Ben Aris in Moscow -
Russia's revenue-hungry government has more or less settled on a new tax regime for the oil and gas sector that is design to "skim the cream" off hydrocarbon producers who are coining it thanks to the ruble's devaluation.
The Ministry of Finance has decided to leave export duties higher rather than increase the mineral extraction tax (MET) on producers – a decision that will bring in more money but will keep the oil companies happy.
The new plan comes at the end of several months of haggling. The state has plumped for raising taxes on companies rather than demanding state-owned companies pay more dividends, but it has balked at hiking taxes on the oil sector too far and decided instead to force the gas monopolist and state-owned Gazprom to pay a disproportional share of fresh taxes. However, everyone will suffer and oil companies are expected to pay roughly an extra $1.5 per barrel of tax (assuming $50 oil prices).
"The ministry expects to raise an additional RUB197bn from the sector by freezing the crude oil export duty in 2016 at 2015 levels (the rate will not be reduced to 36% from 42%, as planned, but while will be cut to 30% in 2017)," Alfa bank said in a note.
Oil companies have been protesting loudly and clubbed together in September to try and lobbied collectively to head off bigger tax hikes. Like in 1999 when operating costs denominated in rubles were slashed to a quarter of their pre-1998 crisis levels, while revenues remained in dollars, most of Russia's raw material producers have seen profits surge in the last six months.
However, unlike 1999 the dramatic fall in oil prices have undone a large part of the devaluation based gains these companies have been enjoying. Still, bottom line is there is still a lot more "cream" in the milk for oil companies even if the dollar value of their oil exports has gone down.
Gazprom has been singled out to bear more of the burden than the largely commercial oil sector. The gas giant will provide an additional RUB100bn via an increase of its gas MET, the size of which has been the main debating point in this discussion.
"Gas MET for independent producers and crude oil MET will not be touched," Alfa Bank reports. "The Finance Ministry has said that the additional tax burden is temporary, and will be applied to 2016 only. The freeze in export duty would mean $1.5/bbl of additional taxation at a $50/bbl oil price, costing Russian companies 4-10% of their 2016 EBITDA, on our numbers. We calculate that the gas MET increase would cost Gazprom some 5% of its 2016 EBITDA."
The main blow to investors will probably come in the form of a Gazprom decision to cancel dividend payments this year.
Gazprom CEO Alexey Miller and the Chairman of the Board of Directors, Viktor Zubkov, met at the St Petersburg International Gas Forum (SPIGF) this week and Interfax reported that the discussion agenda included the amount of the change in the dividend payout for 2016. This will now be determined by the government, not the board, they said.
Gazprom paid $0.12 per share in 2014 and was already expected to reduce its dividend to $0.10 this year, reducing the dividend yield from 5.9% to 5%, but it is now entirely possible the company will pay no dividends at all this year.
Gazprom's stock has been falling since May when the tax burden discussions started in earnest from a peak this year of just over $6 to trade at around $4 this week and remains 6.58% down on the start of the year in dollar terms. Sberbank analysts have the stock with a 38% upside - partly due to the fairly strong p/e ratio of 8.2 - and a hold recommendation, but if the decision to cut dividends is carried through expect that to change to sell.
"The fact that companies might decrease dividends in response to the increase in taxation is extremely negative for Russian oil and gas names' investment cases since dividends are key in the current macro environment and given the uncertainty over regulatory changes in the industry," VTB Capital said in a note. "We estimate Gazprom might pay dividends of RUB 6.4/sh (USD 0.1/sh) for 2016 (if the company sticks to its 25% of RAS payout ratio), but now see downside risks to our forecast. We consider the news as negative."
|Gazprom 2Q15 IFRS results, $ mln|
|C - average of the Interfax poll of eight sell-side analysts. Sberbank CIB did not preview the results.|
|Source: Company, Interfax, Sberbank CIB Investment Research|
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