While she became a champion for lower taxes and “Drill baby, drill!” during her tenure in Alaska, Sarah Palin actually managed to raise taxes on the energy industry. The so-called Palin Levy — while great for residents of the state — wasn’t too kind for those E&P firms wanting to drill in Alaska’s rich energy market.
The severity of the progressive tax managed to stifle drilling and production in the state, and Alaska has actually fallen behind.
However, after months of fighting, the Alaskan state government has put forth a bill that remove the Palin Levy and move the royalty fees towards a more “fair” system. For energy stocks and investors, that’s a huge win.
An Alaska Flat Tax
The problem with Sarah Palin’s energy taxes in Alaska was that scheme of rising levies that would increase when the price of oil would surge. Initially, the tax was set at 25%. However, as oil prices have risen, that tax rose to as much as 75% per barrel. The original idea was that the extra revenue would be used to grow Alaskan jobs and shore up the state’s permanent fund.
The tax scheme worked well as oil royalties made up nearly 92% of Alaska’s unrestricted general fund revenue in 2013. Unfortunately, if you’re an energy driller, that high 75% royalty rate isn’t so good.
As with most of the country, all the easy oil in Alaska has been found. That means the opportunities in the state are of the unconventional kind — i.e. very expensive to tap. With such a huge tax on production, many of these unconventional opportunities are just too expensive and unprofitable for most energy stocks to undertake. As such, CAPEX spending by the energy firms in Alaska has only measured around $2 billion annually since the tax was first created.
The lack of spending on new drilling opportunities has caused Alaska to quickly fall behind other states in terms of energy production. Alaska now sits behind Texas, North Dakota and even California in terms of daily oil output.
In order to combat this shrinking and stagnating production, current Governor Sean Parnell signed into law a new royalty scheme that will cap the tax that E&P firms pay to just 35%. By removing the tax, analysts estimate that Alaska’s production will rise by more than 90,000 barrels per day — not including expansion of existing fields — for the next few years before taking off as new aggressive projects take shape.
Some of those projects are already beginning to take shape, as Alaska has exports of both oil and liquefied natural gas (LNG) on its mind. So, which energy stocks are poised to profit on this news?
Three Winners In Alaska
With nearly 3.82 billion barrels of oil — the nation’s second-largest reserves — trapped in Alaska, the removal of the Palin Levy could be big win for a variety of energy stocks. While it could attract some smaller players like EOG Resources (EOG), many of the biggest winners are already in place in the state.
For starters, take beleaguered BP (BP).
Already the key operator in Alaska’s monster Prudhoe Bay field, the British integrated giant has committed to several new projects in the state now that the Palin Levy has been removed. That includes adding two new horizontal rigs to Prudhoe Bay as well as adding an extra $3 billion in CAPEX to the field. BP has also plans to begin fracking the nearby Sag River formation — which could add as much as 200 million barrels of new oil production.
All in all, those additional rigs and projects should help BP stock see a 40,000 barrel per day jump in its production by 2016. That’s key, as the opportunity is a relatively easy one for BP to tap and add to its production. That should help propel BP stock going forward.
Then there’s pipeline operator TransCanada (TRP), another one of the top energy stocks that should be able to capitalize on this news. While most investors have tied the fate of TRP stock to the much-maligned Keystone XL, TransCanada is already a huge player in Alaska.
TRP recently signed a deal with the Alaskan government to build an 800-mile pipeline that will eventually bring natural gas from the state’s North Slope to a proposed LNG export plant. Unlike the KXL, this project has pretty much been given the green light by Alaska’s government and could serve a huge source of additional cash flows for TRP stock when it’s finally constructed and operational.
Finally, there’s No. 1 Alaskan producer ConocoPhillips (COP) to consider.
Already, COP has the most reserves in the state, and the new tax scheme has it beginning to tap more. During the third quarter, Conoco added an additional rig to its acreage, and that rig has already begun adding to its overall production in the state. Additionally, new projects should add about 16,000 barrels a day to COP’s production by 2015.
And aside from buying into the future TRP LNG pipeline, COP is the sole operator of the Nikiski LNG plant. That facility had been mothballed since 2012. However, with the tax removed, Conoco estimates that it should be able to turn a profit on drilling natural gas nearby and shipping it to Japan and China.
The bottom line: The repeal of the Palin Levy is huge for energy companies in Alaska. The trio of TRP stock, BP stock and COP stock could be some of the biggest winners among energy stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.