Posts by David Shallenberger, CPA, Director of Oil & Gas Services:
The oil & gas industry has long been known to experience regular cycles of booms and busts. One of the most recent examples occurred only a few months ago, when Organization of the Petroleum Exporting Countries (OPEC) made the decision to maintain its current level of production levels in an attempt to capture greater market share. This decision caused the price of oil to tank. By the time the dust settled, oil prices dipped 60 percent and the ripple effect had already begun to take a toll on companies throughout the industry.
This is just one example of how the market can change overnight, but this type of volatility is not exclusive to the oil & gas industry, which is why all business owners throughout all industries should consider taking the steps necessary to guard against a bust – even if you are still riding high on a boom.
3 Tips To Help You Navigate Your Industry’s Busts – And The Booms
- Take Good Care Of Your Assets – Successful navigation of a finicky industry depends on how well you manage your assets. For example, when times are good, take the necessary steps to manage your cash flow and consult with an advisor who can help you make wise, sustainable financial decisions. When it comes to investments made outside the volatility of your business, consider giving your blood pressure a break and make it a priority to first seek the preservation of your capital over your rate of return. Emphasizing capital preservation can better prepare you for those unexpected downturns.
- Live Frugally (Even When You Don’t Have To) – Don’t buy that new car unless you are absolutely sure that you will have the funds needed to cover the payments, and any other unexpected expenses, later on. Setting goals for your spending and saving habits, for example, can help keep your finances in line – helping you to keep your head above water when your business, or the industry, takes unexpected downturn. Instead of driving off the lot in that brand-new car, start by putting some money aside to make a nice down payment. Even though you may have to postpone the purchase for a few months or so, when you are finally able to put the money down you will also be able to significantly reduce your monthly payments – putting you in an even better long-term financial position.
- Choose To Play The Long Game – It may seem hard to diversify your business when so many others appear to be doing pretty good for themselves by chasing the quick rewards. But by operating your business and managing your personal finances more conservatively, you stand a better chance of securing long-term wealth – not to mention a comfortable retirement. In other words, when you diversify your assets, you are able to protect yourself and your business from a sudden and complete collapse.
Owning a business in a volatile industry can be a big gamble, but if you strategically manage your assets, your odds of success become much greater. Be prepared for outside factors that may force your business to go lean by preparing early and creating a solid, sustainable financial management strategy. Take a look at your current operations and consider what changes you can make today to help protect your business from a possible financial catastrophe tomorrow.
Email Rea & Associates to discover more ways to protect your business.
By David Shallenberger, CPA (Wooster office)
For many of us, the future of Ohio’s shale industry has become a regular topic of conversation. And as a landowner in the state’s Marcellus and Utica shale regions, you’ve probably wondered what (if any) effect current events, such as the state budget and plunging energy prices, will have on your financial well-being. While nobody can predict the future, I’m optimistic we won’t see any major slowdowns over the next few years. Here are a few reasons why:
Severance Tax Sees The Cutting Room Floor
We recently learned that Gov. Kasich’s plan to increase the state’s severance tax on horizontal drilling to pay for the plan to cut income taxes was removed in the newest rendition of the state’s proposed budget bill.
The governor’s original two-year budget plan called for oil and gas produced by horizontal wells to be taxed at a 6.5 percent tax rate for product sold at the wellhead – while 4.5 percent tax would have been applied to product sold downstream. Earlier this year, Ohio Tax Commissioner Joe Testa told the media that the governor’s proposed tax hike was because Ohio’s horizontal drilling industry has become more developed and that drilling has proved to be less expensive than anticipated. In response, American Petroleum Institute’s Executive Director, Chris Zeigler, argued that the original budget proposal placed the “future development of Ohio Shale at serious risk.”
Now that the proposed tax increase in question has been removed, one could assume that drilling companies are breathing a sigh of relief. However, while there appears to be no new initiatives in play to raise the existing severance tax rate at the moment, the new budget proposal still has a long legislative journey to make before the June 30 deadline.
Shale Investment Appears To Be Untouched By Low Energy Prices
Lower prices at the pump might be a bit unnerving if you are, for example, in the process of finalizing a mineral lease agreement. But have no fear, even though new drilling initiatives in Ohio’s shale regions are slowing, according to Business Journal Daily, “oil and gas exploration continues to have positive ramifications across the region.”
As Ohio’s oil and gas industry matures, it continues to become more efficient, which has helped it persevere at a time when oil producers in the Middle East and elsewhere appear to be maintaining higher production quotas in an effort to price horizontal drillers out of the market. For example, the practice of “super fracking,” by which producers pump higher quantities of sand into the wells they fracture, has increased productivity from 400 barrels a day to 600. The result is a lower break-even cost for producers and, in general, more staying power than experts had initially thought.
To date, Energy In Depth, an oil and gas trade organization, estimates that Ohio’s shale industry has grown to $22.3 billion, and expects it to grow by another $8.1 billion by 2016, with the construction or extension of additional pipeline infrastructure, power plants and processing plants. In other words – don’t expect the Ohio’s oil and gas industry to slow down any time soon. In fact, it could be expanding as landowners from other parts of the state appear to have been approached by companies looking to increase their reserves.
Companies Eye Mercer County For Fossil Fuel
About 10,000 acres of farmland located in the Mercer County area, about 60 miles southwest of Lima, has been leased for 3D seismic oil and gas exploration according to The Daily Standard, a local news publication. The leased property, which is primarily farmland, will be subjected to noninvasive 3D seismic tests that will identify whether “significant amounts of oil and/or gas” are present. The results are expected to be available by June.
The newspaper reports that “[more] than 90 land leases involving thousands of acres have been filed in Mercer County since 2013 between various companies and property owners … the legal documents give companies access to test, drill or perform other action on the land as stipulated in each agreement.” Mercer County Commissioners agreed to test some government-owned property as well.
This news is not only important to the residents of Mercer County, but to residents throughout Ohio. The fact that companies are actively seeking to further their investment within the state is promising for all landowners. And at the very least, this recent move signifies that these companies have no plans packing up and shipping out anytime in the near future.
Email Rea & Associates if you have questions about how current events could affect your leasing options or if you are considering entering into a lease agreement for drilling or exploratory purposes.
By David Shallenberger, CPA (Wooster office)
Know What Your Pipeline Easement Agreement Entails Before Signing
For years, state and national economists have pointed to the Marcellus and Utica shale regions as a source of relief for Ohio’s economic well-being. As momentum continues to grow, more and more pipeline infrastructure will be built, providing landowners with an opportunity to enter into a pipeline easement agreement. While you may be handed a contract that looks favorable to you, make sure you completely understand your rights and responsibilities before signing.
6 Things To Know Before You Sign
- A pipeline easement grants a pipeline company permission to use your real property to transmit natural gas liquids. This means that your entire property is not affected – just the portion outlined in the contract.
- Understand the difference between a temporary easement and a permanent easement. A permanent easement refers to a time period of 30 years or longer and the amount is taxed at capital gains rates. This happens when the amount received exceeds the cost basis of the portion of the property where the permanent pipeline covers. A temporary easement pertains to a shorter amount of time and is taxed at your ordinary tax rate. A permanent easement is normally more favorable to the taxpayer because of the capital gains treatment.
- You are eligible to be compensated for anticipatory damages to your property. Anticipatory damages are awarded for damages that have not yet taken place. They are generally negotiated with the easement. There are two types of anticipatory damages; Compensatory and Non-Compensatory damages.
- Compensatory damages are linked to items such as crop damages, business income interruption, temporary work site rental and temporary road access. Basically if you are using the property to produce ordinary income or the pipeline company wants to rent a portion of the property while they work, the anticipatory damage income you receive is taxed at your ordinary rate.
Non-compensatory damages are damages that are not tied to the items listed above and are taxed at capital gains rates.
As a landowner, you can also receive actual damages after the pipeline easement is complete. Actual damages are taxed at capital gains rates and any amount of the actual damage payment that is invested back into the property is non-taxable.
- Pipeline easement payments are not ongoing. You will be compensated once, which will likely be when you sign the contract.
- Different opportunities are available for different people. For many, a pipeline easement may be an opportunity to save for retirement. For others, additional economic opportunities may be available. Your CPA is qualified to help individuals identify your best options – those that make financial sense and those that do not alter your lifestyle.
There are many different myths about pipeline easements. Your financial advisor can help you understand the facts, ensure that you get a fair price and manage your tax obligations.
Email Rea & Associates to learn more about how to make the most of your pipeline easement.
Remember the CAT—the Commercial Activity Tax? Well, there’s another acronym you’ll need to get familiar with – the PAT, the Petroleum Activities Tax. Starting July 1, any receipts from the sale of motor fuel will be excluded from Commercial Activity Tax (CAT) receipts. That means if you’re a supplier of motor fuel, you’ll have to pay the replacement Petroleum Activities Tax (PAT), measured by your gross receipts for first sales of motor fuel outside of the distribution system in Ohio. Read the rest of this entry “
Is the recession over? Reports show that we are continuing the slow climb out. While the hill may be tall, chances are the recession has given you new tools to manage the effectiveness of your business and business capital – a renewed focus on cash flow and collections. But is that enough to get you into smooth waters? Read the rest of this entry “
As an employer in the oil and gas industry, historically you may have found it better for your company to hire independent contractors rather than employees. You probably paid your contractors flat day rates rather than an hourly wage. But now these practices are being challenged and companies of all sizes — including oil and gas companies — are being audited by the U.S. Department of Labor (DOL). Read the rest of this entry “
As a business owner in the oil and gas industry, you may have a substantial and noble strategic vision for your company. You may even be thinking that the list of possibilities for what your company can become is endless. But wait… how do you reach your business goals and get to where you want to be? Read the rest of this entry “
By now you’ve heard that Ohio Governor John Kasich signed Ohio’s new budget bill into law. Luckily, the severance tax on oil and gas production was removed from the bill a while back. However, that doesn’t mean that there aren’t other components that you need to be aware of. Read the rest of this entry “
The oil and gas industry in Ohio is constantly changing. So if you’re involved in the industry or are looking to break into the industry, it’s important for you to stay up-to-date on what’s happening. If you haven’t checked out, Ohio Gas & Oil Magazine, then I highly recommend you do. This monthly publication covers an array of topics from government regulations to industry best practices. Read the rest of this entry “
Do you operate a safe business? Of course you do. But is your safety to the level it needs to be to work with the “Big Oil” companies?
The Utica shale boom has presented tremendous opportunities for businesses, like yours, that can somehow assist in the production of oil and gas. However, dealing with Big Oil is unlike dealing with your typical customer. If you’ve yet to discover this yourself, you need to know how to play by their rules. And the first one you’ll need to comply with is safety. Read the rest of this entry “