The recently passed stimulus bill, known as the CARES Act, included several provisions to provide funding to struggling businesses during the COVID-19 outbreak. One of the lesser-known opportunities made it easier for companies to deduct net operating losses and claim an immediate tax refund.
Among the many beneficiaries of this provision has been the oil industry. According to a report by Bloomberg, at least 37 oil-related companies have claimed more than $1.9 billion in CARES Act tax benefits. While many in the industry are using this cash to help prop up their struggling businesses, at least one offshore drilling contractor Diamond Offshore Drilling (OTC:DO), apparently used the funds to pay executive bonuses after filing for bankruptcy protection.
Cashing in on the CARES Act
Bloomberg's report found that several major oil companies received funds as part of this provision in the CARES Act. Some of the biggest beneficiaries included refining giant Marathon Petroleum (NYSE:MPC), which gained a $411 million benefit and deeply indebted oil giant Occidental Petroleum (NYSE:OXY), which anticipates a cash refund of $195 million.
Bloomberg quoted a spokesperson for Marathon, who stated that while "we did not request any benefit," the company is "obligated to follow the tax laws as passed by Congress, which apply to all corporate manufacturers nationwide." Occidental, on the other hand, did reportedly enlist its employees to ask Congress to "provide liquidity to the energy industry."
Both companies found themselves in need of some assistance, given the significant deterioration in their finances amid the COVID-19 outbreak. Low oil prices have put considerable weight on Occidental Petroleum's balance sheet, which has sparked some concerns that it might end up filing for bankruptcy. Meanwhile, Marathon reported a whopping $9.2 billion loss during the first quarter due to the impact the COVID-19 outbreak had on gasoline demand and the value of its assets. However, in both cases, one of the reasons for their recent struggles is that they made expensive acquisitions during stronger market conditions. Now, they're struggling with the debt they took on to finance those transactions because the business environment has deteriorated.
Cashing out before checking out
One of the other notable beneficiaries of the CARES Act was Diamond Offshore Drilling, which Bloomberg pointed out had recognized a $9.7 million tax benefit. That's noteworthy considering that the company recently filed an emergency motion as part of its bankruptcy process so that it could pay out $16.7 million of cash incentives to 85 of its 2,300 full-time employees, including $9.7 million for nine senior executives. The fact that the tax benefit matches the amount paid out to those top executives certainly raises some red flags.
The company, however, deemed the payout necessary because the oil market downturn made its existing stock-based bonus program effectively worthless. It's not the only financially challenged oil company to swap out a stock-based bonus program for cash payments amid the oil market downturn. Whiting Petroleum (NYSE:WLL) paid $14.6 billion in cash bonuses to several of its executives before it filed for bankruptcy. Meanwhile, deeply indebted driller Chesapeake Energy (OTC:CHKA.Q) recently approved a plan to prepay $25 million in incentive compensation to 21 of its executives to ensure they "remain motivated" as the company works with advisors on a potential bankruptcy filing.
Paying for the industry's past mistakes
Congress passed the CARES Act to provide financial assistance to individuals and companies in the wake of the COVID-19 outbreak. While many recipients of these funds needed money due to no fault of their own, others are getting a back door bailout of their past mistakes. That certainly seems to be the case for some of the oil companies taking advantage of the provision for tax rebates. While it's frustrating that taxpayers are the ones on the hook, the hope is that we can collectively channel this dissatisfaction into driving real change in the way that businesses operate. That way, we're not left holding the bag again at the next economic downturn.