For Chevron Corporation (NYSE: CVX) and other big oil developers, 2017 was a rocky year. That could change, and soon, as oil companies will be among the biggest beneficiaries of the newly-passed tax reform bill.
As usual, the numbers tell the story.
The key plank in the tax reform bill is a big cut in the U.S. corporate tax rate, from 35 to 21 percent — a move Republicans say makes U.S. companies more competitive with overseas competitors.
[See: 7 of the Best Energy Stocks to Buy for 2018.]
That’s manna from heaven for oil companies, which pay some of the biggest tax bills among U.S. industries.
Over the past 11 years, the energy industry has paid a median tax rate of 36.8 percent compared to a 30 percent median tax rate paid out by the rest of the Standard & Poor’s 500 index industries, according to MarketWatch. Also, some oil giants bear a larger tax burden than 36.8 percent. Chevron, for example, pays a median effective tax rate of 42.4 percent, while Marathon Oil Corp. ( MRO) pays a whopping 49.9 percent.
Consequently, billions of dollars will soon be rerouted into the coffers of oil industry companies instead of Uncle Sam’s pockets, and that should be good news for energy stocks.
Take Chevron, for example. In the past year, CVX stock rose by 8.5 percent, compared to 20 percent for the S&P 500. Yet, on a long-term view, Chevron is on an upward swing as it promises to pay out another dividend to investors in 2018, its 31st consecutive payout.
Additionally, Chevron is edging closer to the exploration and production of oil and is selling key downstream assets, a move that’s been generally applauded by energy industry analysts. Currently, 17 out of 25 energy analysts who track Chevron stock rate it as a “buy,” while seven rate CVX as a “hold” and only one analyst has issued a “sell” call on the oil giant.
Chevron has also reduced its spending budget, which should make the stock more attractive, says Andy Bhatt, an oil and gas specialist at SW & Associates Consulting, which works with oil and gas companies. Bhatt says that while he personally favors funds over individual energy stocks, Chevron is worth hanging onto.
[See: 7 of the Best Stocks to Buy for 2018.]
“If you’ve already got Chevron stock don’t start dumping it, even in the middle of all this volatility,” he says.
The outlook for the oil sector, however, doesn’t exactly match the rosy outlook for major oil producers like Chevron, given tax reform and better financials.
“For 2018, we’re expecting lower oil prices,” says John LaForge, head of real asset strategy for Wells Fargo Investment Institute.
The potential for oversupply remains a primary concern, even as production costs decline globally, LaForge says.
“During the bull run from 1998 to 2008, prices rose from roughly $10 per barrel to $150 per barrel,” he says. “This spurred excessive [capital expenditures] globally, which oil markets are still grappling with today. A case in point: the U.S. is producing more oil today … than it was the last time [West Texas Intermediate] traded over $100 per barrel in 2014.”
Another major supply issue is that many of the largest oil producers are countries. “These countries, such as Saudi Arabia, have social obligations that must be met,” LaForge says. “The pressure to generate oil revenues in 2018 will be significant, whether the producer is a company or a country.”
For the next five years, Wells Fargo suspects that crude oil will trade in a wide range between $30 and $60.
“Sixty is our high end because, in the last few years, this was the point where U.S. rig counts and production began to rise,” LaForge says. “We believe that overproduction in the U.S. has implications for global oil prices too, as the U.S. now appears to be the world’s swing petroleum producer, pumping out roughly 15 million barrels per day.
Not every oil industry tracker sees it the same way, noting that inventory drawdowns will boost oil prices.
[See: The 10 Best Energy ETFs for an Eventual Bounce.]
Leigh Goehring and Adam Rozencwajg, managing partners at New York-based Goehring & Rozencwajg Associates, say that global oil inventories will continue to draw down this year.
“Inventories stand at levels today where further drawdowns will result in much higher prices,” they say in a statement. “Overall, the global commodity markets, and oil in particular, are now at the point where prices are low, investor interest is very bearish, valuations are nearing 100-year extreme low levels and the fundamentals are as positive as we have seen them in over 25 years of managing natural resource investments.”
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Tax Reform May Be a Big Boost for Chevron Corporation (CVX) originally appeared on usnews.com
