend annually in the U.S. over the next few years "is going to be doing well in a much more advantageous tax environment."
For pipeline companies, the big fear was losing the tax status that makes them attractive investments. Many are structured as master limited partnerships, which don't pay corporate income taxes. Those fears proved to be unfounded and the provision was left alone.
In a conference call Wednesday, Enterprise Products Partners LP noted that the tax overhaul "appropriately preserves the favorable tax attributes for master limited partnerships and encourages MLPs to continue investing in infrastructure growth opportunities, which contributes to U.S. job and GDP growth."
The overhaul provided a quick shot in the arm for utilities, which suddenly found themselves flush with extra cash they had set aside for Uncle Sam. Dominion Energy Inc. reported a $988 million fourth-quarter gain, thanks to the lower rates. NextEra Energy Inc. raised its 2018 forecast by about 45 cents, to a range of $7.45 to $7.90 a share.
Long term, however, lower rates present utilities with a conundrum. State regulators require them to pass savings onto customers, which will reduce cash flow. Utilities may argue they should be allowed to invest some of the money to make generating plants and power lines more reliable. Already, American Electric Power Co. is in talks with regulators in 11 states about the issue. Meanwhile, the company said it will cut planned 2020 capital spending 8.3 percent to $5.5 billion.
None of the major solar, wind and fuel cell energy companies have reported fourth-quarter yet. Even when they do, lower corporate tax rates likely won't be much of a boost because the companies regularly post losses and owe no income taxes.
Regardless of recent trends, electric vehicles and the specter of carbon taxes make fossil fuels a poor long-term investment, according to David Richardson, an executive director at Impax Asset Management, which focuses on sustainability and has about $15.3 billion under management.
"For long-term investors, there are uncompensated risks in owning fossil fuels and we think there are better opportunities in the energy markets that would be around energy efficiency, which has higher returns on investment," Richardson said.