Tax Benefits for the Refiners ETF
The VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK), the only exchange traded fund dedicated to oil refiners, is one of the best-performing energy ETFs over the past 12 months. Some analysts believe the U.S. tax reform legislation passed late last year will provided added benefits to refiners.
CRAK, which is two and a half years old, tracks the MVIS Global Oil Refiners Index, “which is a rules-based, modified capitalization weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
The $25 million ETF holds 26 stocks. Stabilizing crude oil prices and potential production increases from U.S. shale producers could also bolster the case for North American refiners.
“The Tax Cuts and Jobs Act of 2017 is expected to be positive for most energy companies by lowering the future baseline statutory tax rate and thereby boosting reported earnings,” said Fitch Ratings. “It also creates one-time earnings impacts from the re-measurement of deferred tax assets and liabilities at the new lower rates.”
While the broader energy sector is widely seen as a beneficiary of tax reform, refiners in particular are expected to benefit from lower taxes.
“This is because the refining sector has been in a cash tax paying position over the past several years, driven by above-trend crack spreads, strong economic growth, access to cheaper shale based crudes, and structurally cheap gas and power,” said Fitch. “Several refiners identified substantial reductions in cash taxes in Q417 earnings calls, including Marathon Petroleum (MPC, $400 million to $500 million), Phillips 66 (PSX, $400 million range) and Valero ($350 million after taking into account repatriation impacts).”
Those three companies are three of CRAK four largest holdings and combine for 21.6 percent of the ETF’s roster.
“Fitch expects increased tax-related cash flows will partly be used to help support refiner distribution policies. MPC cited extra cash from tax relief as a factor in its decision to increase its dividend by 15%. Valero did not directly link its 14% dividend increase to the tax legislation, but did cite the cash tax benefit and noted that it had paid out above its target range for payouts in 2017,” according to the ratings agency.
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