Oil & Gas Counters: Add Deferred Income Taxes to Owner Earnings

In the latest PETGAS analysis (PETGAS–Fundamental Analysis (1 Nov 2013)), you may notice that I added Deferred Income Taxes to Owner Earnings.

Oil & gas companies tend to have very high deferred income taxes. Sometimes 75% or more of a company’s income statement taxes are deferred, meaning that they’re not paid in cash in the current period.

You see such high percentages because of the sky-high depreciation, depletion & amortization (DD&A) numbers for oil & gas companies and because many companies record them differently for book and tax purposes.

Therefore, according to Oil and Gas Modelling, we should add deferred income taxes to cash flow (or owner earnings, in my context). I think this is logical due to nature of business of oil and gas companies.

Please note that I still do not add deferred income taxes to counters from non-O&G industry as of now.

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