The Ministry of Finance announced plans of substantially increasing excise tax on heating oil and LPG as of September 2007. The Ministry aims to remove the tax break, which stimulates the use of heating oil as a motor fuel instead of diesel, by raising excise on heating oil to PLN 1048 per 1000 liters, the same as for diesel, from PLN 232. Excise on LPG would go up from PLN 695 per 1000 liters to PLN 1000. The ministry estimates that following the tax increase, budgetary income would rise by PLN 2.5bn.
While the increase in indirect taxation would add to the negative impact on demand for fuels, we view the Ministry plans as clearly negative for oil companies. This would probably offset any swing in demand away from LPG towards diesel and gasoline, which would be slightly favorable for PKN Orlen. However, note that similar plans were cancelled on several occasions already due to their unpopularity in the environment of high motor fuel prices. Therefore we expect a neutral market reaction to the ministry announcement. We reiterate our Buy ratings for PKN Orlen with PLN 70.5 fair value estimate, and for Lotos Group with PLN 63.4 fair value estimate.