Written by: Stephen George, Mark Routt and Bradley Ford.
The timely combination of US tax reforms and changes to the global bunker fuel specifications in 2020 are poised to turn US oil and gas downstream into a cash generating machine - full conversion refining margins are set to soar and refiners will keep even more of their earnings. The net result will be US refiners flush with cash and looking for more investments to improve their bottom line.
The reduction of the federal corporate tax rate from 35% to 21% brings US total corporate taxation more in line with other large economies and addresses a key concern about American competitiveness in the global economy. Coupled with generous allowances and accelerated depreciation, the lower rate of tax will boost investment returns on capital projects, and expand the universe of projects able to meet corporate hurdle rates. It leaves companies with the cash needed to fund their projects, to implement smartly and to deliver a quick payback. We believe the US tax reforms will act as a springboard to launch IIoT (Industrial Internet of Things) and Industry 4.0 technology investments that will position US hydrocarbon companies at the forefront of the next industrial revolution; the digitalization of manufacturing.
In the near term, generous capital allowances create a window of opportunity for US companies to plow their profits back into their assets. Our Chief Economists think the smart money will be spent on getting better, not necessarily bigger.
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