EOG Resources, Inc.- Downhole Dirty

EOG Resources explores for, develops, produces and markets crude oil and natural gas primarily in major producing basins in the United States, Canada, Trinidad and Tobago, the United Kingdom, and China. Listed competitors are Anadarko Petroleum, Apache Corporation, and Sonde Resources

Future Value
My short-term (3-6 week hold) target price for the stock is $110.98, with an initial trailing stop at $104.27. My future (5 year hold) target price for the stock is $183, which is an average annual return of 15%. A prior five year hold of the stock would have returned an average of 16% per year. Past and future gains are based on actual and anticiapted earnings. Please be aware that any investment has the potential for loss and past performance is no guarantee of future results.

The Tax Act
The Tax Cuts and Jobs Act of 2017 significantly changes U.S. tax law by, among other things, reducing the U.S. federal corporate tax rate from 35% to 21%, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The law provides companies that have unremitted foreign earnings from investments in foreign subsidiaries and currently hold those earnings overseas, the opportunity to repatriate those earnings by paying a one-time net charge related to the taxation of those unremitted foreign earnings. The Act also allows for the increase of Federal bonus depreciation from 50% to 100% on certain qualifying assets retroactive to September 27, 2017.

The Federal Accounting Standards Board (FASB) has determined that filers have a policy choice to account for this tax on either a period basis or a deferred tax basis. In addition, the FASB requires that companies include in their financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. It is important to note that income tax adjustments required on repatriated earnings will distort a companies earnings and consequently its fair value.

In addition, the Tax Act repeals the corporate alternative minimum tax (AMT) for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers from 2017 and prior years can be applied against regular tax liabilities beginning in 2018. To the extent that AMT credit carryovers are not used to offset regular tax liabilities, these credits are refundable over four years beginning in 2018.

In the case of EOG Resources, Inc., the company, remeasured its U.S. deferred tax assets and liabilities to reflect the effects of the tax rate change from 35% to 21%, and recorded a provisional reduction in the 2017 income tax provision in the amount of approximately $2.2 billion, most of which is related to the decrease in the tax rate. This amount is subject to change upon further analysis of tax elections available to the company, as well as any additional clarification provided by the Internal Revenue Service.

The company also benefited from the repeal of the corporate alternative minimum tax (AMT). This repeal provides that existing AMT credit carryovers from 2017 and prior years can be applied against regular tax liabilities beginning in 2018. To the extent that AMT credit carryovers are not used to offset regular tax liabilities, these credits are refundable over four years beginning in 2018. The company estimates that its AMT credits being carried over to 2018 will total approximately $798 million.

The exact amount of the AMT credit carryover cannot be currently determined, however, due to a federal budgetary provision known as "sequestration," in which a portion of certain refunds are permanently withheld by the government. The sequestration rate, currently at 6.6%, is revised each year, and the company cannot precisely estimate the rate that might be applicable during the next four years.

AMT credits may also be applied against future regular tax liabilities, which would reduce the amount of AMT credit refunds, as well as the corresponding amount of the sequestration charge. In 2017, the company recorded an accrual in the amount of $42 million related to the possible sequestration of refundable tax credits.

The Tax Act further provides for a tax on the deemed repatriation of accumulated foreign earnings for the year ended December 31, 2017. The deemed repatriation tax is based on the amount of post 1986 earnings and profits of the company's foreign subsidiaries and the amount of foreign cash and cash equivalents. At the election of the company, the deemed repatriation tax liability can be paid over eight years beginning with 2017 on an interest-free basis. The company expects that it will pay its estimated deemed repatriation tax of approximately $179 million under this election.

The company cannot finalize the amount of the repatriation tax due to the possible impact of certain tax elections that require further analysis, the completion of its foreign earnings and profits study, and further clarification provided by the IRS.

The Tax Act also makes fundamental changes to the taxation of multinational companies, including a shift beginning in 2018 to a so-called territorial system of taxation that features a participation exemption regime. The company believes that under this new system it will not incur any significant amount of U.S. federal income taxes with respect to its foreign operating earnings. Prior to this change being enacted, the company had accrued U.S. federal deferred income taxes in the amount of $260 million related to its accumulated foreign earnings.

Due to this tax law change, the company reversed this accrual in 2017, resulting in a provisional reduction in its 2017 federal tax provision of approximately $43 million, net of the earnings impact of the repatriation tax. Although future foreign dividends should be exempt from U.S. federal income taxes, the company must still account for the tax consequences of outside basis differences in its investments in non-U.S. subsidiaries. While the company believes that no U.S. federal deferred income tax liabilities should be recorded for such outside basis differences, future IRS pronouncements may require that certain adjustments to the tax basis of its non-U.S. subsidiaries, resulting in the need to record additional U.S. federal deferred income tax liabilities.

Also, the Tax Act provides for 100% bonus depreciation on tangible personal property acquired and placed in service after September 27, 2017, and before December 31, 2023. It also provides for a phase down of bonus depreciation for the years 2023 through 2026. The impact of this provision will depend on the company's future domestic capital spending which cannot be precisely determined at this time, but it is expected to have a favorable effect on the company's cash tax position prospectively.

One other note regarding the Tax Act is that it includes certain limitations on the federal tax deductibility of interest expense, net operating losses and executive compensation. Even though the company does not currently believe that these changes will have a significant impact on its future tax provisions, additional analysis is required.

Insider Transactions
For FY17, the company recorded 194 insider trades involving 1,041,848 shares of stock. Of the 194 insider trades, 130 were Purchases involving 595,479 shares and 64 were Sales involving 446,369 shares.

Fair Warning
EOG Resources, Inc. (NYSE: EOG) - FYE 12/2017 UNDER VALUED The stock is currently trading at levels below my most recent $260 fair value estimate. Please See Linked Worksheet

Disclosure
I hold no shares of EOG Resources, Inc. in my portfolio.
Posted on 03/25/18