Exxon Mobil Corporation XOM and Guyana's government are set to begin discussions over a tax dispute involving $214 million in expenses registered by the U.S. oil giant. The country's Natural Resources Ministry has instructed the tax agency to initiate the resolution process after an audit flagged the costs as potentially overstated.

XOM's Cost Recovery Under Scrutiny

ExxonMobil leads a consortium operating the massive Stabroek offshore block, where expenses are tightly monitored due to the cost oil mechanism. The arrangement allows ExxonMobil and its partners to claim up to 75% of production for cost recovery, while Guyana receives half of the remaining crude. The government ensures these expenses are audited to confirm compliance with contractual terms.

Audit Finds Discrepancies in XOM's Expenses

The dispute followed a review by U.S.-based IHS Markit, which audited ExxonMobil's reported costs from 1999 to 2017. Guyana's tax authority accepted IHS Markit's recommendation to adjust XOM’s cost bank by $214.4 million, reaffirming its stance that these costs should not be reimbursed through oil revenues. ExxonMobil was officially notified of this position, though the company has not publicly responded.

Ongoing Review of XOM’s Recent Expenses

ExxonMobil has already recovered $33.9 billion of the $41.1 billion spent in Guyana, according to vice president Bharrat Jagdeo. Meanwhile, a second audit covering 2018-2020, conducted by VHE Consulting, is ongoing. ExxonMobil has responded to preliminary findings, and VHE is currently reviewing them.

The outcome of these discussions could have significant implications for ExxonMobil’s cost recovery structure and its long-term financial relationship with Guyana.

XOM’s Zacks Rank & Key Picks

Currently, XOM carries a Zacks Rank #3 (Hold).

Investors interested in the energy sector may look at some better-ranked stocks like Antero Resources Corporation AR, NextDecade Corporation NEXT and EOG Resources, Inc. EOG. While Antero Resources presently sports a Zacks Rank #1 (Strong Buy), NextDecade and EOG Resources carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Antero Resources, one of the fastest-growing natural gas producers in the United States, boasts a strategic acreage position in the low-risk properties of the Appalachian Basin. The company has more than two decades of premium low-cost drilling inventory in the prolific basin, securing a strong production outlook. AR is well-positioned to capitalize on the increasing demand for LNG, both in the United States and globally. 

NextDecade is an emerging player in the LNG space with its Rio Grande LNG project in Texas. As demand for LNG continues to grow, the company’s strategic investments in infrastructure and its planned liquefaction capacity provide strong upside potential. With the global LNG market expanding, NEXT is well-positioned to tap into the increasing export demand from the United States.

EOG Resources is an oil and gas exploration and production company with an attractive growth profile, upper-quartile returns and a disciplined management team. With highly productive acreages in premier oil shale plays like the Permian and Eagle Ford, the company has numerous untapped high-quality drilling sites. Additionally, EOG maintains a strong balance sheet and continues to reward shareholders with regular and special dividends. 

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