Quote:
Originally Posted by firebug
Because it leads to you (and lots in the media) thinking this is a cash expense.
Look at their Q2 cash flow statement. What did you see? Right, they added back the deferred tax expense and end up with cash from operations of 1,285MM for the quarter. That means they didn't actually pay any of that right now but are letting investors know that over time (and assuming nothing changes) that will have to pay more taxes.
Last year they only paid $700 million in taxes in North America and let's assume that it was all in AB. Now lets raise this by 20% so the new value is 840MM. 140MM is a lot of money, but it is on over $5,000MM in pre-tax Profits (taxes would go from 14 to 16.8% of profits; 2.8% extra).
$579MM seems like a lot (and it is) but measuring it against 1 qtr of performance is the gimmick. In reality it reflects impact over a much greater amount of time and over a much larger value of revenues and profits.
Let's say you are the avg albertan with 1,000,000 in RRSPs. While individuals don't account for it this way, your personal 'balance sheet' would show the RRSP's on the asset side but on the liability side you would show a deferred tax liability, because when you withdraw them, you owe the gov't the taxes on them at whatever the future rate is.
So lets say you make some calculations and determine that at your forecast withdrawal rate you'll pay an average rate of 25% so on your personal Balance Sheet you'd show a Deferred tax liability of $250,000 (or more likely the PV of $250k). Now lets pretend that the Gov't increases the personal tax rate by 20% so you need to make a new deferred tax estimate on your next balance sheet which works out to 50k increase (or rather the PV of it). Your quarterly income statement would show that expense recognized now, even though the impact is far into the future and could make you show a loss even though the cash impact is zero right now.
Of course you'll be bitter at the gov't and may need to make some changes to your latte habit, but you are not going to have the house foreclosed upon.
I recognize corporate taxes are much more convoluted than my personal tax example, but my point is to show that how liabilities get accrued can cause lots of confusion when looking at them on a quarterly statement.
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Thanks for explaining that.
First question.....why can corporations defer taxes? Makes no sense to me.
Last year they only paid $700 million in taxes in North America and let's assume that it was all in AB. Now lets raise this by 20% so the new value is 840MM. 140MM is a lot of money, but it is on over $5,000MM in pre-tax Profits (taxes would go from 14 to 16.8% of profits; 2.8% extra).
Full disclosure: I work for a big engineering company and CNRL is one of our clients.
It is that $140M that concerns me. That is $140M that is taken out of cash flow to fund future projects. It may not seem like a lot, but that original $700M is based on the 2014 oil price. I assume the number goes higher, if you take a year where the average price of oil is higher than the 2014 average.
My whole point is, that dollar taken by the government is a dollar taken away from project development. Surely, you can agree on that.
Here is a thought experiment. And what KOL was getting at. If you go from 10% to 0%, does that not help producers a bit? By reducing the tax bill, you may (no guarantees that this will work) have allowed companies to not put projects on hold. At least they would have been able to continue with smaller projects. Furthermore, it could have allowed them some money to increase the dividend and/or proceed with share buy backs that could have prevented their stock price from plunging.
Now onto the other issue.
http://www.cnrl.com/upload/media_ele...rim-report.pdf
Canadian Natural’s Chief Financial Officer, Corey Bieber, continued, “The Company has proactively reduced its
development programs in the context of lower commodity prices and lower cash flow. Liquidity remains strong at
$3.3 billion. During the second quarter, absent the impact of the $579 million charge due to the 20% increase in Alberta
corporate income tax rates, our earnings would have been $174 million. This charge effectively translates into lower
future cash flows and therefore, lowers reinvestment in the business. Based upon third party research, this lower future
capital reinvestment likely equates to about 4,100 fewer person years of direct, indirect and induced employment, with
follow-on impact of higher income taxes on future income streams.”
Help me dissect this thing.
I understand that you can't pay tax if you don't make a profit.
The Company incurred a net loss in Q2/15 of $405 million, compared to net earnings of $1,070 million in Q2/14 and
a net loss of $252 million in Q1/15. The net loss in Q2/15 was primarily a result of the 20% increase in the Alberta
provincial corporate income tax rate from 10% to 12%, increasing Canadian Natural’s deferred income tax liability
by $579 million. Adjusted net earnings from operations for Q2/15 were $178 million, compared to adjusted net
earnings of $1,150 million in Q2/14 and $21 million in Q1/15. Changes in adjusted net earnings largely reflect the
changes in cash flow.
This is a confusing statement.
If they lost $405M, shouldn't they pay 0 tax. Can't pay tax on a loss right?
Did they make $178M or lose $405M?
If your net earnings are $178M should you not pay the tax on $178?
Or are they going to use this loss to offset it against a gain in the future?
At the end of the day, I stand by my OP. The next 4 years is going to be a horror movie that is going to have a tragic ending for all of us. The uncertainty of the royalty review and taking money out of companies cash flows (now or later) is the absolute wrong policy right now and we are worst off because of them.