LAHORE The budgetary measures will have a negligible impact on the OMCs, as changes in PDL on regulated POL products will also not directly impact the OMCs because it is completely passed on to the consumer where price elasticity of the POL products is minimal, experts said. So, budget is likely to be a non-event for E&P sector except for any possible broad-based change in tax regime, they added. However, they pointed out that the deemed duty will remain a major regulatory risk for the refineries, as 2.5 percent reduction in deemed duty would reduce FY12E EPS projections by 13 percent. Budgetary measures usually do not impact this sector as most of the agreements (Petroleum Concession Agreements, royalty payments etc) are field specific and are driven by Petroleum Policies. However, government has been considering increasing corporate tax rates for banks from 35 percent to 40 percent in order to meet FBRs revenue targets. In case this idea spills over E&P sector, every 1 percent increase in corporate tax rate will result in 1.5 percent decline in bottom-line for Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL) and Pakistan Oilfields (POL). The government will also disclose its dividend expectations from OGDC and PPL, though targets were significantly missed over FY11 primarily due to acute liquidity shortage in the energy chain led by the circular debt issue. Deemed duty decision in Budget FY12 remains a major regulatory risk for the refineries. The most probable scenario currently seems to be 2.5 percent reduction in deemed duty to 5 percent and incidentals to remain excluded from ex-refinery price calculation. Analysts said that their expectations from the budget for OMC sector are: No change in current pricing mechanism for retail price calculation especially given that the government has already announced deregulation of IFEM. Turnover tax of 0.5 percent is likely to be maintained. Government missed its Petroleum Development Levy (PDL) target over FY11 and is likely to set PDL target of Rs110 billion for FY12. GoP will also disclose its FY12 dividend expectation from PSO. It is expected that the budgetary measures to have a negligible impact on the sector. Any changes in PDL on regulated POL products will also not directly impact the OMCs as it is completely passed on to the consumer where price elasticity of the POL products is minimal. The government recently injected Rs110 billion in the energy chain in order to ease off circular debt. However a lot still needs to be done in order to remove subsidies, reduce unaccounted for losses and collect revenues efficiently from the energy chain. Analysts expect net circular debt (currently at Rs120 billion) to reach at FY11 levels (Rs260 billion) again. This issue will continue to haunt the energy chain especially government owned companies (OGDC and PSO) in the form of high receivables, high finance costs, lower payouts and strain on exploration activities in case of OGDC and PPL. Muhammad Ali Taufiq, an energy expert, said that upside risks related to more discoveries of additional fields in TAL and Nashpa blocks and increase in oil and gas production from Sinjhoro and KPD-Tay blocks exist for the E&P sector. PPL is expected to perform well going forward due to its guaranteed rise in well-head gas prices applicable over its 1HFY12 gas production. On the other hand OGDC and POL are not likely benefit from increase in well-head gas prices due to capped fields and will rely only on increased exploration and production of oil and gas to increase in their profitability. OMCs are expected to benefit from rising POL sales where PSO stands out as the biggest beneficiary of increasing fuel requirement of the power sector while post flood infrastructure rebuilding activity will continue and keep demand of Asphalt on the higher side benefiting APL the most in this case. For refineries however, we maintain an Underweight stance on the back of regulatory risks tied to the industry related to reduction in deemed duty on HSD.