• 3 minutes Don't sneeze. Coronavirus is a threat to oil markets and global economies
  • 5 minutes Boris Johnson taken decision about 5G Huawei ban by delay (fait accompli method)
  • 9 minutes This Battery Uses Up CO2 to Create Energy
  • 12 minutes Shale Oil Fiasco
  • 1 hour Historian Slams Greta. I Don't See Her in Beijing or Delhi.
  • 21 hours Indonesia Stands Up to China. Will Japan Help?
  • 7 hours We're freezing! Isn't it great? The carbon tax must be working!
  • 11 hours US (provocations and tech containment) and Chinese ( restraint and long game) strategies in hegemony conflict
  • 2 hours Beijing Must Face Reality That Taiwan is Independent
  • 23 hours Tesla Will ‘Disappear’ Or ‘Lose 80%’ Of Its Value
  • 1 day Environmentalists demand oil and gas companies *IN THE USA AND CANADA* reduce emissions to address climate change
  • 14 hours Might be Time for NG Producers to Find New Career
  • 9 hours Trump has changed into a World Leader
  • 2 days Anti-Macron Protesters Cut Power Lines, Oil Refineries Already Joined Transport Workers as France Anti-Macron Strikes Hit France Hard
  • 2 days Phase One trade deal, for China it is all about technology war
  • 2 days Angela Merkel take notice. Russia cut off Belarus oil supply because they would not do as Russia demanded
Robert Rapier

Robert Rapier

More Info

Premium Content

Energy Sector Could Benefit Most From Trump’s Tax Plan

The tax bill recently signed by President Trump should be a boon to corporate America. The bill will drop the corporate tax rate from the current 35 percent to 21 percent.

But energy companies, which have historically had a higher tax burden than other companies, stand to benefit the most.

The Highest-Taxed Sector

According to the corporate tax calculator at MarketWatch, the energy sector’s median tax rate for the past 11 years was 36.8 percent, far above the 30 percent average tax rate for all S&P 500 companies.

Companies at the top of the list, like Marathon Oil Corporation and ConocoPhillips, pay taxes at a rate of nearly 50 percent. That’s primarily because they have significant foreign operations, and incur foreign taxes that in some cases are much higher than U.S. taxes. In addition, they usually have to pay severance taxes for oil and gas they extract.

Even most of the lowest-taxed companies on the list pay more taxes than the average S&P 500 company. But energy companies are getting two major breaks in the new tax bill.

Two New Tax Breaks For The Energy Sector

The first break is the obvious drop in the corporate tax rate from 35 percent to 21 percent. This will benefit energy companies across the board, but some will benefit more than others. More on that below. Related: What Is Keeping Oil From Breaking $70?

But one more significant item in the tax bill will immediately boost the fortunes of the entire energy sector. The energy business is probably the most capital-intensive sector. Each year, companies across the sector invest billions of dollars into new projects.

For instance, Chevron Corp. recently announced a 2018 budget for capital and exploration spending of $18.3 billion. ExxonMobil made $22 billion of capital expenditures this year.

Under current tax law, these expenditures can’t be deducted in the year they are incurred. But the new law allows capital expenditures to be deducted in the year of their occurrence. This change will further lower the tax burden for the energy sector while encouraging more capital spending.

Higher Earnings Ahead

Energy companies should benefit across the sector, but refiners are projected to benefit the most. One reason for the increased benefit to refiners is they have consistently enjoyed positive pre-tax income in recent years (in contrast to many of the oil and gas producers).

Bloomberg recently calculated that refiner Phillips 66 could see its earnings next year increase by 16 percent from the tax change. Andeavor’s per-share earnings were projected to increase by 20 percent.

Related: Can Blockchain Bring An End To Corruption?

At the other end of the spectrum, Master Limited Partnerships (MLPs), which consist primarily of midstream companies, are already exempt from corporate tax for earnings that are passed through to unitholders. Thus, since they already receive favorable tax treatment, they will see less benefit from the tax reforms.

Prepare For A Rally

Energy companies have rallied since August as oil prices have climbed higher. But because the new tax law will disproportionately benefit the energy sector, all else being equal the sector should outperform the S&P 500 because of expectations for higher earnings.

Of course, oil and gas prices are other variables that must be accounted for, but that won’t be an issue unless prices sharply drop. Expect the overall energy sector, but especially the refining sector, to emerge as the most significant sector winner from the tax reforms.

By Robert Rapier

 

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage




Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play