From NewsOK

Participants in Tuesday’s energy chat on NewsOK asked how recently approved increases in taxes on Oklahoma wells might impact the ongoing resurgence of the state’s oil and gas industry, among other things.

The Oklahoman’s energy writers, Adam Wilmoth and Jack Money, fielded the questions. This is an abridged transcript of that conversation:

Q: How does Oklahoma’s gross production tax compare to other major oil and natural gas producing states around the country?

Wilmoth: States use different methods and various tax strategies, so I typically look at the effective tax rate, which is the cumulative average tax rate the industry pays.

Idaho commissioned a study on gross production tax rates last year, and it found that in 2016, Oklahoma had an effective service and production tax rate of 3.2 percent, compared to 2.5 percent in Idaho, Utah and Arkansas; 4.6 percent in Texas; 8.8 percent in Louisiana; 9.4 percent in North Dakota; and 12.3 percent in Wyoming.

Meanwhile, a study commissioned by the Oklahoma Oil and Gas Association found Oklahoma’s rate was 6.9 percent in 2012, between 2.9 percent and 3.2 percent from 2013 to 2017 and was set to increase to 4.4 percent in 2018 and 4.8 percent in 2019, based on changes passed in last year’s legislative session.

That study found that Oklahoma in fiscal year 2018 is about in the middle for the pack, No. 8 among 16 oil-producing states. It also found Oklahoma would increase to the fourth highest by fiscal year 2019, not including the tax increase Gov. Mary Fallin signed into law at the end of March.

Q: How will oil and gas companies react to the gross production tax increase? Will there be layoffs?

Wilmoth: It’s an interesting question. Oil and natural gas company representatives have said a higher Oklahoma tax rate could lead them to move some drilling out of state. Others have said the tax rate is just one variable and is of less concern than the price of oil, the cost of sand and other factors. We will have to watch and find out.

Q: Are there any acquisition plans for any of Oklahoma City’s major oil and gas companies?

Wilmoth: SandRidge Energy has solicited bids for deals up to and including acquisition offers. Lead shareholder and activist investor Carl Icahn has said he will nominate his own slate of directors and consider bidding to buy the company outright.

Mergers and acquisitions are common in the oil and natural gas industry, especially in uncertain financial times. During the past three years, we’ve seen several companies throughout the region consolidate through bankruptcy deals and other purchases, and more are possible.

But for now, companies are aiming to produce their best assets. Many that hold assets in popular fields where they don’t intend to drill are selling those unused assets to other companies. Devon, Chesapeake and others have announced plans to sell billions of dollars in assets over the next few years, for example.

Several years ago, some such announcements appeared to be desperation plays to keep companies afloat. But companies recently have generated billions of dollars in cash by selling second- and third-tier properties and using that money in part to drill their best properties.

Q: Can selling these noncore assets put negative pressure on commodity prices?

Money: It could, but it also could lower costs for these companies, something investors find beneficial.

Q: Do you think the private equity companies are going to keep funding all these exploration and production startups, or might it slow down?

Wilmoth: The private equity market is not new, and it’s backed many smaller Oklahoma-based production and midstream companies. And it appears the scale of private investment has increased in recent years. Private investors typically invest in a company hoping to generate a return within three to five years or so, often by selling to a larger energy player. A good example is Edmond-based Tall Oak Midstream, which was formed in 2014 with a $100 million private equity backing. Management sold the first iteration of the company and its assets to Dallas-based EnLink Midstream for $1.55 billion and soon began the second company with a natural gas facility in the STACK. Talk Oak Midstream III is focused on natural gas gathering in southeast Oklahoman’s Arkoma Basin.

Q: As the industry steadily recovers, do you project big companies that had large layoffs will regrow their permanent staffs or rely more on outsourced staffing?

Money: Companies have focused on reducing their operational costs so that they are better prepared to deal with the industry’s sharp activity swings. Generally, they’ve been doing more with smaller staffs. I don’t think that will change, moving forward.


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