As it headed toward bankruptcy, Diamond Offshore Drilling Inc took advantage of a little-noticed provision in the stimulus bill US Congress passed in March to get a US$9.7 million tax refund. Then, it asked a bankruptcy judge to authorize the same amount as bonuses to nine executives.
The rig operator is one of dozens of oil companies and contractors now claiming hundreds of millions of US dollars in tax rebates. They are employing a provision of the US$2.2 trillion stimulus of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), that gives them more latitude to deduct recent losses.
“This is a stealth bailout for the oil and gas industry,” said Jesse Coleman, a senior researcher at Documented, a watchdog group tracking tax claims.
Illustration: Mountain People
It is geared to companies “that have been losing money over the last few years — and now they get that money back as a check from the taxpayers. That’s exactly what the oil industry has been doing,” Coleman added.
The change was not only aimed at the oil industry. However, its structure uniquely benefits energy companies that were raking in record profits in 2018 as crude prices reached US$76.41 per barrel, only to see their fortunes flip a year later.
More than US$1.9 billion in CARES Act tax benefits are being claimed by at least 37 oil companies, service firms and contractors, according to filings with the Securities and Exchange Commission (SEC).
Besides Diamond Offshore, which declined to comment, recipients include oil producer Occidental Petroleum Corp and refiner Marathon Petroleum Corp.
Other oil companies say they did not lobby Congress for the change, which is widely available across all industries.
“We did not request any benefit, we are obligated to follow the tax laws as passed by Congress, which apply to all corporate manufacturers nationwide,” said Jamal Kheiry, a spokesman for Marathon, which got a US$411 million benefit.
Congress embedded the tax change governing losses in the stimulus measure early on, as lawmakers in March moved rapidly to steer trillions of US dollars in aid to COVID-19-ravaged workers and companies.
Alongside expanded unemployment payments and payroll loan programs, lawmakers saw an opportunity to harness the tax code to help get cash flowing to companies struggling to pay rent, workers and insurances.
It “was sold as help for the little guy — help for small business. In the name of small business, we’re shoveling out billions of dollars to big corporations and rich guys,” said Steve Rosenthal, a senior fellow at Urban-Brookings Tax Policy Center.
The provision loosened rules governing how businesses deduct net operating losses — incurred when deductible expenses exceed gross income. For years, companies were able to apply net operating loss deductions to previous tax returns as well as going forward — Congress ruled out retroactive relief as part of the 2017 tax cut law.
That new forward-focused approach works well when the economy is expanding, the promise of using today’s losses as tomorrow’s deductions is not much help to COVID-19-battered companies. It is not guaranteed that they will survive long enough to claim them.
So in the stimulus package, Congress gave businesses the chance to carry back all their losses — and claim immediate tax refunds — or five years from 2018, last year and this year.
“The thought was temporarily we should bring them back so that firms that are seeing significant losses in the next year or over the next year or two can carry those back and get some short-term liquidity,” said Garrett Watson, a senior policy analyst at the Tax Foundation, a non-profit that supports pro-growth tax policies.
Traditionally, the ability to deduct net operating losses is meant to ensure companies get fair tax treatment even amid volatility, Watson said — a plus for the notoriously boom-and-bust oil industry.
“You are going to see the biggest benefits for firms like oil and gas that are seeing volatile profits — and now, of course, extreme losses,” he said.
The combination of big losses now and the congressional tax changes mean it might be years before some oil companies have to pay corporate income taxes at all.
“We’re going to have some large losses this year,” ConocoPhillips executive vice president Don Wallette said in an April 30 earnings call.
The company is in “a zero-tax-paying position in the US and expect to remain there for quite some time,” Wallette said.
There’s no limit on how the new refunds can be used — and even bankrupt firms like Diamond Offshore can get them.
Once one of the world’s largest drilling rig contractors, it filed for Chapter 11 bankruptcy protection on April 26 after crude prices plunged along with demand for its high-tech drillships.
In a first quarter filing, Diamond Offshore, which is majority owned by Loews Corp, said it had recognized a tax benefit of US$9.7 million as a result of the carryback change.
In an emergency motion filed with a federal bankruptcy court on May 1, the company asked for the freedom to dole out US$16.7 million in cash incentives to 85 of its 2,300 full-time employees, including as much as US$9.7 million for nine senior executives.
The company said at the time that deteriorating market conditions and the collapse of Diamond’s stock had made its existing equity-based bonus program “largely worthless.” The tax filing did not specify how the US$9.7 million would be used.
Dozens of other oil businesses have reported reaping the benefits, including US$55 million for Denver-based Antero Midstream Corp, US$41.2 million for supplier Oil States International Inc and US$96 million for Oklahoma-based producer Devon Energy Corp.
Occidental Petroleum, which enlisted its employees to ask Congress to “provide liquidity to the energy industry,” said it now anticipates a cash refund of about US$195 million as a result of the carryback provision and a separate change in the stimulus bill that allows the immediate refund of unused alternative minimum tax credits.
An Occidental spokesperson declined to comment.
National Oilwell Varco, a manufacturer of oil and gas equipment, expects a US$123 million refund by carrying back its losses last year and applying them to its 2014 tax filing.
San Antonio-based refiner Valero Energy Corp recognized an extra US$110 million by carrying back losses to 2015 — when the corporate tax rate was 35 percent instead of the current 21 percent.
Valero spokesperson Lillian Riojas said it is tied to tax losses generated in the first quarter, since the company did not generate net operating loss for federal income tax purposes in the last two years.
Riojas added that the actual refund will depend “not only on the company’s performance for the remainder of the year, also on the impact” of other tax provisions.
The benefits for businesses are “turbo-charged,” Rosenthal said.
That is because they can carry back losses to offset income at a higher corporate tax rate of 35 percent, before the 2017 tax cut law lowered it to 21 percent.
“Getting those losses at 35 percent is very, very favorable — especially this year when the losses are going to be devastatingly large,” Rosenthal added.
The filings themselves reveal only part of the picture. Private companies are able to generate tax refunds too — without disclosing it to the SEC. While some public companies said they benefited from the tax break, they didn not reveal by how much.
For instance, refiner Phillips 66 Corp boasted an effective income tax rate of just 2 percent for the first quarter — well below the federal statutory income tax rate of 21 percent — partly because of the carryback. However, the company did not specify the amount of its expected refund.
Dennis Nuss, Phillips 66 spokesman, declined to comment when reached by telephone on Thursday last week. Representatives for Oil States, National Oilwell Varco, Antero and Devon did not respond to messages seeking comment.
The importance of the provision has not been lost on US President Donald Trump’s administration. US Secretary of Energy Dan Brouillette on April 21 recommended oil companies to consider taking advantage of the expanded deduction, calling it one of several “important liquidity tools that are going to help the industry.”
Congressional tax analysts initially estimated that the expanded loss carryback provision would cost US$25 billion over 10 years — just when used by corporations. Now, some are questioning whether the final pricetag could be much higher, and Democrats are seeking to limit the value of the tax break after raising concerns it overwhelmingly helps corporations and the wealthy.
In a new stimulus bill advanced on Tuesday last week, Democrats in the US House of Representatives proposed scaling back the provision so companies could only apply losses back to 2018.
Their plan would also prevent companies with “excessive” executive compensation or stock buybacks from claiming the tax break — a change that would be retroactive back to March.
Rosenthal said that it was logical for Congress to help businesses that were profitable before the pandemic.
“The CARES Act goes too far, tilting its benefits overwhelmingly to the wealthiest Americans. I think Congress did not know the extent of what it was doing,” he said.
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