Where Do Oil Companies' After-tax Earnings Go? Who Will Be Harmed By A Tax Increase? A Look At Exxon

As Congress is considering increasing the federal taxes on oil companies, closing so called tax loopholes, I thought I take a look at where those after-tax earnings go and who would lose if Congress increased taxes, closed "tax loop holes" and decreased oil company after-tax earnings.

Using Exxon as an example, in 2010, Exxon paid 28 percent of its after-tax earnings, and 17 percent of its cash flow, as dividends to its widely held shareholder base. (About 50 percent of Exxon's shareholders are institutional. These are mostly mutual funds and pension plans.)

Exxon invested about all of the remaining after-tax income, about half of its cash flow, in its facilities, property, plant and equipment. The remaining cash flow was used for financial balance sheet purposes, almost entirely to pay off maturing debt.

So, what will happen if Congress increases the taxes Exxon pays?

It will likely hurt US citizens and retirees.

In 2010, the total of Exxon's earnings went to shareholder dividends, a large part of which are mutual funds and pension accounts, and to the purchase of property, plant and equipment used in the oil exploration and refinery businesses.

On a cash flow basis, all the cash went to dividends, purchase of property, plant and equipment and debt repayment.

Exxon is contractually obligated to make debt repayments, but it is not obligated to make a dividend payment or to reinvest in its business through the purchase of property, plant and equipment.

So, if Congress increases Exxon's tax payments, Exxon will have to cut dividends to its shareholders or reduce the amount it reinvests in its oil business or both.

It is likely Exxon will cut its dividends if its taxes are increased. The payment of dividends is not essential for Exxon's business strategy or to maintain Exxon as a going concern. Cutting dividends is also a very visible act that will get a lot of media attention and draw attention to the negative effects of a tax increase on oil companies.

I offer no opinion as to whether a federal tax law change for Exxon will negatively impact its stock price.

Also, see my post from last year, "BP Dividend Suspension Is A Hidden Tax On US Retirees."