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The oil industry has been a target for entrepreneurs for many years. Low prices make the very things that make businesses valuable not so valuable.
No wonder then that investors have been turning to these companies as a way to make money in the oil market.
Now that OPEC and its allies are cutting back on the oil production, the market is flooded with oil and oil prices are sinking. That is putting a damper on the investments which have made an oil price fall particularly painful for a host of businesses.
Some of these companies are so hungry for cash that they are considering bankruptcy.
“We have heard from a number of companies that are going to open bankruptcy proceedings in 2019 because they’re going to be spending so much more than they’re bringing in,” says a colleague at the Senate Banking Committee.
There are many companies that are publicly traded and some private. Some are big companies, such as Exxon or Chevron. Some are mid-sized, such as Blackstone. Many of them are big players in the drilling business.
Many of these companies face higher capital costs than in years past, as the cost of everything from refineries to drilling rigs have gone up.
So, instead of getting a higher return, these companies are spending all of their cash and wasting huge amounts of money. And in a hard market for their products, that is not a good way to play.
That means the entire financial ecosystem is under pressure.
What’s going to happen?
Another problem is that a lot of companies are still using accounting gimmicks, like booking losses in early 2018 as losses and booking huge tax benefits just prior to tax reform. Many of them are trying to “minimize cash tax expense,” says two sources who were part of the tax reform hearings.
Critics, like Senator Orrin Hatch, say these tactics are a way for companies to reduce taxes on their earnings in 2017 and 2018.
Hatch says that is like borrowing money at zero percent interest and using the money to pay your bills.
“That’s just wrong,” says a government employee who is still at the Department of Energy. “When you’re borrowing money from the taxpayers, you’ve got to pay that money back, and this all comes out of your pocket.”
This technique is known as a “restatement” and can be used by companies to take as much as an $8 billion write-down in 2017.
Some don’t just restate their tax obligation for that year. The companies restate their entire financial history of taking accounting method calls.
Many industries make use of the same method called “fiscal stimulus.” For example, the oil companies may bring in money by investing on projects that will eventually be profitable, which then reduces their operating expenses. By doing this, they turn the expenses into income, which reduces their taxes.
But by bringing in tax-free money, companies may end up laying off and downgrading workers. It’s just a losing strategy.
The government estimates that new accounting tricks could mean some companies are paying less taxes for 10 years on their earnings from 2001 to 2013.