Big oil fifinds hurdles in U.S. tax plan

Overhaul proves to bemixed bag for drilling companies.

For Big Oil, the U. S. tax overhaul is turning out to be a mixed bag, especially for companies that drill overseas.

Twoweeks afterPresident Donald Trump and congressional Republicans passed a sweeping rewrite of the tax code that cuts corporate rates, drillers are fifinding other changes that are less of a boon. BP and Royal DutchShellofffffffffffferedapreview recently, saying they may write offff as much as $4 billion in tax assets as a result.

Caps on debt-interest paymentsandcuts todeductions from previous years’ losses may hurt companies building capital-intensiveprojects with borrowed money. And other provisions, including time limits on expensing exploration, could hem in drillerswith long-term projects, including ExxonMobil and Chevron. That may also give an edge to domes- tic shale production.

“This is anAmerica Firsttype tax plan so oil and gas companies that have the majority of their business in theUnited States are going to dobetter thanmultinationals generally,” said Andrew Silverman, a Bloomberg Intelligence analyst inNewYork.

Cutting the corporate rate to21percent from35 percent likely makes the legislation positive overall, according to Greg Matlock, America’s energy tax leader for EY, a global accounting and consulting fifirm. “But that’s tempered somewhat by several important provisions,” he said in an interview.

Those provisions include curveballs that could blunt or even eliminate the benefifit for some sectors, including refifining, BI said in a report Thursday. That’s added a tinge of uncertainty as the industry prepares to unveil fourth-quarter earnings later this month.

“We’re going to have to see what companies say in their earnings call to get a sense of how they see this new law,” Silverman said. “In some cases it may be surprising.” Here’s a look at howthe overhaulmay affffffffffffect oil and gas businesses:

One downside to the lower corporate rate: Companies with so- called tax assets — deductions from future earnings due to past losses — will see the value of those deductions reduced. Furthermore, the new rules allow businesses to off ff ff ff ff ff set no more than 80 percent of a year’s earnings, down from 100 percent previously, according to Steve Marcus, a Dallas-based tax partner at Baker Botts.

As a result, Shell said it may take a charge of as much as $2.5 billion against its fourth- quarter results. BP put the impact at $ 1.5 billion, although both said they expect the tax bill to be a help in the long term.

“A number of the USE & Ps will experience something similar,” Leo Mariani, an Austin-based analyst at Nat Alliance Securities, said by email. This “is just an on-cash accounting charge and is a one-time hit to net income.”

By con tr ast, EOG Resources will post a onetime gain of $2.2 billion at its fourth- quarter results because of anet deferredtax liability, the Houston-based company said Jan. 4.

The law’s repeal of the alternative minimum tax for businesses will eliminate the ability to amortize exploration costs, according to Bloomberg Intelligence. Those costswill nowexpire, for tax purposes, if they’re not used to offset income the year they’re incurred.

That could favor shale explorerswhose wells come online in amatter ofmonths overmore conventional drilling operations thatmay take several years to start producing oil and gas, Silverman said.

Brent crude gained 0.1 percent to $67.72 a barrel at 10:20 a.m. in New York, bringing the gain since July 1 to 41 percent.

Domestic outputmay gain other incentives as well, as the legislation raises barriers to multinational companies that seek to transfer someincomeoutsidetheU.S. The impact will be complicated, though, by the international nature of huge oil companies. Explorers with global reach such as Exxon orHess Corp. alsoownsome of the largest footprints in U.S. shale fifields these days.

Representatives from Exxon and Hess declined to comment.