Oil cash likely to remain abroad

Wall Street, industry wary of tax bill boon

U.S. oil companies, most with headquarters or significant operations in Houston, have more than $150 billion in foreign earnings, including tens of billions of dollars in cash, that they could bring back into the United States at favorable tax rates under the recently enacted federal tax overhaul.

Companies in other industries are already moving to repatriate their overseas earnings and invest some of the money in their U.S. operations. Apple, for examples, said it will take a $38 billion tax hit to bring home some $250 billion in cash, with plans to spend $30 billion to build a new campus, add data centers and hire 20,000 new workers.

But don’t expect oil producers, refiners and equipment makers to follow Apple’s example. With the oil bust still fresh in the minds of investors, energy companies are under pressure from Wall Street to spend conservatively and use any

spare cash to pay down debt, distribute dividends to shareholders and boost stock prices.

“It’s all about being disciplined with capital, and increasing spending just because you’re repatriating cash wouldn’t be well received,” said Brian Youngberg, an analyst at Edward Jones in St. Louis. “You only invest if the returns are appropriate.”

The question of whether American companies will bring home overseas earnings and what they will do with money are the result of the sweeping changes in the corporate tax system approved at the end of last year by the Republican-controlled Congress and signed by President Trump.

Under the previous tax law, U.S. companies could avoid paying taxes on foreign earnings by keeping it abroad, and they stashed some $3 trillion overseas. The new system imposes taxes on foreign earnings, but U.S. companies are allowed a one-time tax of 15.5 percent for repatriated cash and 8 percent for other assets — far less than the 35 percent they would have paid under the old system.

Many companies are taking advantage of the opportunity. JP Morgan Chase, which told investors that it would pay a multi-billion tax bill to bring back its foreign earnings, said on Tuesday that the corporate tax changes and a more favorable regulatory environment under the Trump administration helped drive a $20 billion U.S. investment plan that includes raising wages for 22,000 employees, opening 400 new branches across the country and hiring 4,000 new workers.

Those investments include raises for nearly 3,500 employees in Texas, and 900 in the Houston area.

Experts skeptical

Analysts and economists are skeptical the oil industry will pour repatriated cash into U.S. drilling and refining operations, because the two oil companies with the bulk of the industry’s foreign earnings — Exxon Mobil and Chevron — are among the more conservative spenders in the business.

Exxon and Chevron together had more than $100 billion in foreign earnings at the end of 2016, according to data from the most recent regulatory filings data compiled by financial research firm Audit Analytics. Exxon Mobil had $54 billion in foreign earnings, the 10th largest among U.S. companies; Chevron had the 13th largest sum, with $46.4 billion.

Foreign earnings can include the value of assets, among other things. At the end of 2016, Exxon had a total of $3.7 billion in cash and cash equivalents, Chevron, just shy of $7 billion.

Exxon and Chevron, which declined to comment on their plans for overseas earnings, don’t have the same incentives to spend the money on U.S. operations as say, Apple, which, in the Trump era, has had to shake off a reputation for relying too heavily on factories in China and other foreign countries, analysts said.

For all the controversy the energy industry has stirred up over oil spills, air pollution and climate change in recent years, oil companies have avoided that kind of negative attention.

The global nature of the oil industry means Exxon and Chevron also must invest in dozens of countries around the globe. But most important, analysts said, the energy companies are unlikely to reinvest foreign earnings because Wall Street wouldn’t like it.

Of late, investors have warned producers against spending too much on efforts to pump greater amounts of oil, saying they’d prefer to earn higher returns through share repurchases, which helps lift stock prices, and increased dividends after taking hits during the worst oil downturn in a generation.

That’s been a mantra of the nation’s biggest publicly traded oil companies even before crude prices crashed in mid-2014. And that’s pretty much the way of things in Corporate America, economists said. Historically, U.S. companies have typically used one-time tax advantages to return money to shareholders, rather than invest in expansions that might increase economic growth, according a recent report by the macroeconomic research firm Capital Economics said in a recent report.

“This would be unlikely to provide a major boost to investment or hiring,” Capital Economics said.

Houston gets a cut

Still, if oil companies repatriate their overseas cash, it would likely provide small benefits to Houston.

The region, after all, is home to plenty of oil and gas shareholders, whether company employees with stock-purchase plans or energy-focused hedge funds. Whenever money moves in the oil industry, whether for parts for drilling in West Texas or platforms off the West Africa Coast, Houston almost always takes a cut, said Bill Gilmer, director of the Institute of Regional Forecasting at the University of Houston.

“If it’s spent abroad, or spent here,” Gilmer said, “a good share of it would end up in the Houston area.”

Houston’s energy companies have billions in foreign earnings overseas. Large independent oil producers, including Houston’s Occidental Petroleum Corp. and Conoco Phillips, had almost $24 billion in foreign earnings combined at the end of 2016, according to the regulatory filings data compiled by Audit Analytics.

Major oil refiners Valero Energy Corp., based in San Antonio, and Phillips 66, based in Houston, together had $6.9 billion in foreign earnings.

Oil field service companies, equipment suppliers and rig contractors, including Houstonbased National Oilwell Varco, Baker Hughes and Halliburton, had more than $24 billion in foreign earnings.

Baker Hughes and Phillips 66 declined to comment. Other companies did not respond to requests for comment. Halliburton told investors on Monday it recorded an $882 million non-cash charge as a preliminary provision for “the net impact of tax reform,” although executives did not specify the sources of the higher tax bill.

Exxon Mobil and Chevron report fourth-quarter 2017 earnings on Feb. 2.