http://online.wsj.com/articles/u-s-energy-companies-deferring-taxes-by-the-billions-1406831370U.S. Energy Firms Rewarded With Tax Deferrals
Investment Incentives Stave Off Billions in Payments, Improving Cash Flow
By DANIEL GILBERT CONNECT
Updated July 31, 2014 2:32 p.m. ET
The wave of spending on U.S. drilling has fed an oil and gas boom and delivered economic benefits, lessening the country's reliance on imports. Reuters
The U.S. energy boom is producing a little-noticed side effect: American oil and gas companies are paying less in federal income taxes.
Energy companies are spending billions of dollars a year to drill in shale formations across the country, sending the nation's daily oil output up by almost 50% in just the past few years. Techniques like hydraulic fracturing and horizontal drilling, which make it possible to tap petroleum in these new fields, make each well cost millions of dollars.
All that spending has allowed drillers to take advantage of incentives in the tax code for drilling and capital expenditures, deferring billions of dollars in income tax.
Ultimately, companies will have to pay some or all of the taxes. But as long as they continue to invest heavily, the spending shelters their income and allows them to defer taxes for years, experts say. In the meantime, they can use the extra cash flow to drill more wells.
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Over the past five years, 20 big publicly traded U.S. oil and gas producers paid a combined $15.6 billion in U.S. income tax, or 11.7% of their American earnings, and deferred $16.5 billion, according to the nonpartisan Taxpayers for Common Sense. Together, the 20 had an effective tax rate of 24% on their U.S. income, below the statutory 35% rate and well below the 46.2% those with overseas operations paid abroad, according to an analysis by the watchdog group, which advocates ending subsidies for industries from agriculture to defense.
Those deferred taxes reflect big increases in capital spending. In 2013 alone, the 30 biggest U.S. oil and gas producers by revenue shelled out $186.9 billion in capital expenditures, 78% more than what they spent in 2009, according to data compiled by S&P's Capital IQ.
Energy industry officials say that the trend of companies deferring tax payments is good for the economy, as higher corporate spending creates jobs and other tax revenue. And the wave of spending on U.S. drilling has fed an oil and gas boom and delivered broad economic benefits, driving down energy prices and lessening the country's reliance on imports.
Companies are "supposed to act economically and not necessarily in the government's best interest, as long as it's legal," said Mitch Tiras, a partner and head of business tax at Locke Lord LLP in Houston. "Tax benefits out there right now are sufficient that you can legally and pretty easily defer taxes for several years."
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One tax incentive, which has existed for about a century, allows companies to deduct "intangible drilling costs," the money they spend preparing to drill a well, from analyzing geology to building a road. The benefit is designed to encourage drilling, often a risky and expensive endeavor, by allowing companies to quickly recover much of their costs.
By taking a big deduction in one year, rather than smaller ones over many years, firms can lower their immediate tax bills but lose those future offsets against future income, which is why they are said to be deferring their taxes. But if they continue to spend heavily, they can continue to defer taxes for years.
A temporary tax break, known as "bonus depreciation," was enacted by Congress in 2008 as part of the economic stimulus package. It has allowed companies in many industries to write off between half and 100% of investments they make in equipment and infrastructure in the year they spend the money, instead of deducting smaller amounts over years under regular depreciation schedules. The tax credit expired at the end of 2013, but Congress is considering a proposal to establish a permanent 50% deduction for certain capital expenditures.
Such deductions would allow "for the cash flow to drill the next well," said Stephen Comstock, director of tax and budget for the American Petroleum Institute, the energy industry's main lobbying group.
"This industry is good at making money," said Ryan Alexander, president of Taxpayers for Common Sense. The group opposes tax subsidies "going to companies that don't really need it," she said.
Railroads, airlines, telecommunications companies also have reported a reduction in taxes as a result of bonus depreciation. But the impact of such incentives has been pronounced in the drilling business, which requires heavy capital spending.
Houston-based Occidental Petroleum Corp. OXY -0.41% has deferred the most U.S. income tax over the past five years among its peers. The company, which made about half of its 2013 income in the U.S., has deferred paying $4.5 billion in federal income taxes over the past five yearssix times as much as what it paid the government, according to its regulatory filings.
Occidental declined to comment. In May, the company told the U.S. Securities and Exchange Commission that the increase in deferred income taxes was "mainly due to faster depreciation on capital expenditures." Occidental on Thursday reported that its capital spending continued to rise, increasing 15% in the first half of 2014 compared with a year ago.
Occidental's $9 billion capital spending last year, along with its $7 billion income tax liability, have both nearly tripled since 2009. It pays far less income tax per barrel of oil in the U.S. than any of the regions where it operates globally, from Latin America to the Middle East.
Pioneer Natural Resources Co. PXD -2.49% , a big driller in West Texas, deferred $450 million in federal income tax between 2009 and 2013, essentially its entire federal tax bill. EOG Resources Inc., EOG -3.69% a shale pioneer, deferred $2.3 billion in federal tax over the same period, triple what it paid the government.
At least some of the increase in deferred federal taxes probably stems from overseas income, which accounts for the majority of profits for Exxon Mobil Corp. XOM -4.17% and Chevron Corp. CVX -2.48% U.S.-based multinationals must to pay federal taxes on their foreign income if they are taxed at a lower rate abroad. They can defer such taxes until they bring the money home.
Not all of the companies driving the shale boom have been profitable. Chesapeake Energy Corp. CHK -2.37% , for instance, booked a net $3 billion in pre-tax losses between 2009 and 2013, paying $4 million in federal income tax on revenue of $30 billion. It reported a net benefit in its deferred income tax liability over the period.
Write to Daniel Gilbert at daniel.gilbert@wsj.com