Crude mostly traded above the $100-per barrel mark before August 2014, arguably the most glorious days for energy explorers. This helped the upstream players rake in significant cash and reward investors handsomely. The healthy pricing scenario convinced U.S. shale players to ramp up production by utilizing new methods such as horizontal drilling and hydraulic fracturing (or fracking).
While major oil producers started ramping up crude production, the energy space changed from an oil deficit one to an oversupplied market which resulted in low oil prices. Even as oil is currently trading above the $55-a-barrel mark, the commodity price is way lower than the mid-2014 level.
Along with OPEC’s production cut extension agreement, the tax reform bill will provide a breather to energy players.
Senate & House Agree on 21% Corporate Tax
The Republicans in the Senate and House have decided to put the corporate tax rate at 21% instead of 20%, per the accord signed on Dec 13. Even after the slight bump up, the rate is way lower than the current 35%. Meanwhile, President Trump applauded the move and is content with the 21%.
How Will the Energy Sector Benefit?
The Energy sector has long been a major tax payer with a median tax rate of 36.8% for the last 11 years, as per the corporate tax calculator of MarketWatch. Over the same time frame, the average tax rate for the S&P 500 universe has been estimated at 30% by MarketWatch. Hence, energy companies in general have been losing money more than the majority of S&P 500 companies in the form of taxes.
To date, energy firms like Marathon Oil Corporation MRO, ConocoPhillips COP, Hess Corporation HES, Apache Corporation APA and Chevron Corporation CVX have paid high median effective annual tax rates of 49.9%, 46.9%, 45.5%, 42.6%, and 42.4%, respectively, per MarketWatch.
Marathon Oil, Hess, Apache and Chevron carry a Zacks Rank #3 (Hold), while ConocoPhillips carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
With a 21% tax rate, oil and gas companies will definitely save a lot of money, which could be directed toward growth and maintenance projects.
Energy companies invest significantly as the industry is capital-intensive in nature. For example, the world’s largest publicly traded oil company, ExxonMobil Corp. XOM, has announced a $22-billion capital plan this year, while Chevron has set its capital spending budget for 2017 at around $20 billion.
In the current scenario, capital expenditures cannot be tax-deducted in the year they are incurred. Consequently, U.S. companies need to plan their capital expenditure judiciously. However, companies will be able to deduct their capital expenditures from taxable income immediately, as per the provisions of the tax reform bill. Naturally, this aspect of the bill hugely favors the oil industry.
In the event of companies being able to deduct capital expenses in the year of their occurrence, their tax bills for the year would be lowered significantly due to higher deductions. This will leave more cash in the hands of these companies which can be used to make capital expenditures, acquisitions and share repurchases, among others.
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Chevron Corporation (CVX) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
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ConocoPhillips (COP) : Free Stock Analysis Report
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