88 Energy Reaches Agreement to Sell $ 19.1M in Tax Credits | Local company
June 22— Alaska’s more than $ 700 million oil and gas tax credit obligation has been reduced in part, but not because lawmakers are paying it back.
The leaders of the little explorer of North Slope 88 Energy Ltd. announced on June 21 that they had reached a deal with the state’s largest oil producer to sell $ 19.1 million in Alaska state refundable tax credits for $ 18.7 million of dollars.
The transaction itself is not unusual, as state officials and industry insiders have said such transactions have occurred regularly since the state began limiting its annual credit repayments from tax in 2015. Previous transactions involving potentially sensitive financial information have generally not been recognized and rarely, if ever, the value of the transaction has been disclosed.
Ashley Gilbert, chief executive of Australia-based 88 Energy, said the deal was made simply to speed up the time within which the company could realize the value of the credits it held. Current estimates are that 88 Energy credits are unlikely to be fully repaid until 2026, according to a company statement.
“As a result of the transaction, the company is now debt free with annual overhead costs reduced by more than $ 1 million in associated finance costs,” Gilbert said in a prepared statement.
According to company figures, 88 Energy holds $ 16.1 million in debt maturing at the end of 2022. Income from tax credits will be used to repay and the remaining $ 2.6 million will be allocated to the fund. turnover of the business. Needs.
The credits were largely given to small exploration companies that performed qualifying work, but were then often used as collateral for loans issued by investment banks to support additional exploration work. A credit commonly used for explorers with no production and no tax liability required the state to pay 35% of the cost of eligible work in cash.
The legislature largely ended the tax credit program in 2017, as state revenues remained low and savings began to decline. However, the credits acquired but not paid in previous years remained.
88 Energy owns approximately 210,000 acres on the North Slope, primarily on the edge of other industrial activities. The company has participated in the drilling of several exploration wells in the southern part of the slope in recent years and in April announced its Merlin well drilled last winter in the Alaska National Oil Preserve that hit the sands. of the Nanushuk formation which are the basis of several large oil fields in progress. developments.
The sale also saves 88 Energy on future interest payments on this debt.
At the other end of the deal, the large anonymous producer – the group including ConocoPhillips, ExxonMobil or Hilcorp, which do not recognize individual transactions – can use the $ 19.1 million in credits to pay taxes on the production. of oil he owes to the state and save the difference of about $ 400,000 between the value of the credits and the purchase price of $ 18.7 million.
The state, in turn, will see its tax credit bill, which stood at $ 732.5 million at the start of the year, according to the Revenue Department, decrease by $ 19.1 million.
At this point, it looks like selling 88 Energy on credit and similar deals will be the only way to reduce the government’s obligation this year. That’s because the legislature did not approve a $ 114 million payment to the state’s oil and gas tax credit fund when it passed the operating budget on June 16.
The $ 114 million payment was supposed to come from the Constitutional Budget Reserve Fund, which requires a three-quarter vote of the House and Senate, but the CBR’s raffle vote failed after being shrouded in the complex battles and ubiquitous on the size of permanent fund dividend checks.
Paying the tax credit is one of many programs or obligations that will not be funded in fiscal 2022 if lawmakers do not pass additional funding bills.
Gov. Mike Dunleavy has called the Legislature to a second special session beginning June 23 to remedy the budget effective date he says is necessary to prevent a government shutdown on July 1. Many lawmakers, however, argue that the budget is valid as is based on previous legal opinions concluding that spending bills do not need an effective date clause to be immediately valid. .
As it stands, this year would mark the third consecutive budget in which the legislature decided not to fund tax credit payments, a situation that has helped push some small businesses out of business and hurt the state’s reputation among industry lenders.
The last payment to the tax credit fund of around $ 100 million came in fiscal 2019 after the state’s plan to sell bonds that would support full repayment of the credit obligation. been challenged in court. Lawmakers decided not to pay a tax credit for the next two years, as the bond plan lawsuit made its way through the courts.
The Alaska Supreme Court unanimously ruled that the plan violated strict debt accumulation rules in the state’s Constitution last September, putting lawmakers back to square one.
Although it has been years since the state granted any significant amounts of tax credits, the tally of more than $ 700 million of outstanding credit certificates continues to complicate matters for credit holders, who Nor are they all banks and oil companies.
The borough-owned Interior Gas Utility in the Fairbanks area owes $ 15 million for the LNG storage credits it earned when it recently completed a 5.25 million LNG storage tank. gallons intended to support the expansion of gas distribution in the region.
IGU Managing Director Dan Britton wrote by email that if the credits are not paid, the local utility will ultimately be forced to borrow to complete projects that the credits would otherwise have funded. The end result is either slightly higher utility tariffs or slower expansion of UGI’s gas network, according to Britton.
In total, revenue officials said about 40 entities held oil and gas tax credit certificates.
The tax credit situation is also a challenge for the new owners of Cook Inlet’s small gas producer, Furie Operating Alaska, which filed for bankruptcy in 2019 due to management and production issues and owed more than $ 100. million dollars to the state. Fury’s pre-Chapter 11 iteration creditors still owe $ 103 million, according to CEO John Hendrix.
However, Hendrix’s deal last year to buy Furie for $ 5 million in cash included a clause requiring the company to pay creditors $ 15 million plus 7% interest, which will take effect the year. next, if about 90% of the $ 103 million is not paid by July 2025, he wrote in an email.
“If they pay back the tax credits owed to creditors, my purchase price goes from $ 20 million to $ 5 million,” he said.
Hendrix was the former oil and gas policy adviser to former Governor Bill Walker in 2016, when Walker vetoed most, but not all, of the tax credit payment approved by the legislature. He said in an interview that he pointed out to Walker at the time that the state must fund the credits each year based on the formula provided by law, which typically provides for payments of between $ 50 million and $ 150 million. dollars, instead of paying them to the tune of several hundred million dollars each year.
It’s very different from the fact that the legislature is now ignoring the legal formula, Hendrix said.
“The money comes from (production) taxes, it repays the credits. What they are doing now, the legislature does not appropriate the money they receive in taxes, ”he said.
Back on track, the persistent lack of credit repayment could indirectly slow the progress of a potentially important oil discovery, according to another small explorer.
London-based Pantheon Resources Ltd. purchased the assets of Anchorage-based Great Bear Petroleum after Great Bear carried out years of exploration and obtained North Slope tax credits.
The leaders of the Pantheon announced in late May an oil discovery near the Dalton Highway which they say is more than 1 billion recoverable barrels. They said in a company statement responding to questions about tax credits that Pantheon did not purchase the Great Bear credits or associated debt, noting that Pantheon’s work was done after the program ended.
However, Great Bear and its lender are major shareholders in Pantheon and the company’s ability to raise funds for work in progress is “significantly compromised by debt that remains unpaid due to state failure. to redeem eligible tax credits ”, according to the Declaration of the Pantheon.
We don’t know how much we owe Great Bear.
Elwood Brehmer can be contacted at [email protected]