Exxon Mobil ( XOM ) probably didn't expect its phenomenal first quarter earnings figures to end up raising questions from the general public all the way to the White House. The company reported earnings of $10.65 billion for Q1 2011; 69% higher than the figure for Q1 2010. While investors rejoiced at the bumper earnings, politicians trained their guns at the oil industry as a whole, calling to question the long-standing tax incentives for exploration and production, particularly for the large oil and gas producers. Exxon, the world's largest independent oil and gas exploration and production company, is clearly taking a beating, along with its competitors like Chesapeake ( CHK ), Anadarko ( APC ), ConocoPhillips ( COP ) and Chevron ( CVX ) based out of the U.S.
We currently maintain a $92.44 price estimate for Exxon Mobil , about 10% above market price.
The Democrats firmly believe that its time to show these tax incentives the door…
With gas around $4 a gallon, and the government trying to fight growing fiscal deficits, the through-the-roof profits reported by oil companies clearly did not go down well with politicians. Players in the U.S. oil industry benefit from a $4 billion tax incentive, put in place to help them compete with companies based out of other countries where tax rates are lower.
But Democrats are now calling the incentive a subsidy that the oil companies no longer deserve. President Obama and key Democratic lawmakers are pushing for the elimination of these subsidies, with several Republicans also supporting this view.
… but Exxon obviously believes otherwise
Exxon claims that it paid $3.1 billion in taxes in the U.S. in Q1 2011, considerably more than the $2.6 billion in profits it made through its U.S. operations. This clearly makes it one of the biggest taxpayers in the country, and it believes the oil industry is being singled out.
In terms of impact, if the tax incentive is abolished, then Exxon's effective tax rate will increase to 35%.
This would knock-off over 5% in value from our $92.44 price estimate for Exxon Mobil .