Energy Prospectus

Dan, which of the companies you cover are leveraged the most to the upside if WTI averages $70 in 2018?

CLR and EOG are unhedged and they produce a lot of oil.

You can find the production mix and a table of hedges at the bottom of each forecast model.

Thanks. I also looked at the latest 10Q of EPM. It also does not have any hedges, and is currently profitable. Is not as leveraged since it has no debt, but it is not dragged down by hedges.

EPM is one of very few oil and gas companies that are currently paying taxes. Thus the reduction from 35% to 21% directly increases current cash flow from which future dividends will be paid. Look for an increase in dividends soon.

On the other hand in the case of deferred taxes, many have reduced their net deferred taxes payable by the benefit of writing off idc currently that is likely recorded at 35% benefit. The accounting for the reduced rates should be run through tax expense though deferred taxes do not impact cash flow. Thus the adjustments will be as confusing as the mark to market adjustments on hedges or the non cash ceiling adjustments for impairment to properties based upon prevailing prices at time of financial statement (trailing twelve month averages.

On the other hand, many of the oil and gas companies have net operating loss carry forwards which beginning next year may only be carried forward and may only offset up to 90% of current taxable income. This in the recovery period, many of these companies will begin paying some cash immediately rather than postpone until all of the net operating losses have been absorbed as under prior law.

As Dan as said evaluation of these companies is always based upon current and future cash flows.

Expensing intangible drilling costs ("IDC") reduces current income taxes and increases deferred income taxes. It is a timing difference, not a permanent difference.

Total income tax expense is GAAP Net Income X the tax rate. The current / deferred split is the tax rate times the difference between taxable net income and GAAP net income.

This is an extremely difficult concept for most accountants to understand, much less "normal people". So, I am sure that it will cause investors a lot of confusion as well.

The one thing to remember is that big drop in future tax rates will reduce "Deferred Tax Debts" on the balance sheet and improve balance sheet ratios. This will make the bankers very happy.

Yes, the reduction in how much NOL carryforward can be used does hurt a bit.