Could this tax change end up burning the Woodside share price?

Could a new tax be good news for Woodside investors?

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Key points

  • ASX energy share Woodside has been a strong performer in recent years, doubling in value between 2020 and 2022
  • But this week, the federal government has revealed some big changes to the taxes energy companies pay that will be a part of tomorrow's budget
  • But perhaps these changes aren't as bad as investors might have feared, seeing as the Woodside share price has risen sharply on the details

The Woodside Energy Group Ltd (ASX: WDS) share price has been one of the strongest ASX 200 performers over the past couple of years. Between October 2020 and October 2022, this ASX energy share more than doubled, rising from around $17 to almost $40. 

This rise was fuelled by the massive spike in global energy prices we saw over 2021. As well as the merger with BHP Group Ltd (ASX: BHP) oil division that we saw that same year.

But in 2023, the growth of the Woodside share price has seemingly slowed. The ASX 200 energy giant is currently down a hefty 4.1% in 2023 to date. That stands in stark contrast to the S&P/ASX 200 Index (ASX: XJO), which is sitting on a year-to-date gain of around 4.6% at the time of writing:

But perhaps the 2023 pain that Woodside shares have experienced this year so far has further to run. As the more economically tuned-in readers would be aware, the federal government's latest budget is imminent. Budget night is set for tomorrow night.  This is the point we will find out the full state of the government's finances.

But as is typical with the budget, Australians have been given a few 'sneak peaks' at what might be coming our way. And it just happens that one of this year's such peaks directly affects the Woodside share price.

Changes to offshore gas taxes are imminent

Yesterday, Treasurer Jim Chalmers revealed that the upcoming budget would include some changes to the Petroleum Resource Rent Tax (PRRT). The PRRT is a tax scheme that only applies to the profits generated from the sale of petroleum products derived from most offshore oil and gas wells and rigs.

However, the current arrangement allows energy companies to offset 100% of their exploration and development costs before having to pay PRRT on any profits generated.

That is set to end tomorrow night. According to the Treasurer's statement, the PRRT will be altered so that energy companies will only be able to offset 90% of their costs, rather than 100%. This change is expected to raise an additional $2.4 billion for the government's coffers over the next four years.

Here's what the Treasurer's statement had to say in justifying this move:

The Government will act on Treasury's key recommendation to achieve a fairer return from offshore LNG projects by introducing a cap on the use of deductions from 1 July 2023. Specifically, the change will limit the proportion of PRRT assessable income that can be offset by deductions to 90 per cent.

This change will bring forward PRRT revenue from LNG projects. This will ensure a greater return to taxpayers from the offshore LNG industry, while limiting impacts on investment incentives and risks to future supply…

Under the current rules, most LNG projects are not expected to pay any significant amounts of PRRT until the 2030s. The changes announced today address this issue.

So at first glance, these changes don't seem like good news for ASX energy shares, including the Woodside share price. After all, more tax generally means fewer profits and dividends for shareholders. That might explain why Woodside shares dropped meaningfully early last week when speculation of this potential move was swirling around.

Why is the Woodside share price jumping at higher taxes?

Saying that though, the Woodside share price has rebounded quite strongly today – the first ASX trading day since this announcement was made official. At present, the company is up a healthy 2.63% at $33.97 a share.

Perhaps this tells us that investors are relieved by the new PRRT changes.

That's certainly the view of two ASX brokers. According to a report in the Australian Financial Review (AFR) today, an analyst at broker Citi stated that Woodside "may have come out of the PRRT review 'largely unscathed'".

Additionally, Credit Suisse analyst Saul Kavonic predicted that the lion's share of the new tax burden would be shouldered by the overseas-listed Chevron and Inpex, who own the Gorgon and Ichthys LNG projects respectively. Kavonic reckons that the "impact on Woodside's earnings will be a reduction of 1 per cent to 2 per cent".

So it seems likely that ASX investors were expecting a bigger hit for the Woodside share price, given that the energy share is rising so strongly today.


Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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