Oklahoma oil and gas companies are examining how to take advantage of changes in corporate taxes.
President Donald Trump signed a GOP-backed bill to decrease the corporate tax rate from 35 to 21 percent in December. Sarah Terry-Cobo writes in the Journal Record that there was a perception that the lower tax rate would result in stock buybacks, dividends and implicit payouts to corporate executives, according to University of Tulsa energy business professor Tom Seng.
But the reality is that a lower tax liability means something different for each of the dozens of publicly traded oil and gas companies in Oklahoma. As drillers and pipeline companies discussed annual results with analysts, few said they’d pay out dividends. Many instead opted for paying down debt.
Seng said shareholders can get indirect benefits when executives reduce debt; that can increase credit ratings, making the company healthier.
“If you’re paying down debt, you’re a more solvent company,” he said. “Unless you’re a shareholder and thinking, ‘Goody, goody, my share price is going up.'”
Sarah Terry-Cobo told KGOU that Chesapeake Energy Corporation will use the lower tax rate to pay down some of its $9 billion in debt.
“Chesapeake CEO Doug Lawler says paying down debt reduces the interest expenses, which helps lower those costs further,” Terry-Cobo said.
Devon Energy Corporation also plans to pay down debt with the change in tax liability. Terry-Coby says Devon intends to have moderate oil production growth this year.
“They expect to generate cash, or not outspend what they make, this year,” Terry-Cobo said.
Continental Resources’ board and executive have not yet reached a formal decision on what they plan to do about the reduced tax liability. Terry-Cobo says they could also pay down debt and improve their credit rating.
“Continental is run a bit differently because Mr. Hamm and his family own a majority of shares, about three-quarters of all the stock. So that means their investors, which are the Hamms and other executives, aren’t expecting short-term returns. So they can follow a 10-year development plan, because they’re in it for the long haul,” Terry-Cobo said.
SandRidge Energy is currently in a transition period. The company’s board ousted its CEO earlier this month, and on Monday announced the layoff of 80 employees at the Oklahoma City headquarters. The company reported a loss of $19 million in the previous quarter. Terry-Cobo says interim CEO, Bill Griffin, has not spoken much about tax policy change in his update with investors, and has instead focused on a new direction for the company.
“He is planning to be conservative with spending this year. Unlike all the others we mentioned, SandRidge has very little debt. That’s because they came out of bankruptcy in October 2016, so they owe about $38 million on the building, but that’s about it,” Terry-Cobo said.
Jacob McCleland: You’re listening to the Business Intelligence Report, a weekly conversation about business news in Oklahoma. I'm Jacob McCleland, and my guest today is Sarah Terry-Cobo. She’s a senior reporter at the Journal Record newspaper. Sarah, thank you so much for joining us.
Sarah Terry-Cobo: Thanks for having me, Jacob.
McCleland: As part of the Trump administration and Republican party tax cut package, the corporate tax rate has been slashed from 35 to 21 percent. Overall, did the tax reduction have the intended effect for Oklahoma’s oil and gas companies?
Terry-Cobo: I guess it depends on who you’re asking. How companies accumulate taxes can either be considered a benefit or a liability. So for some oil companies, they had higher net income because they had a lower tax liability, or fewer taxes to pay. But for others, they actually had to write down losses because of the way benefits had changed.
McCleland: Well let’s go through some of the companies and what the lower corporate tax rate means to them. What are Chesapeake and Devon doing with the extra cash?
Terry-Cobo: There was a fairly consistent theme there, and that was paying down debt. Chesapeake, of course, has much more debt overall, with more than $9 billion. But Chesapeake CEO Doug Lawler says paying down debt reduces the interest expenses, which helps lower those costs further.
Devon will also use that change in tax liability as a way to pay down debt. They want to have moderate growth in their oil production this year and they expect to generate cash, or not outspend what they make, this year.
McCleland: What about Continental Resources CEO Harold Hamm? I understand that company is run differently. How will Continental use the extra money?
Terry-Cobo: Right. Well, Continental’s executives and board have not made a formal decision yet on what they will do with the reduced tax liability. But in general in 2018, they will also pay down debt, which can improve their credit rating.
Continental is run a bit differently because Mr. Hamm and his family own a majority of shares, about three-quarters of all the stock. So that means their investors, which are the Hamms and other executives, aren’t expecting short-term returns. So they can follow a 10-year development plan, because they’re in it for the long haul.
McCleland: You didn’t mentioned SandRidge in particular in your story, but of course that company is in a transition period right now. The company’s CEO was ousted earlier this month, and 80 employees were laid off on Monday. SandRidge lost $19 million in the last quarter. What are the options for a company like SandRidge to use this change in tax policy?
Terry-Cobo: The interim CEO, Bill Griffin, says he is planning to be conservative with spending this year. Unlike all the others we mentioned, SandRidge has very little debt. That’s because they came out of bankruptcy in October 2016, so they owe about $38 million on the building, but that’s about it.
Griffin didn’t talk much about the tax change when he updated investors. His concern was outlining the new direction for the company.
McCleland: Let’s talk about these SandRidge layoffs for just a moment. The company laid off nearly a third of its workforce at its office in Oklahoma City. What does this mean for the company moving forward?
Terry-Cobo: It’s a really hard question. The workforce is a fraction of what it was a few years ago, and it has much less land leased and about half of the reserves it had back in 2015. So Griffin is examining this offer that Midstates Petroleum had a few weeks ago. Misstates is based in Tulsa and they asked SandRidge to buy them out. Both companies have a significant amount of wells in the Mississippi Lime play. That’s the basin in northern Oklahoma with an extraordinary amount of salty wastewater compared to other places.
The wells in the Mississippi Lime are the ones that are leading the decline in how much oil and gas SandRidge has in its reserves. And Griffin says he wants to increase oil and gas production in the STACK, that’s northwest oklahoma, and in Colorado. So, we’ll see.
McCleland: We’ve been talking today to Sarah Terry-Cobo. She’s a senior reporter at the Journal Record newspaper. Sarah, thank you so much.
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