Russian Tax Reforms May Give Exxon’s $92 Value a Boost
Exxon Mobil‘s (NYSE:XOM) Arctic ambitions in Russia received a boost when Russian Deputy Finance Minister Sergei Shatalov announced that the country would consider shifting the tax burden for high cost Arctic drilling from taxation of revenues to taxation of profits. [1] The announcement, which was made in the Russian Economic and Financial Forum being held in Germany, was seen as the Russian government’s efforts to channel investment into the Arctic to boost production. Russia has historically imposed high taxes on the oil industry but has looked to reform its approach over the past year to keep up production. [2] Earlier this year Exxon announced a deal with local oil producer Rosneft to jointly drill in the Russian Arctic region, beating out competitor BP (NYSE:BP).
We have a $93 price estimate for Exxon which is at a 25% premium over its current market price
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Tax reforms to boost investment
In October the Russian government announced that it would overhaul the taxation system for oil production in what was called the 60/66 program. [2] The change was taken to make sure that sufficient investment would be made in the exploration and production sector to keep Russian production at 10 million barrels /day (Mbd). It was estimated that if the prior taxation system was continued, private participation would be limited and production would drop to 8 Mbd by 2020. It is reported that under the old system Russian oil companies earned about $10 per barrel of oil even when international crude prices exceeded $100.
The latest move plans to shift to taxing profits rather than revenues for players willing to explore out in the sea, which tends to be much costlier. This is a major boost for Exxon, which is looking to explore Russia’s substantial reserves in the Arctic. (See: Exxon Readies for Arctic Gushers with Rosneft Deal) The oil major had earlier made it a provision of the agreement with Rosneft that Exxon and the Russian government would agree to consult on tax matters.
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