U.S. fuel makers are poised to reap billions under a sweeping Republican overhaul of the tax code. But don’t expect them to expand, go on a hiring binge, or lower prices at the pump.
Refiners haven’t built any major new plants in the U.S. since the 1970s. Instead, they have been returning profits to shareholders en masse in recent years, because the country has more gasoline and diesel than it can consume.
That strategy is expected to continue if refiners, who have largely been paying the current 35% corporate tax rate, see their rate drop to 21% under the proposed tax cut, according to analysts and people familiar with the companies’ plans. The brunt of the savings—an extra $1.5 billion next year alone—likely would wind up benefiting the companies’ investors, including billionaire Warren Buffett.
The case study of U.S. refiners shows that for many industries, the impact of the tax cut on capital investment and job growth will be limited for a simple reason: Pouring the money back into expansion wouldn’t make business sense.
Andeavor Corp. , one of the country’s largest independent refiners, said last week that it would reinvest 25% to 35% of cash flow back into its business over the next three years and could increase dividends and share buybacks.
Gregory Goff, chief executive of the company, formerly known as Tesoro, said much of the cash from tax cuts would go back to investors. They have been paid $1 billion in dividends since 2012, and the value of their shares increased after the company bought back $2.4 billion in stock.
“At the end of the day, it probably frees up more for shareholders,” Mr. Goff told analysts earlier this month.
President Donald Trump touted his ideas for cutting taxes during a visit to an Andeavor refinery in North Dakota in September.
Valero Energy Corp. also is likely to direct much of the cash from tax cuts to dividend payments and stock buybacks, according to people familiar with the company’s plans. It returned $600 million to investors through dividends and stock buybacks in the third quarter of 2017 and has said it would buy back another $1.6 billion in shares.
Analysts say the strategy makes sense for refiners, which face longer-term uncertainties about demand for gasoline and diesel, due to the emergence of electric vehicles and improving fuel efficiency.
“You don’t want more capacity in an industry where there is already overcapacity,” said Paul Cheng of Barclays PLC. “It’s unlikely you’ll have the need to spend all this money and you shouldn’t, you would destroy value.”
Mr. Cheng projects the legislation would provide around a 20% boost to refiners’ earnings per share and a 9% increase or more to cash flow from operations. Many of the companies likely would opt to return more than half of that cash to investors, he said.
Phillips 66 would have a cash-flow increase of $227 million from the tax change, according to Barclays. If all of those funds were returned to shareholders, more than $34 million would go to Mr. Buffett’s Berkshire Hathaway, based on his roughly 15% stake in the refiner.
A spokesman for Phillips 66 declined to comment. A spokeswoman for Berkshire Hathaway didn’t respond to a request for comment.
For investors, U.S. refiners have been one of the best bets among oil-and-gas companies recently due to their relatively high profits compared with capital investments.
Since 2012, U.S. refiners including Valero, Andeavor, Marathon Petroleum Corp. , PBF Energy Inc., Phillips 66 and others provided $53 billion in cash to shareholders in dividends and buybacks, more than half the cash they generated from operations in that time, according to a Wall Street Journal analysis of FactSet data.
While the industry has spent billions upgrading existing refineries, in the past five years, the biggest four fuel processors that don’t produce oil or gas delivered a total return of 180% to shareholders, including dividends, beating the S&P 500 index by almost 75 percentage points, according to FactSet.
Unlike major oil companies like Exxon Mobil Corp. and Chevron Corp. , which both produce and refine oil, independent refiners have largely been unable to use other tax provisions to avoid paying the current 35% tax rate. That is because they are unable to take advantage of offsets such as deductions for drilling costs.
“The vast majority of independent refiners are actually American companies that can’t take advantage of various tax loopholes around the world and are stuck with America’s tax code,” said Brendan Williams, vice president of government affairs for PBF. He said PBF supports tax reform but wouldn’t discuss the company’s capital expenditure plans.
Yet we still pay high prices at the pump while are bridges and roads crumble like ancient ruins. Trump is simply lining the pockets of his rich buddies. This should surprise no one, except maybe the idiots who voted in a meaningless “election” and support their puppet of choice.