America's shale gas drillers anticipate paying income taxes for the first time in years after they saw cash flows soar with natural gas futures prices above $8/MMBtu and the futures curve pegging prices above $4/MMBtu for the next three years.
The drillers have always paid taxes severance taxes, sales taxes and property taxes, for example but they generally had no income tax liability for more than a decade as they consistently lost money, outspending themselves by drilling new wells while gas prices continued to drop.
The group expects to soon file income taxes, with some spending discipline intact and large amounts of debt paid off. The years of losses were not for naught most companies banked future income tax deductions from the red ink but they are burning through these deductions with their current cash flows.
Appalachian driller Antero Resources Corp. expects to start paying cash taxes late in 2023 if prices stay high, Michael Kennedy, senior vice president of finance and CFO, told analysts on Antero's first-quarter earnings call.
"We have $2.3 billion of [net operating losses] in addition to $800 million in unused intangible drilling cost deductions, Kennedy said. "So we have a lot of tax attributes. However, when you have in excess of $2.5 billion of free cash flow this year and next, you chew through those pretty quickly. So not this year, but right now, at these commodity prices, sometime in late '23 is when we would become a cash taxpayer."
The intangible drilling cost provision allows producers to deduct the costs of setting up and drilling a well. Net operating losses can be deducted and carry forward depending on which tax law was in effect when the losses occurred.
Marcellus Shale pioneer Range Resources Corp. expects to be paying income taxes soon, Mark Scucchi, senior vice president and CFO, told analysts on a first-quarter earnings call.
"Cash tax is clearly top of mind for everyone," Scucchi said. "It's a byproduct of higher commodity prices, something the industry hasn't faced in a while."
"Fortunately, for Range, sitting with about $2.9 billion in federal net operating losses, we are starting from a very strong position," Scucchi said. "That is an asset a deferral of cash taxes for our shareholders that, frankly, with higher prices gets realized sooner."
Scucchi does not expect Range to be paying cash taxes this year or next.
EQT Corp., the largest U.S. gas producer by volume, may or may not pay income taxes this year, but it expects to start paying in 2023 at the latest, CFO David Khani told analysts on the company's earnings conference call.
"We're going to probably burn through our net operating losses this year, and so we'll start to become more of a cash taxpayer in 2023," Khani said. "It is obviously very sensitive to the commodity price. And as you've seen, natural gas has been really, really volatile."