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| War Has Been Declared on U.S. Energy |
| 2009-02-28 |
| On Thursday, the White House released its federal budget proposal--declaring war on United States energy producers. Though somewhat anticipated, there are a number of tax incentives for the oil industry that may be repealed. At first glance, it appears that independent producers who primarily operate within the U.S. stand to be hurt the most. As it pertains to the budget, the biggest tickets items include the repeal of the Gulf of Mexico royalty relief, the expensing of intangible drilling costs (IDCs), the manufacturing tax deduction, and the percentage of depletion method for oil and natural gas. The Gulf of Mexico Royalty relief calls for lower royalties when commodity prices are below certain thresholds. Given the long investment cycle, large investment, and geological risk associated with offshore drilling, producers claim the royalty relief is necessary to reduce capital impairment risk. The budget also provides for a fee on nonproducing leases on federal lands (primarily offshore)--basically a "use it or lose it" clause. Players that stand to be impacted by this change include the majors: ExxonMobil, Chevron, ConocoPhillips, and large independents like Anadarkoand Devon. Portfolio diversity will insulate the largest producers from these higher taxes to some degree. Perhaps of greater importance is the repeal of the IDC deduction. IDCs (roughly 80%-90% of the well cost) are tax-deductible, allowing producers to defer taxes. An especially active producer that increases its drilling budget every year can effectively avoid paying cash taxes for years. Given the heavy capital requirements for early- to mid-stage producers, the IDC tax deduction is a critical component of a firm's financing strategy. Small to medium-sized E&Ps that are still rapidly growing stand to be impacted the most from this change: Chesapeake Energy CHK, Range Resources RRC, Ultra Petroleum UPL, XTO XTO, and Southwestern Energy SWN, among others. Because natural gas is primarily a regionally traded commodity, we believe this places a governor on the pace at which domestic natural gas production can grow, putting upward pressure on prices in the longer term. Producers with clean balance sheets who aren't as reliant on IDC tax credits as part of their financing strategy stand to benefit. The manufacturing tax credit is pretty straightforward and was enacted with the 2004 American Jobs Creation Act. In 2008, it represented a 6% tax credit on manufacturing activities. The budget calls for oil companies to be ineligible for this deduction. The percentage of depletion clause is a little more complicated and only pertains to nonintegrated producers. It is essentially a form of accelerated depreciation, which defers tax payments. Bottom line, cash taxes appear to be headed higher, which points to higher oil and natural gas prices in the longer term. With a higher cost structure, we wouldn't expect U.S. producers' profits to move in lock step. |
| Posted by:Fred |
| #7 Next he will go after the electric companis, tax the crap out of them. Then he will brag about not increasing income tax and blame the high cost of energy on greedy corperations. Good god he is transparent. Im glad my solar power is up. |
| Posted by: 49 Pan 2009-02-28 23:58 |
| #6 Add to this Sec Interior Salazar basically placing all shales Off Limits for even R&D work, and exploration. |
| Posted by: OldSpook 2009-02-28 16:42 |
| #5 For the short term, energy exploration and production has been slowing due to falling prices, but has overall been supportive of the economy. The above tax changes is sure to decrease jobs in the energy exploration and service areas, as well as equipment manufacturing. A big hit to the U.S. economy over the next twelve months. |
| Posted by: DoDo 2009-02-28 14:21 |
| #4 From yesterday's investors' news letter by John Mauldin: "This week saw President Obama give us a budget with a projected deficit of $1.75 trillion dollars, and a massive tax increase on the "wealthy." But hidden in the details was an even larger tax increase on everyone. Obama wants to create a cap-and-trade program for carbon emissions. This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately. It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy." |
| Posted by: Anguper Hupomosing9418 2009-02-28 13:34 |
| #3 Follow the money. |
| Posted by: g(r)omgoru 2009-02-28 12:43 |
| #2 At first glance, it appears that independent producers who primarily operate within the U.S. stand to be hurt the most. And this reduces our dependence upon foreign oil how? OBAMA: In ten years, we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela. Number one, we need to expand domestic production and that means telling the oil companies the 68 million acres that they currently have leased that theyÂ’re not drilling, use them or lose them. |
| Posted by: Besoeker 2009-02-28 12:10 |
| #1 The regret will be felt world wide. |
| Posted by: newc 2009-02-28 11:44 |