Our Guest Post today is by Suzanne Edwards, staff writer for the Houston Business Journal. The following article was originally published on January 19, 2016. It speaks to the use of tax advantages to make lemonade out of lemons in the current oil industry by turning its NOL into an advantage for investors.
As the article originally appeared:
The continuing oil slump has given rise to a new kind of begraggled energy company – the “zombie energy company,” a term employed by Scott Gaille, fomer general counsel of Houston-based ZaZa Energy Corp. who left to start his own law firm.
A zombie company refers to a public company that’s still trading, hence it being half alive, but doesn’t have enough money to invest in growth or pay off debts. So it exists, but only marginally. “It’s basically what happed to ZaZa,” Gaille said (sic).
But even as shells of their former selves, these zombie companies still retain a certain appeal to investors. When companies have a substantial net operating loss (NOL), lenders can’t foreclose on the loss. And that NOL status can be a strategic advantage from a tax perspective.
If the NOL is large enough, investors might have an incentive to take the company through a restructuring, convert its debt to equity and use the copropration for future acquisitions and developments, said Gaille.
Whether or not ZaZa Energy can turn its NOL status into gold remains to be seen, but another Houston company has already made significant headway on the back of its net operating loss: Par Pacific Holdsing Inc. (NYSEMKT: PARR).
Par Pacific CEO William Pate said the company would likely keep its acquisitions within the U.S. because that’s where its tax assets – or NOL – was advantageous.
Par officially reversed its operating losses in the first quarter of 2015 when it reported a net income of $462,000, up from the $39.5 million net loss the company reported for the third quarter of 2014. But both Pate and Joseph Israel, the CO of Par’s subsidiary Par Petroleum, told the Houston Business Journal that the company’s prior net operating loss tax advantage was substantial in resetting the company’s trajectory.