A 500bp increase in the corporate tax for Exploration & Production sector in the upcoming budget is likely to hurt Pakistan Petroleum Limited (PPL), Pakistan Oilfields limited (POL) and Oil and Gas Development Company (OGDC). While budgetary measures, generally, do not impact the E&P industry directly; increased rate of corporate taxes can raise an important issue as field-specific agreements govern activities including fiscal measures and royalty payment of fields, said a research analyst Mohammad Fawad Khan at KASB Securities.
The stability clause will come under scrutiny and may have a direct bearing on the E&P’s future if the government decides to raise corporate tax. Other revenue measures including secondary public offering plans for PPL will hold importance for E and P companies. The government, currently, targets IPOs of $200 million, which can raise PPL’s free float to 27 percent. In addition, a tight timeline for OGDC’s exchangeable bonds issue may cause slippage in the targeted deadline of June for the bonds issue. Government targets bonds issue worth $500-700 million. Assuming a 30 percent premium on the current stock price, this can result in potential share divestment of five to seven percent once the bonds mature.
Furthermore, OGDC and PPL are expected to pay a cash dividend of Rs 17 and Rs 8.0 per share, respectively, in FY12. Adjusting with government stake, this should translate into a contribution of Rs 40 billion to the national exchequer. While discussion on price deregulation dominated news flow in the past, measures to resolve inter-corporate debt and estimation of the power tariff subsidy will hold the key. The current pricing mechanism for retail prices’ calculation is likely to continue. The government has already made few, but important, changes in the retail pricing mechanism in December 2010. Lack of clarity and absence of consensus on dismantling the freight pool will mean continuation of uniform pricing.
