Corporate tax changes included as part of sweeping new U.S. legislation that also reforms climate and health care policy will fall most heavily on companies in the oil and gas sector, says Moody’s Investors Service.
In a report, the rating agency said the tax measures featured in the Inflation Reduction Act — including a 15% alternative minimum tax on companies with at least US$1 billion in profits, and a 1% excise tax on stock buybacks — will hit energy sector firms hardest.
“In our analysis, we found that large oil & gas issuers that pay little income tax also tend to have some of the largest share buyback plans, which will make them the most affected by the new taxes,” the report said.
Overall, the report estimated 9% of U.S. investment-grade companies are likely to face higher taxes under the new alternative minimum tax; whereas most speculative-grade companies won’t be affected, given that they are typically smaller.
As for the new buyback tax, Moody’s said it “comes at a time when oil and gas companies have been leaning heavily on buybacks as they benefit from high commodity prices and capital discipline to generate unprecedented amounts of free cash flow.”
For example, in the second quarter, four large energy firms — ExxonMobil Corp., Shell plc, TotalEnergies SE and Chevron Corp. — bought back a combined US$23 billion worth of stock, and indicated that buybacks would continue into 2023, the report noted.
Moody’s said it doesn’t expect the new tax to curtail buybacks or alter companies’ capital allocation decisions, but suggested the tax could represent a “considerable source of tax revenue over the next couple years.”
In a separate report, the rating agency said several power companies could be hit by the new alternative minimum tax, but that those utilities would also benefit most from the legislation’s energy-related provisions, which “will reduce the cost of developing clean energy-related projects and help facilitate the power sector’s carbon transition.”