Oil and gas companies will bear the brunt of a new fees and levies, including a taxing scheme included in the Inflation Reduction Act of 2022 that is expected to be signed by President Joe Biden, according to analysis by Moody’s Investors Service.
The legislation adds taxes on U.S. corporations that have profits of more than $1 billion, adding a 15% alternative minimum tax (AMT). It also levies a 1% excise tax on companies that buy their own stocks.
Moody’s analysis, published in an Aug. 12 report, found that “large oil and gas issuers that pay little income tax also tend to have some of the largest share buyback plans, which will make them the most affected by the new taxes.”
The 15% AMT targets large multinational corporations that would otherwise be paying little to no tax in years of significant financial statement profitability, Moody’s said.
“This tax effectively eliminates a substantial portion of the benefits of deferred taxes and net operating losses for companies that have a consistent $1 billion dollars of reported pre-tax income,” said David Gonzales, Moody’s vice president and senior accounting analyst, according to the report.
Affected, Rated Investment Grade Companies by Sector:
|Sector||Companies with $1B pre-tax income||Number paying less than 15% tax rate||Increase in cash tax rate|
|Energy: oil & gas||19||14||15%|
|High tech industries||28||9||5%|
|Chemicals, plastic & rubber||12||6||6%|
|Hotel, gaming & leisure||7||4||5%|
The tax zeroes in on companies that have more than $1 billion in modified pre-tax income that pay less than 15% of cash taxes. It is calculated by taking book pre-tax income and replacing depreciation expense with capital expenditures to simplistically simulate accelerated depreciation that is used under current tax law.
While the hardest hit sectors, including technology, industrial chemicals, plastic and rubber and hotel, gaming and leisure companies will all see an increase, oil and gas companies will be hardest hit.
Of the four industries with the largest change in taxes, “it is notable that [the] oil and gas industry has a full 15% delta in its cash tax rate –- primarily because these companies currently pay little or no tax. Now, they will have to pay the full 15% minimum tax rate on their book pre-tax income,” Gonzales said.
From a liquidity perspective, the tax could be most harmful to large companies that are growing and have only recently met the income threshold that kicks in additional taxation, according to Moody’s.
“These companies may have reserves of net operating losses that allow them to defer paying cash taxes in the first years of profitability. Their net operating losses have been used to offset taxable income, but that offset will in most cases be undone by the book minimum tax of 15% and can be a material portion of operating cash flow,” Gonzales said.
From an income statement profit-after-tax perspective, most affected companies will see no change in overall tax expense in the income statement, as any additional tax expense will also give rise to a deferred tax asset that can be used in future years to offset tax bills for amounts over the 15% minimum.
Moody’s said the 1% excise tax on stock buybacks is not material enough to warrant a change in credit analysis by the rating service.
The excise tax comes at a time when oil and gas companies have been buying back stock in order to reward shareholders as producers benefit from high commodity prices and capital discipline “to generate unprecedented amounts of free cash flow,” Gonzales said.
Companies such as Exxon Mobil, Shell, TotalEnergies SE and Chevron Corp. have combined for an aggregate $23 billion of buybacks in the second quarter and each of these companies has provided guidance that buybacks will continue apace into next year.
Moody’s estimated that 9% of U.S. companies it has rated investment grade are likely to pay higher cash taxes under the new AMT, a credit negative for them.
“We do not expect that speculative grade companies will be materially affected because they tend to be relatively smaller in size,” Gonzales said.
Public independent producers such as Pioneer Natural Resources will see mixed effects from the new taxes. In second-quarter 2022, Pioneer reported share repurchases totaling $750 million since the end of the first quarter, which would have triggered the 1% excise tax. However, the company also paid cash taxes of $144 million, giving it an effective tax rate of 22% for the second quarter.
“While the tax is not likely to significantly affect the volume of share repurchases, it could be a considerable source of tax revenue over the next couple years,” Gonzales said. “We do not expect the 1% excise tax on stock buybacks to have a material impact on creditworthiness or change issuers' capital allocation decisions.”
On Aug. 12, American Petroleum Institute (API) President and CEO Mike Sommers said the Inflation Reduction act takes important steps toward oil and gas leasing and investments in carbon capture and storage. The bill increases tax incentizes storage of carbon dioxide by enhancing carbon tax credits, known as 45Q, to $85/ton of permanently sequestered CO₂ equivalent, up from $50 per ton.
But Sommers said in a new release that the legislation “falls well short of addressing America’s long-term energy needs and further discourages needed investment in oil and gas.”
Sommers said that while API shares the goal of addressing climate change, considerable tax increases come at the wrong time. The law additional adds $11.7 billion import tax on crude oil and petroleum products and increased fees on domestic production and the establishment of a new $6.3 billion natural gas tax.
“This legislation imposes additional costs on American families and businesses at a time when policymakers should be looking for solutions to provide relief,” Sommers said.
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