ConocoPhillips announced separation into separate E&P and R&M companies today. The spin-off is likely during the first half of 2012. ConocoPhillips' major businesses are well positioned in their respective markets, so the resulting spin-off companies should look strong from a financial perspective. See my article on Spin-Off transactions.
ConocoPhillips was a top performer among integrated oil companies during 2010. Leading analysts project that the company will earn $7.75 per share and dividends will rise by 10% annually in 2011 - 2012.
THE LEGAL DETAILS:
The ConocoPhillips board approved the separation yesterday.
A ruling from the IRS is required to ensure this transaction qualifies for tax-free treatment (though meeting the requirements does not appear to be an issue).
Neither FTC nor shareholder approval is required.
Thursday, July 14, 2011
Wednesday, July 13, 2011
FTC and DOJ Revise HSR Form and Filing Requirements with Special Focus on Energy MLPs
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have announced major revisions to the Hart-Scott-Rodino (HSR) Report Form and the Premerger Notification Rules.
See http://www.ftc.gov/opa/2011/07/hsrform.shtm
The revisions are expected to come into effect in early August, 30 days after publication in the Federal Register.
The changes sweep away the requirements for parties to provide information including:
(i) Copies of documents already filed with the Securities and Exchange Commission;
(ii) Economic code "base year" data; and
(iii) Detailed breakdowns on all the voting securities to be acquired.
Despite the FTC’s aim to streamline the filing process, in some areas the filing burden has arguably increased. In particular, some controversial changes survived an 11-month consultation, albeit in a watered-down form.
In new Item 4(d) of the Form, all parties will be required to disclose all "confidential information memoranda" prepared by or for officers or directors of their ultimate parent companies in the year before the date of filing. This extends to studies, surveys, analyses and reports prepared by investment bankers, consultants and other advisers.
Perhaps more significantly, the revised Form provides a broad definition of a new term, "associate," to define entities under common management with the acquiring person, but not controlled by the acquiring person. The FTC has been concerned about the lack of information available about families of entities that fall outside the scope of the HSR Rules, and the antitrust ramifications of acquisitions involving them. (Master Limited Partnerships in the energy industry are highlighted in particular.) The new reporting demands apply to entities under "common investment or operational management" with the filing party and place detailed notification requirements upon them. The change means that private equity and investment funds could now be caught by disclosure requirements.
Under new Item 6(c)(ii), an acquiring party must report associates' holdings of voting securities and non-corporate interests in the target, where they are of five percent or more but less than 50 percent. This requirement extends to entities that have six-digit NAICS industry codes that overlap with the target's. Similarly, Item 7 will require information about "associate" entities.
The method of reporting revenue has also been revised (Item 5). All manufacturers – whether domestic or foreign – will be required to report revenue from sales of their products only under 10-digit NAICS codes. Sales of products that are only sold, and not manufactured, by the parties will continue to be reported under wholesaling or retailing codes.
Other minor revisions have been made to complete the changes made to the HSR Rules in 2005 that related to unincorporated entities.
The revisions will be published in the Federal Register within the next few days and will take effect 30 days after the date of publication.
See http://www.ftc.gov/opa/2011/07/hsrform.shtm
The revisions are expected to come into effect in early August, 30 days after publication in the Federal Register.
The changes sweep away the requirements for parties to provide information including:
(i) Copies of documents already filed with the Securities and Exchange Commission;
(ii) Economic code "base year" data; and
(iii) Detailed breakdowns on all the voting securities to be acquired.
Despite the FTC’s aim to streamline the filing process, in some areas the filing burden has arguably increased. In particular, some controversial changes survived an 11-month consultation, albeit in a watered-down form.
In new Item 4(d) of the Form, all parties will be required to disclose all "confidential information memoranda" prepared by or for officers or directors of their ultimate parent companies in the year before the date of filing. This extends to studies, surveys, analyses and reports prepared by investment bankers, consultants and other advisers.
Perhaps more significantly, the revised Form provides a broad definition of a new term, "associate," to define entities under common management with the acquiring person, but not controlled by the acquiring person. The FTC has been concerned about the lack of information available about families of entities that fall outside the scope of the HSR Rules, and the antitrust ramifications of acquisitions involving them. (Master Limited Partnerships in the energy industry are highlighted in particular.) The new reporting demands apply to entities under "common investment or operational management" with the filing party and place detailed notification requirements upon them. The change means that private equity and investment funds could now be caught by disclosure requirements.
Under new Item 6(c)(ii), an acquiring party must report associates' holdings of voting securities and non-corporate interests in the target, where they are of five percent or more but less than 50 percent. This requirement extends to entities that have six-digit NAICS industry codes that overlap with the target's. Similarly, Item 7 will require information about "associate" entities.
The method of reporting revenue has also been revised (Item 5). All manufacturers – whether domestic or foreign – will be required to report revenue from sales of their products only under 10-digit NAICS codes. Sales of products that are only sold, and not manufactured, by the parties will continue to be reported under wholesaling or retailing codes.
Other minor revisions have been made to complete the changes made to the HSR Rules in 2005 that related to unincorporated entities.
The revisions will be published in the Federal Register within the next few days and will take effect 30 days after the date of publication.
EPA and Coast Guard Announce Agreement to Jointly Enforce US and International Air Pollution Requirements
The US Environmental Protection Agency (US EPA) and the US Coast Guard (USCG) recently announced an agreement (MOU) to jointly enforce US (Act to Prevent Pollution from Ships) and international air pollution (MARPOL Annex VI) requirements for vessels operating in US waters. These requirements establish limits on nitrogen oxides (NOx) emissions and require the use of fuel with lower sulfur content, in the latest efforts to protect human health and the marine environment by reducing ozone-producing pollution. The most stringent requirements apply to ships operating within 200 nautical miles of the coast of North America.
See http://www.epa.gov/compliance/resources/agreements/caa/annexvi-mou062711.pdf
In US EPA’s words, "[t]oday’s agreement forges a strong partnership between EPA and the US Coast Guard, advancing our shared commitment to enforce air emissions standards for ships operating in US waters. Reducing harmful air pollution is a priority for EPA and by working with the Coast Guard we will ensure that the ships moving through our waters meet their environmental obligations, protecting our nation’s air quality and the health of our coastal communities."
These sentiments were echoed by USCG leadership. "This agreement demonstrates the Coast Guard’s long-standing commitment to protecting our nation’s marine environment," said Rear Adm. Kevin Cook, Director of Prevention Policy for the USCG. "Aligning our capabilities with EPA enhances our commitment to the marine environment while minimizing the impact on shipping."
By way of background, MARPOL was developed through the International Maritime Organization (IMO), the United Nations agency dealing with maritime safety and security, as well as the prevention of marine pollution from ships. MARPOL is the main international agreement covering all types of pollution from ships. Air pollution from ships is specifically addressed in Annex VI of the MARPOL treaty, which includes requirements applicable to the manufacture, certification, and operation of vessels and engines, as well as fuel quality used in vessels in the waters of the United States. Since January 2009 all vessels operating in US waters must be in compliance with MARPOL Annex VI regulations, but enforcement has lagged.
See http://www.epa.gov/oecaerth/civil/caa/annexvi-mou.html
The purpose of the MOU was to establish terms by which US EPA and USCG can work together to implement and enforce Annex VI requirements. While the MOU does not add any new compliance requirements, it does signal that enforcement of the requirements has become a top priority. US EPA and USCG also sent a letter to the maritime industry notifying them of the MOU, and to advise that US EPA and USCG are taking measures to promote compliance, including investigating potential violations and pursuing enforcement actions with penalties for violations. The central provisions of the MOU relate to vessel inspections, certification, examination and investigations. Importantly, the MOU also discusses enforcement by criminal prosecution and penalties.
More information is available on US EPA's website.
See http://www.epa.gov/otaq/oceanvessels.htm#emissioncontrol
This development signals upcoming enforcement on the part of both agencies. Shipowners, ship operators, shipbuilders, marine diesel engine manufacturers, marine fuel suppliers and marine insurance providers should be prepared to deal with increased enforcement and prosecution of air pollution laws.
See http://www.epa.gov/compliance/resources/agreements/caa/annexvi-mou062711.pdf
In US EPA’s words, "[t]oday’s agreement forges a strong partnership between EPA and the US Coast Guard, advancing our shared commitment to enforce air emissions standards for ships operating in US waters. Reducing harmful air pollution is a priority for EPA and by working with the Coast Guard we will ensure that the ships moving through our waters meet their environmental obligations, protecting our nation’s air quality and the health of our coastal communities."
These sentiments were echoed by USCG leadership. "This agreement demonstrates the Coast Guard’s long-standing commitment to protecting our nation’s marine environment," said Rear Adm. Kevin Cook, Director of Prevention Policy for the USCG. "Aligning our capabilities with EPA enhances our commitment to the marine environment while minimizing the impact on shipping."
By way of background, MARPOL was developed through the International Maritime Organization (IMO), the United Nations agency dealing with maritime safety and security, as well as the prevention of marine pollution from ships. MARPOL is the main international agreement covering all types of pollution from ships. Air pollution from ships is specifically addressed in Annex VI of the MARPOL treaty, which includes requirements applicable to the manufacture, certification, and operation of vessels and engines, as well as fuel quality used in vessels in the waters of the United States. Since January 2009 all vessels operating in US waters must be in compliance with MARPOL Annex VI regulations, but enforcement has lagged.
See http://www.epa.gov/oecaerth/civil/caa/annexvi-mou.html
The purpose of the MOU was to establish terms by which US EPA and USCG can work together to implement and enforce Annex VI requirements. While the MOU does not add any new compliance requirements, it does signal that enforcement of the requirements has become a top priority. US EPA and USCG also sent a letter to the maritime industry notifying them of the MOU, and to advise that US EPA and USCG are taking measures to promote compliance, including investigating potential violations and pursuing enforcement actions with penalties for violations. The central provisions of the MOU relate to vessel inspections, certification, examination and investigations. Importantly, the MOU also discusses enforcement by criminal prosecution and penalties.
More information is available on US EPA's website.
See http://www.epa.gov/otaq/oceanvessels.htm#emissioncontrol
This development signals upcoming enforcement on the part of both agencies. Shipowners, ship operators, shipbuilders, marine diesel engine manufacturers, marine fuel suppliers and marine insurance providers should be prepared to deal with increased enforcement and prosecution of air pollution laws.
Thursday, June 16, 2011
Outside Service Providers Are Not Liable Under Federal Securities Laws, Says US Supreme Court
Can an investment adviser be held liable in a private action under Securities and Exchange Commission (SEC) Rule 10b-5 for false statements included in its clients' mutual funds' prospectuses? On June 13, 2011 the US Supreme Court said "no" in Janus Capital Group, Inc. v. First Derivative Traders. That answer brought a huge sigh of relief from not only investment advisers but also other outside professional service providers.
BACKGROUND
Janus Capital Group, Inc. (JCG) is a publicly traded company that created the Janus family of mutual funds, which are organized in a business trust as the Janus Investment Fund. The Janus Investment Fund retained JCG's wholly owned subsidiary, Janus Capital Management LLC (JCM), to serve as its investment adviser. JCG, which issued prospectuses, was sued in federal district court, along with JCM, on allegations that both entities violated federal securities laws because statements in prospectuses for certain individual Janus funds were misleading.
The district court dismissed the case, rejecting the argument that JCM could be liable whether or not it drafted the misleading prospectuses. The US Court of Appeals for the Fourth Circuit reversed, holding that "although the individual fund prospectuses are unattributed on their face, the clear essence of plaintiffs' complaint is that JCG and JCM helped draft the misleading prospectuses."
SUPREME COURT WEIGHS IN WITH BRIGHT-LINE RULE
The Supreme Court granted certiorari to address whether JCM, as an advisor, could be held liable in a private securities action for false statements included in the prospectuses.
Justice Thomas delivered the Court’s opinion, which Justices Roberts, Scalia, Kennedy and Alito joined. The Court focused on the word "make." Rule 10b-5, promulgated by the SEC pursuant to authority granted under §10(b) of the Securities Exchange Act of 1934, prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities.
According to the Court, "for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker." The Court looked to speechwriting for comparison, noting this "rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit – or blame – for what is ultimately said."
The Court rejected the argument that both JCM and JCG might have "made" the misleading statements within the meaning of Rule 10b-5 because JCM was significantly involved in preparing the prospectuses: "This assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses. Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5."
Had the Court not created much needed clarity with a bright-line rule, many service providers – accountants, bankers, lawyers, investment advisers and the like – who are involved in preparing documents disseminated to investors would have remained at risk. The Court had previously held that there is no secondary "aiding and abetting" liability under Rule 10b-5 against those who do not "make" a statement, but contribute "substantial assistance." And now, given the Court's opinion in Janus, service providers can rest even easier, with a better understanding of what it actually means to "make" a statement under Rule 10b-5.
BACKGROUND
Janus Capital Group, Inc. (JCG) is a publicly traded company that created the Janus family of mutual funds, which are organized in a business trust as the Janus Investment Fund. The Janus Investment Fund retained JCG's wholly owned subsidiary, Janus Capital Management LLC (JCM), to serve as its investment adviser. JCG, which issued prospectuses, was sued in federal district court, along with JCM, on allegations that both entities violated federal securities laws because statements in prospectuses for certain individual Janus funds were misleading.
The district court dismissed the case, rejecting the argument that JCM could be liable whether or not it drafted the misleading prospectuses. The US Court of Appeals for the Fourth Circuit reversed, holding that "although the individual fund prospectuses are unattributed on their face, the clear essence of plaintiffs' complaint is that JCG and JCM helped draft the misleading prospectuses."
SUPREME COURT WEIGHS IN WITH BRIGHT-LINE RULE
The Supreme Court granted certiorari to address whether JCM, as an advisor, could be held liable in a private securities action for false statements included in the prospectuses.
Justice Thomas delivered the Court’s opinion, which Justices Roberts, Scalia, Kennedy and Alito joined. The Court focused on the word "make." Rule 10b-5, promulgated by the SEC pursuant to authority granted under §10(b) of the Securities Exchange Act of 1934, prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities.
According to the Court, "for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker." The Court looked to speechwriting for comparison, noting this "rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit – or blame – for what is ultimately said."
The Court rejected the argument that both JCM and JCG might have "made" the misleading statements within the meaning of Rule 10b-5 because JCM was significantly involved in preparing the prospectuses: "This assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses. Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5."
Had the Court not created much needed clarity with a bright-line rule, many service providers – accountants, bankers, lawyers, investment advisers and the like – who are involved in preparing documents disseminated to investors would have remained at risk. The Court had previously held that there is no secondary "aiding and abetting" liability under Rule 10b-5 against those who do not "make" a statement, but contribute "substantial assistance." And now, given the Court's opinion in Janus, service providers can rest even easier, with a better understanding of what it actually means to "make" a statement under Rule 10b-5.
Friday, May 20, 2011
FCPA-Inspired Bribery Act Projected to Hit the Oil and Gas Industry Hardest
The UK Bribery Act is scheduled to take effect on July 1, 2011, and according to a recent study by Ernst & Young, it will hit the oil and gas industry the hardest.
Ernst & Young's news release revealed some troubling statistics regarding bribery prosecutions under the US Foreign Corrupt Practices Act (FCPA) since its inception in 1977. In the study, Ernst & Young analyzed 118 FCPA cases involving 242 companies (including subsidiaries) and 167 prosecutions (an additional 30 are still pending) to determine which industries were most likely to be prosecuted. The data revealed that oil and gas companies were the most likely to be prosecuted under the FCPA, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third most prosecuted industries, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young noted in the release that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained "There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk."
According to Ernst & Young, it elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. It is not exactly comparing apples to apples, however, because the UK Bribery Act, as written, is stricter than the FCPA, criminalizing the following three major areas that are not covered by the FCPA.
1. Bribery of private individuals and companies – The UK Bribery Act extends the prescribed conduct to include private commercial bribery, e.g., bribery between private individuals and companies, where a foreign official is not involved.
2. Offerors and acceptors of bribes are equally culpable – The FCPA only criminalizes the offer or payment of a bribe. The UK Bribery Act punishes not only the offer and payment of a bribe, but also the acceptance of a bribe.
3. Facilitation payments – Unlike the FCPA, the UK Bribery Act contains no exception for facilitation payments – monies paid to expedite the performance of a routine governmental action by a foreign official to which the payer is legally entitled – but rather, specifically prohibits their use.
Companies doing business in both the UK and United States should take note of the differences between the UK Bribery Act and FCPA, and will need to revise their existing compliance programs to reflect the more expansive provisions of the UK Bribery Act and the distinctions between the two.
Ernst & Young's news release revealed some troubling statistics regarding bribery prosecutions under the US Foreign Corrupt Practices Act (FCPA) since its inception in 1977. In the study, Ernst & Young analyzed 118 FCPA cases involving 242 companies (including subsidiaries) and 167 prosecutions (an additional 30 are still pending) to determine which industries were most likely to be prosecuted. The data revealed that oil and gas companies were the most likely to be prosecuted under the FCPA, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third most prosecuted industries, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young noted in the release that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained "There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk."
According to Ernst & Young, it elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. It is not exactly comparing apples to apples, however, because the UK Bribery Act, as written, is stricter than the FCPA, criminalizing the following three major areas that are not covered by the FCPA.
1. Bribery of private individuals and companies – The UK Bribery Act extends the prescribed conduct to include private commercial bribery, e.g., bribery between private individuals and companies, where a foreign official is not involved.
2. Offerors and acceptors of bribes are equally culpable – The FCPA only criminalizes the offer or payment of a bribe. The UK Bribery Act punishes not only the offer and payment of a bribe, but also the acceptance of a bribe.
3. Facilitation payments – Unlike the FCPA, the UK Bribery Act contains no exception for facilitation payments – monies paid to expedite the performance of a routine governmental action by a foreign official to which the payer is legally entitled – but rather, specifically prohibits their use.
Companies doing business in both the UK and United States should take note of the differences between the UK Bribery Act and FCPA, and will need to revise their existing compliance programs to reflect the more expansive provisions of the UK Bribery Act and the distinctions between the two.
Wednesday, May 18, 2011
Global Cooling: A Cautiously Optimistic View of the Next Two Years
Global oil demand experienced some modest destruction last month (about 3.5%) and the IEA and EIA both released declining demand projections which many believe will continue through the third quarter of 2011. However, many stock analysts remain bullish on energy because of expected overall growth in demand attributable to Asia, former Soviet bloc countries (FSU), and Latin America. Projections put crude prices at around $105/bbl (Brent) at 2011 year end, $110/bbl (Brent) and gas at $5.25/mcf next year with those prices holding through 2013, so there is good reason to be optimistic.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
Thursday, May 5, 2011
Another Stinker: New Corporate Tax Proposal Lurks in Halls of Congress
Legislative analysts are buzzing about a new corporate tax proposal coming soon to a Congress near you. The proposal will center around the taxation of "pass-through" entities (like S corporations) that have revenues of more than $50 million.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
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