Skip to content

Research & Blogs

Is The White House/Exxon Statement A Signal For No Border Adjustment Tax On Oil And Gas?

By Dan Tsubouchi

It may well turn out to be an excellent CERA week for the Cdn oil and natural gas sector to start the turn in sentiment from negative to positive. The #1 issue for relative underperformance of Cdn oil and gas stocks to the US peers is the fear of Border Adjustment Tax (BAT) including US imports of Cdn oil and gas.  Two events yesterday seem to be more than coincidence.  Yesterday’s White House statement on ExxonMobil (XOM) looks to be a signal pointing to NO BAT on oil and gas.  And XOM’s CERA speech yesterday looks to be the finishing thought or closer to the argument that links the reality of oil and gas logistics to be a key contributor to Trump’s priorities of growth, jobs, manufacturing, and exports. 

XOM’s press release looked like a layup for a Trump Tweet.  We almost ignored the XOM keynote speech [LINK] yesterday at CERA’s Who’s Who in the energy world conference in Houston after reading the XOM press release “ExxonMobil Plans Investments of $20 Billion to Expand Manufacturing in U.S. Gulf Region[LINK].  On the surface, the release looked like it was just a layup for a Trump tweet.

The news release headline made us keen to read it as we thought this was likely to provide some detail on the $20 billion of projects and expanding the Gulf of Mexico refining and chemical business had to have some positive flow thru to Cdn heavy oil and natural gas.  But that wasn’t the case.  Rather, the XOM release was likely a turn off for some as it looked like it was written by and for Trump to use in a tweet.  XOM says it “is expanding its manufacturing capacity along the U.S. Gulf Coast through planned investments of $20 billion over a 10-year period to take advantage of the American energy revolution”.  And XOM highlights “all told, we expect these 11 projects to create over 45,000 jobs. Many of these are high-skilled, high-paying jobs averaging about $100,000 a year. And these jobs will have a multiplier effect, creating many more jobs in the communities that service these new investments”.  It certainly sounded like a forward looking $20 billion plan with a lot to come.  But XOM also noted that the 10-year period began in 2013, saying “Investments began in 2013 and are expected to continue through at least 2022.

The subsequent White House/XOM made us take a second look. However, the subsequent White House statement “President Trump Congratulates Exxon Mobil for Job-Creating Investment Program[LINK] made us take a second look beyond the headlines.  There are 17 pages of White House press releases/statements since the Trump inauguration [LINK] and this is the only including a company’s name in the title.  That was interesting, but much more than that, it’s the only one that includes quotes from a company CEO.  The other recent jobs release was the Feb 28 release “President Trump Delivers on Jobs for the American People[LINK] that simply noted specific companies, the billions being invested and jobs being created.  Yesterday’s White House release chose to include the following XOM CEO Woods comment, writing “Darren W. Woods, chairman and chief executive officer of Exxon Mobil announced the company’s investment program during a keynote speech today to an oil and gas industry conference in Houston, Texas.  “Investments of this scale require a pro-growth approach and a stable regulatory environment and we appreciate the President’s commitment to both,” said Woods.”   We recognize that BAT is tax reform item and not considered a regulatory item, but we don’t see why the White House would have included the Woods “stable regulatory environment” in its statement if they planned a major disruption to refinery costs if they planned to put BAT on oil and gas.  And BAT would cause a major disruption to the cost structure for refineries importing Cdn heavy oil and have to impact economics.  The White House could have easily included a different XOM quote in the statement.

XOM’s CERA speech may be the closing argument linking oil and gas to Trump’s priorities.  The White House statement made us look at the XOM CERA speech as less of an industry appeal for NO BAT on oil and gas, rather the start of the justification for why oil and gas would be exempted from BAT.  And when we looked at it from that different perspective, the XOM speech doesn’t look like an appeal, but more of a finishing touch or closer to the argument linking the realities of oil and gas logistics to Trump’s priorities of growth, manufacturing, jobs, and exports.  XOM does not mention the specific role of Cdn heavy oil to refineries, but, all oil and gas people, know that the US refineries cannot replace Cdn heavy oil, nor switch to light oil without billions and years to modify refineries.  XOM deserves credit for laying out the key support argument (rationale for Trump) to exclude refining, chemicals, petrochemicals and other industrial natural gas users from BAT.

  • Reminds that a US based technology revolution, “the shale revolution”, has led to the US being an energy exporter.
  • But this technology has done more than that. It is also incentivizing U.S. manufacturing to invest and grow.”
  • XOM’s tag line “In this way, an upstream technology breakthrough has led to a downstream manufacturing renaissance”, and creating new manufacturing jobs
  • Links conceptually refining and chemicals to manufacturing that exports. And these businesses can only work with crude oi and natural gas as inputs. “One example – very close to home for me – is in the refining and chemicals sectors. These businesses are leveraging the shale revolution to manufacture cleaner fuels and more energy-efficient plastics. We are using new, abundant, domestic energy supplies to provide advantaged products to the world.”
  • Growing the Gulf” is about more than increased manufacturing capacity, though. It is also about increased exports. These projects are export machines, generating products that fast-growing nations need to support larger populations with higher standards of living”.

Importantly, “Growing the Gulf” also creates jobs. Lots of them. All told, we expect these 11 projects to create over 45,000 jobs. Many of these are high-skilled, high-paying jobs – averaging about $100,000 a year. They will also have a multiplier effect, creating many more jobs in the community. ExxonMobil is building a manufacturing powerhouse along the U.S. Gulf Coast

A modified BAT seemed to be the direction last week.  The last 10 days of key political comments seemed to be pointing to a modified BAT with a possible exemption/lesser impact for oil and gas.  Recall last week’s comments from Kevin Brady (House Ways and Means Committee Chair) on modifying BAT.  In the March 3 issue of The Gartman Letter, Dennis Gartman highlighted the Brady quote “At the end of the day, we are going to have border adjustment in tax reform because we can’t be competitive without it… I predict too that there will be improvements in that [border provision], from the original provision. We’ve been listening very carefully to retailors, refiners, and automakers about how you design it the right way and phase it in the right way to allay their concerns.”  The Brady comments are significant as he had been holding firm to the tax reform package including BAT that was designed last June.  But last week, Brady made a point of stating there will be changes or as he called it improvements to BAT, and he also highlighted retailers, refiners and automakers on how BAT gets modified.  There is a reality of oil and gas logistics (ie. US PADD 2 and 4 refineries can NOT replace Cdn heavy oil) that has to be clear to Trump, especially with Rex Tillerson in the cabinet. The US does not have the heavy oil potential to replace our heavy oil imports, and does not have the natural gas infrastructure to replace our natural gas imports for the mid term.

The White House/XOM statement may be the catalyst to at least shift sentiment if not move some capital off the sidelines.  There is no guarantees on BAT or what it would include, but we believe the White House/XOM statement is a key signal that Trump understands the realities of oil and gas logistics and XOM’s commitment to capex based on a stable regulatory environment.  And the XOM speech should be viewed as the finishing touch or closer to the argument that links oil and gas to Trump’s priorities of growth, jobs, manufacturing, and exports.  The two events seem to be interlinked or just a great coincidence. Everyone is well aware that Cdn oil and gas stocks have dramatically underperformed US peers in 2017 driven primarily by fears of BAT.  The BAT fears are also the key reason why the Cdn IPO market did not see a number of successful privates IPO in Q1/17.  NO BAT on oil and gas should lead to a gap up in the Cdn stocks.  We haven’t seen investors jump back in to close that gap and bet on NO BAT.  But the White House/XOM statement and XOM’s closer that links oil and gas to growth, manufacturing jobs, and exports may be the catalyst to at least shift investor tone to an increased likelihood of NO BAT, if not start to get some capital flowing back to the Cdn oil and gas stocks.