“The only certainty in life is death and taxes.”
— Mark Twain.
The death of a company may not be as certain as a human’s, but taxes are an everyday occurrence for corporations and humans alike. In the most recent budget proposal from the Obama administration, companies in the energy space could see a big increase in that certainty.
Let’s take a quick look at the gory details and see what the industry gets out of it.
Just give it to me, doc
To determine the exact effects of the new budget proposal, you have to do some pretty deep digging. The reason is that the tax increases are spread out over several different departments. For instance, there is a proposal to increase the taxes by $64 million a year starting in 2014 to pad the Oil Spill Liability Trust Fund, but it’s only noted as a line item buried deep in the summary tables.
When all of it is tallied up, the FY2014 budget calls for an additional $90 billion over the next 10 years from the energy sector, or more specifically, from fossil fuels. Some of these include direct taxes on the industry, such as repealing the ability to expense intangible drilling costs and the Enhanced Oil Recovery Credit. Others are more indirect methods, like repealing the Last In-First Out accounting method.
Certainly, some of these moves will hurt certain parts of the oil and gas industry harder than others. For example, Denbury Resources Inc. (NYSE:DNR) is an Enhanced Oil Recovery specialist, so the EOR tax credit would hurt it much more so than others. Another example is a shortening of primary lease terms for federally auctioned land. This would shorten the time an exploration and production company has to start producing from federal lands before the lease expires. A move like this would certainly hurt companies with lots of undeveloped land on their books (Chesapeake Energy Corporation (NYSE:CHK), anyone?).
Overall, this could be a pretty hard pill to swallow. Right now, the oil and gas industry in the US pays about $86 million in taxes to the federal government every day. If all of these proposals were to pass, it would roughly add $24 million per day in taxation to the entire industry. According to a Wood Makenzie study back in 2011, these types of tax hikes would have a pretty hefty effect on the entire industry. Its calculations predict that by 2020, an increase in taxes would cost the industry about 700,000 less barrels of oil equivalent per day.
I paid for what?
With all of this new spending, what exactly does the energy sector get out of it? If you are in fossil fuels, not much. There are some token moves that will help, such as implementing a faster, more efficient permitting process for oil and gas leasing. Also, a proposal to increase the contribution to the oil spill liability trust by $0.01 would help cover the costs for oil spill cleanup. This is an idea that has been kicked around since the Macondo spill back in 2010. With Exxon Mobil Corporation (NYSE:XOM)‘s recent spill in Arkansas in the news lately, it brings this proposal into the forefront.
Most of the benefits from these moves will go toward clean energy research and energy conservation initiatives. While many will deride the efforts as a way of using the oil and gas industry as an ATM, the case can be made that energy taxes have been used to develop the next energy source for well over a century.
What a Fool believes
According to a Harris Interactive poll, 74% of Americans believe that increased energy taxes is not the best solution. Many believe that higher taxes will eventually lead to higher energy costs for consumers. In reality, though, this is only a budget proposal, and it could be months before we see a final proposal.
As much as taxes may dominate the news cycles, very rarely should taxes sway your investment decisions. To paraphrase Warren Buffett, when someone pitches a sound investment idea to you, the first thought in your mind is never, “What will my tax rate be on the gain?” Rather, focus on solid companies that will perform no matter what business environment is out there.
The article Obama Sends the Taxman After the Energy Sector originally appeared on Fool.com is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. The Motley Fool owns shares of Denbury Resources and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
