GOP Tax Law Bails Out Fracking Companies Buried in Debt

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EOG Resources is one of the top companies in the fracking industry, and thanks to the new tax bill passedย by Republicans and President Donald Trump at the end of last year,ย EOGย had an exceptionally strong year compared toย 2016.

In 2017, the companyย reported a net income of $2.6 billion.ย The previous year? Aย loss of $1.1 billion. That financial turnaroundย seems very impressive until you realize that $2.2 billion, or about 85 percent,ย of its 2017 income was the result of the new tax law. Without that gift from the GOP and Trump, EOG would have lost approximately $700 million between those two years. Instead they are $1.5 billion ahead of theย game.

With numbers like these, itย is easy to see how the Taxย Cuts and Jobsย Act of 2017 was a much-needed lifeline for the money-losing fracking industry. EOG is routinely touted as one of the best shale oil and gas companies. Yet the companyย still lost $700 million in the past two years. Orย at least itย would haveย if not for the taxย bill.

This is the same company that an analyst at the investment advice website Seeking Alpha says is โ€œgenerally considered one of the best unconventional upstream oil andย gas players in the business, and its financials back it up.โ€ If those are the best financials in your industry, your industry hasย a bigย problem.

An interesting side note is that EOG standsย for Enron Oil and Gas, which wasย spun off as its own company from Enron โ€” the company notorious for one of the great energy Ponzi schemes of the 20th century. Today, an Enron spinoff company is being held up asย the most fiscally sound in the shale oilย industry.

And Seeking Alpha is now pushing EOG as a good investment and wondering when โ€œthe equities market will wake up and smell this opportunityโ€ despite EOG still being over $6 billion in debt. Without the tax overhaul it would be much harder to make thisย argument.

There is one prominent person in the shale industry warning against rosy forecasts for shale oil,ย and that is Mark Papa, head of independent oil company Centennial Resource Development. Papaโ€™s last job? CEO of EOG Resources.

Continental Resources is another of the shale companies being heralded as a good investment in 2018. Continental is run by Harold Hamm who was an advisor to the Trump campaign and has taken the title ofย โ€œShale Kingโ€ย that once belonged to Aubrey McClendon. Hammโ€™s net worth is estimated at over $13ย billion.

Thanks to the new tax law, Continental took home an extra $700 million because its effective tax rate for 2017 was negative 406 percent.


Continental Resources 2017 Annual 10-Kย Filing

And Continental needed that money (although Hamm certainly doesnโ€™t). In 2007 Continental had $165 million in debt and paid $13 million a year in interest on that debt. In 2016 itsย debt had ballooned to $6.5 billion and the annual interest payments rose toย $321 million. The GOP tax lawย essentially pays off two years of Continentalโ€™s interest payments, allowingย this failing business model to continue because Continental has not been generating enough income to pay even theย annual interest on its debt.

While the company he leads is drowning in $6.5 billion ofย debt, Harold Hamm is personally worth twice that amount. He’ll be fine. He was easily able to afford one of the most expensive divorce settlements ever.ย 

These are just two examples of shale companies receivingย an immediate financial lifeline from the GOP tax bill. These companies also will benefit from lowered tax rates in future years. However, this one-time handout simply masks the reality that the shale revolution looks a lot like a Ponzi schemeย enriching CEOs and Wall Street financiers by producing oil and gas with borrowed money that is unlikely to be paid back in theย future.

And Hamm and the Wall Street financiers have no incentive to do anything differently. Sure bankrupt energy companies destroy worker pensions, wipe out investors equity, layoff thousands of workers โ€” but if we use the coal industry as an example โ€” CEOs will still get bonuses after driving their companies intoย bankruptcy.

Tax Bill Especially Beneficial to Oilย Companies

The benefits of the new tax bill are certainly not unique to oil and gas companies. Utility companies did even better and the big Wall Street banks who are financing the cash-burning shale industryย also are awash in new profits thanks to the GOP taxย overhaul.

However, due to the nature of how oil and gas companies book profits and losses โ€” and the epic money-losing streak the shale industry created over the past few years โ€” these companies benefited more thanย most.

To be clear โ€” this bill which was signed at the end of 2017 was applied to the deferred tax liabilities that were already on the booksย โ€” thus erasing a large chunk of the liabilities for these companies that had built up while the industry kept borrowing to drill more and ultimatelyย lose more money. Simply aย bailout of reckless financial behavior by any otherย name.

And it wasnโ€™t just the companies primarily working in shaleย that benefited. ExxonMobil raked inย a $6 billion benefit from the new tax law,ย which even CNN Money referred to as aย โ€œgift.โ€

Industry Will Use Bailout to Borrow and Drill Moreย 

In discussing the trade deficit President Trump recently tweeted theย following:

Coming from a man whose careerย includesย multiple bankruptcies, this shouldnโ€™t be surprising. The shale oil industry definitely has a kindred spirit in the White House.

What happens when you give free money to gamblers on an epic losing streak?ย In the shale industry, they doubleย down.

ExxonMobilย has promised to use the billions it gained from the tax bill to โ€ฆ drill and frack more shale oil. Which is likely to result in further discounts of Permian Shale oil, which will lower the price of oil andย put more pressure on the heavily leveraged shaleย companies.

While the mainstream media is pushing the industry message that shale companies now are focused on profits instead of just production volume,ย record U.S. oil production and predictions for even greater increases would appear to reveal the lie in that promise. Just as most sharks must swim to stay alive, shale companies must drill to preserve CEO bonuses, which are often tied to oil production, not profits. So, they drill. Even when that means losing money on nearly every barrel of oil theyย pump.

A graphic from the Wall Street Journalย reveals just how much money the shale industry has been losing compared to traditional oil โ€” all while CEOs such asย Harold Hamm were amassing billions in personal wealth. The shale oil industry generated free cash flowย pumping oil for one brief periodย inย the last seven years. Hamm has done a bit better personally during that timeย frame.

Shortly after President Trump signed the new tax bill, he took another vacation to Mar-a-Lago where he reportedly told those in attendance: โ€œYou all just got a lotย richer.โ€

A rare moment of honesty from the President. And while he wasnโ€™t speaking specifically to shale oil CEOs โ€” it’s safe to say they got the message loud andย clear.

Follow the DeSmog investigative series:ย Finances of Fracking: Shale Industry Drills More Debtย Thanย Profit

Main image: โ€œCreative Commons Natural Gas Fracking in Louisianaโ€ by Daniel Fosterย used underย CC BYNCSA 2.0ย combined with original photo by Justinย Mikulka

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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