Energy Trends in November 7, 2017

Transcription

1 Energy Trends in 2018 November 7, 2017

2 Speakers Kevin Schroeder National Managing Partner, Energy Industry, Grant Thornton LLP Mel Schwarz Partner, Tax Services, Grant Thornton LLP Kyle Reid Partner, Transaction Services, Grant Thornton LLP Grant Thornton LLP. All rights reserved. 2

3 Learning objectives 1 Cite key issues and challenges for the industry in the year ahead 2 Identify trends and implications related to energy M&A activity 3 Assess the impact of the new lease accounting standard on energy companies 4 Evaluate potential impact of changes in tax regulations Grant Thornton LLP. All rights reserved. 3

4 Agenda 1 Energy trends to watch 2 Potential impact of tax reform 3 M&A update Grant Thornton LLP. All rights reserved. 4

5 Energy trends to watch

6 Key trends in the energy industry Recovery continues Impact felt from recent hurricanes Changing workforce demographic/talent pool Increased focus on technology and analytics Grant Thornton LLP. All rights reserved. 6

7 Important financial reporting guidance lease accounting The new leasing standard will be effective Jan. 1, 2019, for calendar-year public companies and in 2020 for nonpublic entities. The SEC is also requiring comparative reporting three years of income statements and two years of balance sheets. Companies will likely need to start tracking more data about operating leases as early as January Grant Thornton LLP. All rights reserved. 7

8 And don't forget revenue recognition Public company guidance effective December 31, 2017 Effective for private companies December 31, 2018 Grant Thornton LLP. All rights reserved. 8

9 Deeper dive... Tax reform Trends in M&A Grant Thornton LLP. All rights reserved. 9

10 Potential impact of tax reform

11 Corporate rate cut Flat 20% rate Effective for tax years beginning after 2017 Personal service corporations pay flat 25% Grant Thornton LLP. All rights reserved. 11

12 Pass-through rate cut 25% rate for pass-though business income: Passive owners apply rate on all income Active owners must parse out income considered compensation and subject to top rate of 39.6% 2 methods for active owners: 70/30 safe harbor (creates blended rate of 35.5% in top bracket) Return on capital calculation Election binding for 5 years Professional services: Cannot use 70/30 safe harbor Can use return on capital calculation if result is at least 10% of income Grant Thornton LLP. All rights reserved. 12

13 Return on capital calculation 7 percent + Short-term AFR (1.27%) X Tax basis - Bonus depreciation & Section 179 Grant Thornton LLP. All rights reserved. 13

14 Expensing Bonus depreciation doubled for five years: 100% for property placed in service after Sep. 27, 2017 and Jan. 1, 2023 Used property added (if new to taxpayer) Public utilities and real estate businesses excluded (they are instead spared interest deduction limitation) Section 179 expensing for tax years beginning after 2017 and before 2023 Limit increased from $2 million to $5 million Phaseout threshold increased from $5 million to $20 million Both numbers indexed for inflation Grant Thornton LLP. All rights reserved. 14

15 Interest deduction Deduction for net interest expense limited to 30% of EBITDA Disallowed expense could be carried forward up to 5 years Limit and carryforward applied at entity level for pass-throughs Public utilities, real estate businesses, and businesses with $5 million or less in gross receipts exempt 'Trade-off' for full expensing not particularly well-matched Expensing is temporary but this provision is permanent Hits leveraged or down-year taxpayers not necessarily using more expensing Many businesses using full expensing not necessarily hit Grant Thornton LLP. All rights reserved. 15

16 AMT and NOL Corporate AMT repealed, but NOL limit retained outside of AMT NOLs Can use your unused credits over the next four years as refundable if needed! Can offset only 90% of taxable income in any year: AMT rule outside or AMT NOL carrybacks eliminated but carryforwards are indefinite Carryforwards indexed to inflation at 4% + short-term AFR Grant Thornton LLP. All rights reserved. 16

17 Contributions to capital Contributions to capital would be included in income to the extent they exceed FMV of stock received If no stock received, entire contribution included in income Basis of contributed property would be the amount of income recognized under provision if greater than transferor's basis plus transformer gain Grant Thornton LLP. All rights reserved. 17

18 Key business provisions repealed Issue Section 199 DPAD Like-kind exchanges other than real estate Deduction for 50% of entertainment expenses Deduction for employer-paid transit, parking, and gyms Rehab credit WOTC credit New markets tax credit Enhanced oil recovery credit Marginal wells credit Private activity, advance refunding, and tax credit bond Insurance reforms Revenue $95.2 billion $30.5 billion $21.0 billion $12.8 billion $9.3 billion $3.6 billion $1.7 billion $200 million No revenue effect $56.7 billion $42.9 billion Grant Thornton LLP. All rights reserved. 18

19 International overview Move to territorial with 100% dividends received deduction One-time tax on previously unrepatriated earnings as transition and payfor 3 very significant anti-base erosion provisions: Minimum tax on "high returns" Limit on global interest expense Excise tax on deductible payments to related foreign parties Grant Thornton LLP. All rights reserved. 19

20 Notable omissions in bill Carried interest untouched R&D credit retained No repeal of 3.8% tax on net investment income No repeal of medical device excise tax LIFO survives Cash method of accounting survives and improves No mark-to-market for derivatives Grant Thornton LLP. All rights reserved. 20

21 M&A update

22 Cost of production ($/barrel) M&A in Energy coming out of the woods Two significant deal drivers E&P companies achieved a significant reduction in drilling and completion times and lowered cost of production. Productivity enhancements led to a better well performance and increased production E&P companies producing and exporting more at lower prices, benefitting Oilfield Services and midstream. US production continues to grow and supported by increase in exports. Sustained lower cost environment would be critical for continued M&A activity Exxon Shell Conoco EOG Chevron Pioneer Continental Philips Grant Thornton LLP. All rights reserved. 22

23 Oil prices continues to dominate M&A trends Major deals in 1H'17 Marcellus: EQT-Rice energy ($8.2B) Permian: ExxonMobil's-BOPCO ($5.6B) and Parsley Energy- Double Eagle Energy ($2.8B) Large transaction in Midstream in 2016 and early 2017.Sunoco- ETP ($51B) and Enbridge-Spectra ($43B). Large deal activity in Oilfield services in 2016.GE-Baker Hughes ($32B) and FMC-Technip ($7B)...1H'17 activity muted Grant Thornton LLP. All rights reserved. 23

24 Deal activity increasing across the O&G spectrum Upstream sector M&A activity concentrated in Permian and Canadian oil sands region With oil price stable, appetite for assets in other geographies has increased. 44 deals valued at around $20 billion in Permian in H Marcellus and Eagle Ford basins had 7 deals ($10 B) and 8 deals ($4.7B) respectively Deal valuations measured in dollar per acre, steadily reached highs in the Permian smaller and highly variable deal valuation in other basins. Canadian producers expanding positions in the oil sands as international majors exit due to difficulty in turning around operations. Financial investors sitting on plenty of dry powder seem to have regained an appetite to buy assets... Some PE firms see demand as an opportunity to cash out Private equity looking to exit Permian assets - Riverstone, Encap, Trilantic, NGP, LimeRock partners, CrownQuest and Discovery Natural Resources. Deal activity focused on economies of scale and improve productivity and non-core divestitures. Grant Thornton LLP. All rights reserved. 24

25 Deal activity increasing across the energy spectrum Midstream sector M&A activity remained stable, reflecting relatively stable cash flow streams, which are largely unaffected by low prices for oil and gas they store or transport...strong uptick in deal activity beginning 2H'16 but muted activity in H Two large deals in 2H'16 - Sunoco-ETP deal ($51B) and Enbridge-Spectra ($46.5 B) Pembina Pipeline Corp. acquisition of Veresen ($7.11B) is the largest deal in H Key M&A drivers include MLPs divesting non-core assets to generate cash and deleverage Mergers to create synergies and/or diversify. North American utilities increasing looking to buy into midstream sector in order to expand natural gas footprint Dynamics of midstream sector changing with US becoming a net producing more than net imports Strong private equity interest in midstream assets with reliable returns and steady cash flows Grant Thornton LLP. All rights reserved. 25

26 including Downstream and Power & Utilities Downstream sector benefited from lower oil prices; however, oil price volatility impacted deal activity Recent deal activity in convenience store acquisitions and large majors divesting noncore refining assets National oil companies (NOCs) expanding downstream positions in consuming countries to enhance market access Saudi Aramco acquired Motiva, US joint-venture refining and marketing company with Shell. Activity in Power & Utilities driven by low natural gas prices and need for more stable power grid Utilities exploring diversification and flexible power generation (e.g., solar, micro power). Trend likely to accelerate over next several years Significant PE interest and foreign investment due to long-term stability of asset class Slow growth of power and gas utilities - Further consolidation expected but few players left Grant Thornton LLP. All rights reserved. 26

27 Key transaction issues in recent energy deals Fixed vs. Variable Costs Contract Terms Revenue recognition Finance & Operations During downturn, companies cut costs, including labor rapidly and deeply including cuts to essential "fixed cost" operations Consider potential impact of rising labor costs in future. Important to understand "true" cost structure and impact of rising input prices As large players exerted significant pricing pressure over smaller players, some companies entered into deals that are not sustainable Important to understand longer term implications of pricing and terms Selling companies, often small and medium enterprises, adopt simplified revenue recognition practices that don't always portray proper cash flow/ earnings Consistent GAAP practices.asc-606 mandatory for public companies from Dec17 and private companies from Dec18. Many companies reduced headcount and IT investment in finance and accounting functions resulting in more estimates with limited support, bigger year-end adjustments, weak systems, inventory control issues, etc. Grant Thornton LLP. All rights reserved. 27

28 Energy M&A outlook remains cautiously optimistic 1 Price stability and supply/demand rebalancing 2 Ability to operate with leaner cost structure 3 Reduction in Private equity dry powder for buyouts 4 Export growth LNG & Crude Grant Thornton LLP. All rights reserved. 28

29 Speakers Kevin Schroeder National Managing Partner, Energy Industry, Grant Thornton LLP Mel Schwarz Partner, Tax Services, Grant Thornton LLP Kyle Reid Partner, Transaction Services, Grant Thornton LLP Grant Thornton LLP. All rights reserved. 29

30 Disclaimer This Grant Thornton, LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser. Grant Thornton LLP. All rights reserved. 30

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