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Polish Oils: PGNiG and Lotos might continue to underperform PKN in the days ahead

Polish Oils: PGNiG and Lotos might continue to underperform PKN in the days ahead

4.1.2012 12:08

Poland plans to introduce a new hydrocarbons tax system, which will include not only shale gas but also conventional gas and oil, Deputy Finance Minister Maciej Grabowski said yesterday. “We want to be ready with our proposal in the first half of 2012,” he added. “The levy together with the corporate tax will presumably weigh on the companies’ profits comparably to the mining tax, standing at around 50% of profits.” The introduction of the new tax is “a long-term prospect” and will take place once companies in Poland start commercial production of shale gas, Grabowski said.

Our view:

As we do not attach any value to shale gas in our models, tax on shale gas production has no direct impact on our fair value estimates. Thus, the announcement remains value-neutral for Polish shale-gas explorers such as PGNiG (3,96 PLN, 1,54%), PKN (35 PLN, -0,57%) and Lotos (23,66 PLN, -0,34%). Also, the new tax system has been mentioned several times in the past and no one could possibly have believed that shale gas extraction would be a tax-free business in Poland. Thus we would not read too much into this part of the news.

By contrast, the change in the tax regime for conventional natural gas or crude oil will hardly be positive for current producers such as PGNiG and Lotos. In an international context, Polish hydrocarbon producers currently enjoy a very benign fiscal regime and pay charges of only PLN 5.5/mcm for high-methane gas, PLN 4.9/mcm for low-methane gas and PLN 35/t for crude oil. If Poland carries out an overhaul of its tax system for conventional hydrocarbon production, we are likely to see a significant deterioration in the fiscal environment.

As information is scarce (i.e. no details on the exact tax rates/royalties, on the amount to be collected or on timing) it is impossible to precisely quantify the valuation impact. It is also unclear whether the government would like to introduce the new tax regime together with gas market liberalization, which is critical for PGNiG.

Assuming that Poland will collect 50% of profits from upstream operations and full liberalization takes place by 2014, our back-of-the-envelope calculation suggests a PLN 0.49 (or 12%) reduction in our fair value for PGNiG and a PLN 2.0 per share (or 8.3%) reduction for Lotos. Arguably, if liberalization does not occur and PGNiG continues to be obliged to sell its gas production at the currently depressed level, the valuation impact is a lot more negative. As we have not attached any value to upstream in our PKN model, a new tax system has no direct valuation impact on our fair value estimates. However, it arguably has an impact on the company’s future upstream plans/spending.

PGNiG and Lotos might continue to underperform PKN in the days ahead. However, the initial harsh reaction to the announcement (PGNiG down 4.4%, Lotos down 1.1% and PKN down 0.9%) may have sufficiently priced-in this latest negative newsflow, especially in light of the remote introduction of and uncertainties related to the new tax system.

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