Congress’s new tax legislation has kept accountants busy through the holidays, as companies analyze how the new law will affect earnings and operations.
The headline provision of the legislation cuts corporate rates from 35% to 21%, reducing overall tax burdens. While accountants are still determining the overall effect of the bill, Shell (ticker: RDS) and BP (ticker: BP) have each announced preliminary expectations.
Perhaps counterintuitively, both companies predict significant charges in Q4 2017 earnings, with Shell estimating $2.0 to $2.5 billion and BP predicting $1.5 billion in noncash adjustments. This is the result of the lower tax rate, as each company has significant deferred tax assets that can be used to offset future tax payments. At a lower tax rate these are worth less on paper, leading to a noncash adjustment.
Overall, however, Shell reports it expects the bill will be “favorable to Shell and to its US operations, primarily due to the future reduction in the US corporate income tax rate from 35% to 21%.”
The preliminary estimations from these supermajors likely also apply to most independent E&P companies in the U.S. The oil price downturn created challenging times for producers, and many still have significant deferred tax assets on the books. These companies will likely report similar special charges, as these assets become less valuable. Lower overall tax rates should offset these impacts, though, making the tax bill a positive for companies over the long term.
