Two tax measures in the Inflation Reduction Act will raise costs but do little to change M&A or share-buyback trends in the oil and gas sector, experts said.
The act includes a 1% tax on share buybacks. From Exxon Mobil Corp. to much smaller shale gas driller Gulfport Energy Corp., oil and gas producers have billions in scheduled share buybacks coming up. But the 1% tax on the planned buybacks amounts to less than the daily moves in most companies' stock prices, limiting the impact on companies, senior portfolio manager Brian Kessens of Tortoise Capital Advisors LLC said in an interview.
"I don't think it's going to slow them at all," Kessens said, who noted that some firms might shift the bulk of their buybacks into the 2022 tax year.
The act also sets a 15% alternative minimum tax on companies with more than $1 billion in book, or operating, revenues. Operating income is typically revenues minus expenses before any adjustments. The provision's tax implications will factor in as companies weigh M&A because certain deals would move some combined companies' operating income above $1 billion.
The impact on the oil and gas M&A market will likely be slightly fewer deals at slightly higher costs, Kessens said, expecting the accumulated value of deals over time to be generally unchanged. "I think underlying M&A is going to continue in this sector because companies are recognizing that together they have a lot more synergies," Kessens said.
However, Wes Poole, Ernst & Young's Americas energy and resources tax leader, said that with current high oil and gas prices, most drillers are paying taxes at rates higher than 15%.
"A company will pay the 15% [alternative minimum tax] only if it exceeds their regular income tax liability," Poole said.
The 61 exploration and production companies that make up the S&P Oil & Gas Exploration & Production Index reported paying an average of 16.1% in income tax in the most recent second quarter, according to S&P Global Market Intelligence data.
Pavel Molchanov, an oil, gas and renewables analyst for Raymond James & Associates, does not expect dealmakers to shift gears at $1 billion in income. "I simply cannot imagine that any attractive M&A deal would be set aside purely because of the $1 billion rule," Molchanov said in an email. "Whether companies choose to engage in M&A will hinge on broader strategic considerations rather than the $1 billion alternative minimum tax threshold."
Dealmakers can incorporate the cost of any tax into a potential merger with all other merger considerations, Deloitte Tax LLP's U.S. oil, gas and chemicals tax leader, Jeff Wright, said via email.
"It is reasonable to assume that a company may rationally decide to take steps to avoid or delay crossing that threshold," Wright said. "However, large M&A decisions are often driven by bigger economic and strategic factors, and incremental tax costs often do not drive the decisions."
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