88 Energy makes deal to sell $19.1M in tax credits
Alaska’s $700 million-plus oil and gas tax credit obligation has been cut some but not because lawmakers are paying it down.
Leaders of the small North Slope explorer 88 Energy Ltd. announced June 21 that they have reached an agreement with a larger oil producer in the state to sell $19.1 million worth of refundable tax credits from the State of Alaska for $18.7 million.
The transaction itself is not unusual, as state officials and industry insiders have said such deals have been a regular occurrence since the state started limiting its annual tax credit refund payments in 2015. Prior deals involving the potentially sensitive financial information, though, have not typically been acknowledged and rarely, if ever, has the value of the transaction been disclosed.
Ashley Gilbert, managing director of Australia-based 88 Energy said the deal was made simply to accelerate the timeline on which the company could realize the value of the credits it held. Under current estimates, the 88 Energy’s credits were not likely to be fully reimbursed until 2026, according to a company statement.
“As a result of the transaction, the company is now set to be debt-free with reduced annual overheads of over $1 million in associated finance costs,” Gilbert said in a prepared statement.
According to the company’s figures, 88 Energy holds $16.1 million in debt that is due to mature at the end of 2022. The revenue from the tax credits will be used to pay that off and the remaining $2.6 million will be put towards the company’s working capital needs.
The credits were largely issued to small exploration companies that did qualifying work, but they were then often used as collateral for loans issued by investment banks to support additional exploration work. A commonly used credit for explorers with no production and no tax liability had the state paying 35 percent of the cost of qualifying work in cash.
The Legislature largely ended the tax credit program in 2017 as state revenues remained low and savings started to dwindle. However, the credits earned but unpaid in previous years remained.
88 Energy holds approximately 210,000 acres on the North Slope mostly around the edges of other industry activity. The company has participated in drilling several exploration wells on the southern portion of the Slope in recent years and in April announced its Merlin well drilled last winter in the National Petroleum Reserve-Alaska struck Nanushuk formation sands that are the basis for multiple large, ongoing oil developments.
The sale also saves 88 Energy from future interest payments on that debt.
On the other end of the deal, the unnamed large producer — the group including ConocoPhillips, ExxonMobil or Hilcorp, which do not acknowledge the individual transactions — can use the $19.1 million in credits to pay down the oil production taxes it owes to the state and save the roughly $400,000 difference between the value of the credits and the $18.7 million purchase price.
The state, in turn, will see its tax credit bill, which stood at $732.5 million to start the year, according to the Department of Revenue, decrease by $19.1 million.
At this point, it appears 88 Energy’s credit sale and similar deals will be the only way the state’s obligation will be cut 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 they passed the operating budget June 16.
The $114 million payment was set to come out of the Constitutional Budget Reserve Fund, which requires a three-quarters vote from both the House and the Senate to draw from, but the CBR draw vote failed after being wrapped in the complex and omnipresent fights over the size of Permanent Fund dividend checks.
The tax credit payment is one of several programs or obligations that will go unfunded in the 2022 fiscal year if lawmakers do not pass additional funding bills.
Gov. Mike Dunleavy called the Legislature into a second special session starting June 23 to remedy the effective date for the budget that he insists is needed to prevent a government shutdown July 1. Many legislators, however, argue that the budget is valid as-is based on prior legal opinions that conclude 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 the tax credit payments, a situation that has helped push some small companies into bankruptcy and damaged the state’s reputation amongst lenders to the industry.
The last payment to the tax credit fund of approximately $100 million came in fiscal year 2019 after the state’s plan to sell bonds that would support a full payoff of the credit obligation was challenged in court. Lawmakers decided against tax credit payments the next two years while the lawsuit over the bond plan made its way through the courts.
The Alaska Supreme Court unanimously found the plan violated the strict sideboards on accruing debt in the state Constitution last September, putting lawmakers back at square one.
Despite it being years since the state issued any significant amount of tax credits, the $700 million-plus tally of the yet-unpaid credit certificates continues to complicate matters for credit holders, which are not all banks and oil companies, either.
The borough-owned Interior Gas Utility in the Fairbanks area is owed $15 million for LNG storage credits it earned when it recently completed a 5.25 million gallon LNG storage tank intended to underpin expanding gas distribution in the area.
IGU General Manager Dan Britton wrote via email that if the credits are left unpaid the local utility will eventually be forced to borrow to complete projects the credits would have otherwise funded. The ultimate result is either slightly higher utility rates or a slower expansion of IGU’s gas network, according to Britton.
In all, Revenue officials said there are approximately 40 entities holding oil and gas tax credit certificates.
The tax credit situation is also a challenge for the new owners of the small Cook Inlet gas producer Furie Operating Alaska, which filed for bankruptcy in 2019 due to management and production issues and being owed more than $100 million by the state. Creditors to the pre-Chapter 11 iteration of Furie are still owed $103 million, according to CEO John Hendrix.
However, the deal Hendrix reached last year to purchase Furie for $5 million in cash included a clause that requires the company to pay the creditors $15 million plus 7 percent interest, which kicks in next year, if approximately 90 percent of the $103 million is not paid off by July 2025, he wrote in an email.
“If they pay off the tax credits owed to the creditors my purchase price goes from $20 million to $5 million,” he said.
Hendrix was former Gov. Bill Walker’s oil and gas policy advisor 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 stressed to Walker at the time that the state needed to fund the credits each year based on the formula laid out in statute, which generally calls for payments in the $50 million to $150 million range, as opposed to fully paying them off to the tune of several hundred million dollars each year.
That’s much different than the Legislature now ignoring the statutory formula, Hendrix said.
“Money comes in from (production) taxes, it pays down the credits. What they’re doing now, the Legislature isn’t appropriating the money they’re getting in taxes,” he said.
Back on the Slope, the continued lack of credit reimbursement could indirectly slow the progress on a potentially large oil discovery, according to another small explorer.
London-based Pantheon Resources Ltd. purchased Anchorage-based Great Bear Petroleum’s assets in 2019 after Great Bear had done years of exploration work and earned tax credits on the North Slope.
Pantheon leaders in late May announced an oil discovery near the Dalton Highway that they believe is greater than 1 billion recoverable barrels. They said in a corporate statement responding to questions about the tax credits that Pantheon did not purchase Great Bear’s credits or the associated debt, noting that Pantheon’s work has been done after the program ended.
However, Great Bear and its lender are large shareholders of Pantheon and the company’s ability to raise money for ongoing work is “significantly compromised by the debt that remains outstanding due to the failure of the state to repurchase the eligible tax credits,” according to the Pantheon statement.
It’s unknown how much Great Bear is owed.
Elwood Brehmer can be reached at [email protected].