Viva Energy Group Limited Pre-IPO Report Quality stock and value closer to high-octane than regular unleaded

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1 ? Viva Energy Group Limited Pre-IPO Report Quality stock and value closer to high-octane than regular unleaded Morningstar Equity Research 28 June 2018 Contents 2 Investment Summary 4 Company Overview 6 Vertically Integrated Business Model 7 Industry Overview 9 Market Position 13 Economic Moat 16 Financial Health 17 Valuation 18 Earnings Forecasts 20 Scenario Forecasts 23 Key Risks 24 Management & Stewardship 26 IPO Offer Structure 28 Earnings Summary Mark Taylor Senior Analyst mark.taylor@morningstar.com Angus Hewitt Associate Equity Analyst angus.hewitt@morningstar.com Viva Energy Group Limited's Public Offering does not constitute an offer of shares in any jurisdiction in which it would be unlawful. The prospectus may not be distributed to any person and the shares may not be offered or sold in any country outside Australia and New Zealand unless it is accompanied by the institutional offering circular as part of the institutional offer. Executive Summary We think investors can comfortably invest in the initial public offer, or IPO, of Viva Energy Group Limited, or Viva, (ASX: VEA), as the IPO is priced below our AUD 3.00 per share fair value estimate. Based on the indicative pricing range of AUD 2.50 to AUD 2.65 per share, we do see reason to invest in the IPO though more moderate buy recommendation than strong buy as the offer range equates to a 4-star rating, below our highest 5-star rating. There is a lot to like about the Viva business. It is the second-largest refined fuel supplier in Australia at 14.2 billion litres or 24% share of the 60 billion litre market overall, second only to largest player Caltex Australia Limited with approximately 27% share. It is also one of the most vertically integrated players in the country with the second-highest refining capacity, second-most comprehensive pipeline infrastructure, the highest number of fuel terminals, and third-largest number of retail sites. The pipeline and terminal infrastructure furnish competitive advantage, though we don't think sufficiently to justify an economic moat. Key Takeaways Viva enjoys a strategically advantaged infrastructure base from which to refine, store, and distribute fuel across Australia. It has a market-leading position in Victoria, and near-market-leading positions in most other Australian states. Since Shell's Australian downstream operations were acquired in 2014, Viva management has delivered noteworthy two-year underlying pro forma EBITDA CAGR of 11.1% to AUD 700 million. Our base-case DCF fair value estimate of AUD 3.00 per share assumes revenue and EBITDA CAGR of 5.9% and 5.2%, respectively, over the next five years. We have adopted prospectus forecasts for 2018 and first-half However, unlike Viva, we include Viva Energy REIT and Liberty Oil contributions in underlying earnings. Consequently, our underlying 2018 and first-half 2019 NPAT forecasts are AUD 345 million and AUD 191 million, respectively, slightly higher than Viva's AUD 306 million and AUD 171 million. Our Viva fair value estimate equates to a 2022 EV/EBITDA multiple of 8.6 to Caltex at 8.4, high enough we think given risks. Investing in older and far smaller refineries than Asian mega-cousins is a potential trap that must be carefully navigated, and the distant but regardless real threat from electrification of transport is an inevitable market detractor. Companies Mentioned Name/Ticker Economic Moat Currency Fair Value Estimate Current Uncertainty Price Rating Morningstar Rating Market Cap(Bil) Viva Energy Group Limited VEA None AUD High - - Caltex Australia Limited CTX None AUD High QQQ 8.50 Z Energy ZEL None NZD High QQQ 3.00 providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or class service have been prepared by Morningstar Australasia Pty Ltd (ABN: You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product s future performance. To obtain advice tailored to your situation, contact a professional financial adviser.

2 Page 2 of 28 Investment Summary We initiate on Viva with an AUD 3.00 per share DCF fair value estimate which is above the top of the offer price range of between AUD 2.50 per share and AUD 2.65 per share. Based on our fair value estimate and valuation multiples for peers, we believe Viva shares are 12% undervalued at the top-end of the indicative pricing range, and approximately 17% undervalued at the lower bound. It can be an uncomfortable feeling being asked to invest in an IPO where none of the cash proceeds are retained by the company. Rather it is a 100% cash extraction by the vendor, and the second if you count the value withdrawn via the initial Viva Energy REIT IPO sell-down. However, while it requires investors to take just that little extra leap of faith, Viva has some quality assets to allay fears and the price does offer value. Based on the indicative pricing range of AUD 2.50 to AUD 2.65 per share, we see reason to invest in the IPO though more moderate buy recommendation than strong buy as the offer range equates to a 4-star rating, below our highest 5-star rating. Investors should read the prospectus carefully before making the decision to invest. Based on our valuation, we think investors stand to benefit over the long term by investing in the IPO. We recommend investors apply for shares in the IPO but with a tempered enthusiasm appropriate for a 4-star stock. This is not quite a high-octane buy. The stake available to IPO investors is being sold-down by Vitol Investment Partnership, a consortium of the Dutch group Vitol, one of the world's largest independent energy commodity trading companies, and the Abu Dhabi Investment Council. Vitol expects to hold between 40% and 50% of the shares at completion of the offer. No surprises Viva will source the majority of its crude and refined products from Vitol, a positive given Vitol is an energy trading giant. However, it is conceivable if more competitive terms were available from suppliers other than Vitol, Viva may be placed at a competitive disadvantage. The indicative IPO pricing range reflects an enterprise value/ebitda multiple of 6.5 to 6.9 for the nonfiscal year to June 2019 based on prospectus forecasts. We think this flatters the truth by removing the Viva Energy REIT and Liberty Oil equity values from the denominator. But by our measure of 7.0 to 7.5, which adds back Viva Energy REIT and Liberty Oil to the denominator, the Viva offer remains attractive. There is a lot to like about the Viva business. In a club of four including Caltex, BP, and Mobil, it is the second-largest refined fuel supplier in Australia at 14.2 billion litres or 24% share of the 60 billion litre market overall, second only to largest player Caltex Australia Limited with approximately 27% share. It is also one of the most vertically integrated players in the country with the second-highest refining capacity, second-most-comprehensive pipeline infrastructure, the highest number of fuel terminals, and third-largest number of retail sites. The pipeline and terminal infrastructure furnish competitive advantage, though we don't think sufficiently so to justify an economic moat. In the fuel supply and retailing industry, we think the two potential sources for a moat would be cost advantage or efficient scale, and in our view, neither Viva or any other player in Australia is likely to achieve a sufficiently sustainable competitive advantage from either aspect to warrant a moat.

3 Page 3 of 28 The IPO of Viva aims to raise AUD 2,399 million to AUD 3,058 million. Net of listing costs, the entire proceeds will flow to Vitol Energy Partnership in lieu of its 50%-60% equity sell-down. Post-IPO stock held by Vitol Energy Partnership will not be subject to any escrow arrangements. Viva is guiding for a weaker 2018, underlying pro forma net profit after tax, or NPAT, expected to soften 11% to AUD 345 million or AUD 0.18 per share on a replacement cost basis. Replacement cost strips out the impact of movements in the crude price on inventory. However, we view longer-term earnings growth prospects as reasonably attractive, given our forecast five-year revenue CAGR of just 5.9% and underlying EPS growth of 6.2% over the same period. The Viva Board's policy is to target a dividend payout ratio of 50%-70% and dividends are expected to be fully franked. Assuming a 60% payout, the implied annualised forecast dividend yield range for 2018 is a comparatively pedestrian 4.8% to 5.0%. We say annualised because no dividend will be paid for the six months to June The first dividend is expected to be paid in April Against our relatively sanguine outlook for the refined fuels industry, there are a number of key concerns. These include the potential for heightened competition, driving lower margins given the entrance of a number of new players into the retail arena. Upstream stalwarts like Chevron, Mobil, and now Shell have withdrawn leaving BP as the lone example. It is no longer a four-pillar closed shop where players' eyes weren't necessarily as focused on supply and retail as upstream segments. New players now live or die on their retailing. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit. Caltex felt this keenly before closing its Kurnell refinery in Sydney, followed closely by BP at Bulwar Island in Brisbane. Vitol may be less concerned than other Viva shareholders given energy trading is its main game and Viva is as much customer as asset. Finally, potential investors should be fully cognisant of the potential for electrification of transport to materially impact refined fuel markets in the future. Exhibit 1 Earnings Summary for Viva (AUD million) Pro-forma Prospectus Morningstar Forecasts Revenue 20,117 16,816 18,829 22,845 23,958 23,736 23,304 25,085 Growth -16.4% 12.0% 21.3% 4.9% -0.9% -1.8% 7.6% Operating Costs 19,550 16,328 18,130 22,201 23,271 23,012 22,520 24,224 Growth -16.5% 11.0% 22.5% 4.8% -1.1% -2.1% 7.6% Underlyling EBITDA Growth -13.9% 43.3% -8.0% 6.6% 5.5% 8.4% 9.7% Depreciation Interest Tax Underlying NPAT EPS (cps) Growth -14.9% 46.1% -10.7% 9.4% 4.9% 10.0% 11.8% DPS (cps) Growth 81.8% 4.9% 10.0% 11.8% Dividend Payout Ratio 36% 60% 60% 60% 60% Franking 100% 100% 100% 100% 100% 100% 100% 100% Source: Morningstar and Viva Energy Prospectus

4 Page 4 of 28 Exhibit 2 Stages of the Refined Product Value Chain Product Sourcing Infrastructure Customer Controlled Retail Offshore Supply (Vitol) Coles Alliance Retail Independent & Product sourcing Terminals, pipelines, tankers, depots branded resellers Geelong Refinery and shipping airports, diesel stops, truck stops outlets and card Tranport, Mining & Industrials Commercial & Third Party Aviation Wholesale Australian Refiners Other Source: Morningstar Company Overview Vitol bought Shell's Australian downstream operations in 2014, and renamed them Viva Energy. Shell had serviced an Australian customer base for over 110 years. Viva subsequently bought Shell's Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. This enabled Viva to liberate approximately AUD 900 million in real-estate value while retaining a 38% interest in the REIT, a partial hedge against operating lease exposure. We value the REIT equity at market or AUD 0.34 per share, in addition to AUD 0.03 for Liberty Oil at book value. Viva is Australia's second-largest vertically integrated refined transport fuel supplier, delivering over 14 billion litres of refined product annually or approximately 24% of national requirement. We describe Viva as vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia's refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva's Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported product, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. It was profitable from 2015 through 2017, generating AUD 276 million EBITDA in 2017.

5 Page 5 of 28 Exhibit 3 Australian 2017 Refined Product Demand by State (million litres) Petrol Diesel Jet Other NSW QLD VIC WA SA NT TAS Source: Morningstar, Wood Mackenzie, Viva Energy Prospectus Viva owns or has contracted access to a national infrastructure network comprising terminals, storage tanks, pipelines, and retail sites. It has higher equity stakes in more terminals than any other player and an enviable pipeline position. These are vital infrastructure pieces for fuel distribution. Viva directly supplies almost 900 retail sites and a further 266 through 50%-owned Liberty Oil. This is the third-highest in the country behind Caltex at nearly 2,000 including Woolworths sites, and BP at 1,400 sites. Viva leases the majority of supplied retail sites from Viva Energy REIT and the majority of these, or just over 700, are Coles Alliance-operated sites. Viva typically retains limited responsibility for site infrastructure and people management, keeping its operations capital-light. The company also supplies third parties on a wholesale basis including dealer-owned and Liberty sites. Viva supplies fuel on a wholesale basis to the Coles Express and other third parties. Coles Express operates its sites, including setting retail fuel prices and running the convenience offering. Viva receives site lease and licence income from Coles Express, as well as royalties from convenience sales by Coles Express in excess of agreed sales thresholds. Viva's control of Coles Express sites, by virtue of the lease, is a key point of difference between it and Caltex's Woolworths arrangement. The lease provides Viva certainty of use for the site in the longer term regardless of Coles' actions. Woolworths' control over its retail sites leaves Caltex famously exposed to a change in ownership. Unlike Viva, Caltex and 7-Eleven also operate franchise sites in their networks. Viva has a term agreement for Vitol to supply refined products and refinery feedstock at marketbased pricing with no procurement fee for at least the first five years. This favourably leverages

6 Page 6 of 28 Vitol as one of the world's largest commodity trading companies. Viva also has the sole right to use the Shell brand in Australia for sale of retail fuels. Viva's Vertically Integrated Operating Model Viva, along with Caltex, BP and Mobil, is in a rare breed of vertically integrated Australian refined fuel suppliers. It begins from refining and import terminals, to storage and distribution infrastructure, and on to a network of retail sites. Viva owns or has access to 23 import terminals with pumpable capacity in excess of 1.2 billion litres. It also has five inland depots and over 290 kilometres of key pipelines across Melbourne, Sydney, and Brisbane. Viva owns and operates the Geelong refinery in Victoria, the second-largest and most complex refinery in Australia, supplying more than 11% of Australia's total fuel requirements or approximately 50% of fuel demand in Victoria. Geelong refinery converts imported and locally sourced crude oil into petroleum products including gasoline, diesel, jet fuel, aviation gasoline, gas, solvents bitumen, and other specialties. It is strategically located in one of the larger Australian fuel markets. The refining process involves the fractional distillation of crude oil which is heated and separated into a range of fuel product. Fuels manufactured by Geelong are transported by pipelines, trucks and ships. Refined products are transported to Viva's Newport terminal in Melbourne via two 55 kilometre pipelines which have a combined capacity of 100,000 barrels per day. Viva's pipeline infrastructure is an important part of its distribution network. In New South Wales, Viva imports refined products through its Gore Bay terminal, which is connected by pipeline to the Clyde terminal for further inland storage and distribution. Viva supplies Sydney Airport via its owned jet fuel pipeline, and connects with its retail network and commercial customers via road transport.

7 Page 7 of 28 Industry Overview The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equated to approximately 59.6 billion litres of product in 2017, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Exhibit 4 Australian 2017 Refined Petroleum Demand 5% 2% By Fuel Type 10% By Sector Road 10% 38% Diesel Petrol 7% 2% 4% Aviation Industrial 14% Jet Other LPG 12% 51% Residential, Commercial an Agriculture Petrochemicals Fuel Oil Marine Fuel 31% 14% Other Source: Morningstar, Wood Mackenzie, Viva Energy Prospectus The key market participants are the integrated refiner/marketers including Viva, BP, Caltex, and Mobil who operate all the way from refinery to retail, the importers including Puma Energy and United Petroleum who skip the refining rather importing and buying domestically refined products for on-selling and distributing through their own retail networks, and finally the pure retailers like Coles Express, Woolworths, and 7-Eleven who sell fuel as part of a broader offering including convenience goods, the fuel sourced from suppliers (usually the integrateds). Exhibit 5 Key Market Participants Supply & Trading Refining Distribution Assets Marketing Shell/Vitol Viva Liberty Coles Caltex Woolworths BP Mobil 7-Eleven Trafigura/Puma World Fuel Services Glencore United Vopak Stolthaven Trafigura/Puma United Source: Morningstar, Caltex

8 Page 8 of 28 The Australian wholesale fuel marketing sector has undergone a period of transition over the past decade, with three refineries closing between 2012 and 2015 and remaining output now covering less than half of the domestic retail fuel requirement. Still, the Australian fuel marketing sector remains highly concentrated, with the four integrated refiner/marketers supplying the majority of the market. This competitiveness is supported by ownership of, and access to, established infrastructure assets. The retail fuel marketing landscape has also changed with a dramatic reduction in site numbers. Between 1970 to the mid-2000s, the total number of retail sites declined to just over 6,000 from approximately 20,000. As the number of retail sites has declined, sites located in busy areas or adjacent to major roads have accounted for an increasing share of total volumes. Volumes in the Australian liquid fuels market continue to grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. Our outlook is for comparatively steady Australian refined fuels demand growth of 1.5% per year, capturing a number of positives, partially offset by negatives. The positives include a benign economic growth forecast of 2.5%-3.0%, population growth of 1.5%, rising aviation use due to affordability and higher fuel loading for longer-haul flights, and Australia's vast distances favouring motoring over alternatives particularly in transport. Demand detractors include improving fuel efficiency and enhanced engine sophistication, and hybridisation/electric vehicles. Partial ameliorators to revenue destruction within the detractors include the requirement for more expensive higher-octane fuels in sophisticated engines and a lack of electric vehicle range within the context of Australia's distances. Electric vehicle uptake will lag and be far lower in Australia than for other OECD countries and we expect the hybrid/electric vehicle fleet to rise from current negligible levels to less than 0.5% of total by Refined product prices in net-import markets like Australia are typically set with reference to the landed price of imports, termed the import parity price, or IPP. This price reflects the prevailing export price in key regional hubs (principally Singapore) adjusted for incremental freight, insurance and import duties. The gross refiner margin reflects the difference between the landed cost of fully imported refined product versus the cost of purchasing and refining the crude oil locally. On a monthly average basis, the Geelong refinery has achieved approximately a USD 3.50 per barrel gross refiner margin premium to the benchmark over the five-year period. In Australia, the IPP makes up just under half of the retail price of fuel, with excise and GST making up a further approximate 40%, and gross wholesale and retail margins the balance. Wholesale and retail gross margins represent the operating or gross margins downstream petroleum companies receive (before taking into account operating and distribution costs) for selling refined product to end customers. Wholesale gross margins are typically around half that for retail gross margins, a function of the lower costs associated with high-volume fuel sales.

9 Page 9 of 28 Exhibit 6 Indicative Breakdown of the Cost of Australian Retail Fuel in 2017 Australian Retail Price of Fuel USD 150/bbl (at AUD 1.25 per litre) 40% - Excise and GST USD60/bbl Excise and GST 40% 15% - Wholesale and Retail USD 23/bbl Wholesale and Retail Gross Margin 15% Import Parity Price (IPP) Cost to Import to Australia Singapore Price Cost to Import Insurance Duties/Taxes USD 5.2/bbl Refinery Underlying EBITDA Gross Geelong Refiner Margin (USD 10.2/bbl) Singapore Gross Refiner Margin USD 3.9/bbl Refinery Operating Costs 45% - Import Parity Price USD 1.1/bbl Refinery Energy Cost Crude Oil Cost USD 55/bbl USD 55/bbl Crude Oil Cost Source: Morningstar, Viva Energy Prospectus Market Position We estimate Viva as the number-two player in the country though the company does not directly address its market position other than to say it has a leading one. There is no precise answer given the differences in markets being addressed by the various participants. We determine Viva is the second-largest refined fuel supplier in Australia at 14.2 billion litres or 24% share of the 60 billion litre market overall, second only to largest player Caltex Australia Limited with approximately 27% share. It is also one of the most vertically integrated players in the country with the second-highest refining capacity, second-most-comprehensive pipeline infrastructure, the highest number of fuel terminals, and third-largest number of retail sites.

10 Page 10 of 28 Exhibit 7 Australian Refinery Capacity Refinery Capacity Annual (kbbl/day) (Bn Litres) Kwinana (BP) Geelong (Viva) Lytton (Caltex) Altona (Mobil) Source: Morningstar, Viva Energy Refineries don't run at capacity due to product mix and down-time, but at 6.0 billion litres, Viva's Geelong covers approximately 43% of volumes marketed, higher than Caltex at approximately 37%, but lower than BP who owns the country's largest refiner at Kwinana in Western Australia. Exhibit 8 Number of Terminals Weighted by Equity Interest Viva BP Caltex Mobil Rio Tinto Vopak Terminals Pty Ltd Other NSW Victoria Queensland Western Australia South Australia Tasmania Northern Territory Source: Morningstar, ACIL Tasman We estimate Viva has 19 fuel terminals, the highest equity interest in Australia's 80 odd total terminals. Further, the figure likely understates Viva's position when the smaller capacity of numerous regional terminals is taken into consideration.

11 Page 11 of 28 Exhibit 9 Key Pipeline Positions Weighted by Equity Interest Pipelines Viva Caltex BP Mobil Clyde - JUHA Jet 100% Kurnell - JUHA Jet 100% SMP 60% 40% Sydney-Newcastle 100% Bulwar - JUHA 100% Lytton - Pinkenbah 100% Pinkenbah - JUHA 50% 50% Altona - Somerton 100% Geelong - Somerton 100% Holden Dock - Newport 100% Kwinana - Freemantle 100% Kwinana - Freemantle 100% Kwinana - Kewdale 100% Weighted No. of Pipelines Source: Morningstar On an admittedly very crude measure, we also rate Viva as the second-most-significant pipeline owner on a score of 3.5 in terms of pipelines, behind Caltex at 4.1, but ahead of BP and Mobil at 3.0 and 2.4, respectively. Pipeline connectivity to key demand centres increases distribution efficiency. Ignoring access to third party pipelines, Viva owns outright one of only two dedicated jet fuel pipelines to Sydney airport in its 32 kilometre Clyde-JUHA pipeline. Its Gore Bay to Clyde pipeline strategically accesses fuel import to the heart of Sydney, a key competitive advantage. Clyde terminal and the jet pipeline are also well placed to service any new airport at Badgerys Creek. In Melbourne, Viva has a pipeline from Geelong refinery to the wholly owned Newport terminal which on-connects to the Somerton terminal to service Tullamarine and Avalon airports. Viva also owns a pipeline in Perth from Kwinana to North Fremantle and shares pipelines in Brisbane and elsewhere. We give Caltex a slightly higher score given the combination of its wholly owned jet pipeline from Kurnell to Sydney airport, and its jointly 60/40-owned Sydney Metropolitan pipeline to Silverwater with Mobil, which on-connects to Caltex's wholly owned Newcastle pipeline, the only one to that city. A dominant Sydney position has added weight given it is the largest market in the country, particularly as an aviation hub.

12 Page 12 of 28 Exhibit 10 Supplied Site Ownership and Operatorship Caltex Viva Liberty BP Mobil Metro United Puma Westside Balance Ownership Owned Yes 330 Leased Yes Dealer/Agent-owned Yes 1,070 Woolworths/Coles/7-Eleven Total 1, , ,350 Operatorship Self Operated Sites 314 Yes 330 Coles/ Woolworths/7 Eleven Other dealers/agents 1, Yes 1,070 Yes Total 1, , ,350 Source: Morningstar, Viva, Caltex, BP, ACCC At approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Caltex at approximately 1,985 and BP at 1,400. This allocates 100% of Liberty s 266 sites to Viva, despite its just 50% shareholding. In terms of outright site ownership, Caltex leads with 476 followed by BP at 330 sites. We'd credit Viva owning approximately 260 sites, adding eight directly owned sites to an indirect 38% interest in 670 sites leased from Viva Energy REIT. In terms of "controlled" sites, owned and/or leased, Viva's 677 total betters BP's 330 and stacks up well against Caltex at 860. In this respect, Viva controls a higher 58% proportion of supplied sites including Liberty, to Caltex's 43%. Caltex does not control the 520 Woolworths sites it supplies, nor a further 600 sites which are dealer-/agent-owned.

13 Page 13 of 28 Economic Moat Viva has no economic moat. The company supplies about a quarter of the Australian transport fuels market, the second-highest behind Caltex. Viva enjoys a strategically advantaged infrastructure base from which to refine, store, and distribute fuel across Australia. It has a market-leading position in Victoria, and near-market-leading positions in most other Australian states. But market share alone does not make a moat, and the markets in which Viva operates are highly competitive. Exhibit 11 Sydney Refined Fuel Pipeline and Terminal Infrastructure Legend Wickham (Caltex 100%) NEWCASTLE Pipelines - Caltex 100% Carrington (BP 100%) - Caltex/Mobil 60/40 - Viva 100% Hamilton (Viva/Mobil 50/50) - Mobil 100% - Vopak 100% - Industry Line (Petrol, Diesel) - Terminal Clyde (Viva 100%) SYDNEY HARBOUR 15km 300mm Gore Bay (Viva 100%) Silverwater (Caltex/Mobil 50/50) 32 km S Botany (Mobil 100%) Jet M P JUHI Pet. Hydrant (Petrol, Diesel) Jet BOTANY BAY Viva BP JUHI 17 km (Jet) (Pet, Dies, Jet) Kurnell (Caltex 100%) Caltex Mobil Pet (Jet) Botany (Vopak 100%) Qantas Banksmeadow (Caltex 100%) Dies Botany (Terminals Pty Ltd 100%) SYDNEY AIRPORT (Industry Line) Botany (Common User Terminal) Source: Morningstar Viva delivers over 14 billion litres of refined product annually or approximately 24% of the national requirement. It is one of the most vertically integrated players with the second-highest refining capacity, second-most-comprehensive pipeline infrastructure, the highest number of fuel terminals, and third-largest number of retail sites supplied. We stress Viva's vertical integration because few companies refine fuel locally anymore, with much of Australia's refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are, however, four refineries remaining including Viva's Geelong in Victoria. Geelong converts imported and locally sourced crude

14 Page 14 of 28 oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported product, into retail channels via the comprehensive supply network. Geelong was profitable from 2015 through 2017, generating AUD 276 million EBITDA in 2017, and since 2013, it has achieved an average margin premium of USD 3.50 per barrell, or bbl, to Singapore equivalent. This is a healthy result but not sufficient in and of itself to confer a moat. Even if it was sustainable, refining comprised an average 38% of underlying group EBITDA over the two years to More likely we expect refining to remain under pressure from larger Asian examples. Australian refining is at an intractable disadvantage to far larger and more modern Asian refineries. And increased exposure to Asian refinery margins heightens earnings exposure to regional shocks, another important factor in our no-moat stance. Exhibit 12 Melbourne Refined Fuel Pipeline and Terminal Infrastructure MELB. JUHI Avgas Somerton (Mobil/BP/Viva) AIR. Holden Dock (CUB) Yarraville (Mobil/BP 50/50) Newport (Caltex 100%) Newport (Viva 100%) 4.5 Bn Lt Altona (Mobil 100%) Legend Pipelines 6.4 Bn Lt Geelong (Viva 100%) - Mobil 100% - Viva 100% PORT PHILIP BAY - Terminal Hastings (United 100%) 5.5 Bn Lt - Refinery Capacity WESTERN PORT Source: Morningstar In the fuel supply and retailing industry, we think the two potential sources for a moat are cost advantage and efficient scale, but in our view, neither Viva or any other player is likely to achieve sufficiently sustainable competitive advantage from either aspect. Caltex achieved average sub-10%

15 Page 15 of 28 returns on invested capital for the six years to 2013, before closure of the Kurnell refinery in 2014 boosted returns to low double digits, ahead of our assessed 8.6% WACC. But returns don't sufficiently exceed WACC to justify a moat. Similarly for Viva, we forecast high-single-digit returns in the long run, creditably meeting WACC but not exceeding it which would be required to justify a moat. Exhibit 13 Brisbane Refined Fuel Pipeline and Terminal Infrastructure Source: Morningstar Ownership or control of storage facilities supports competitive import economics; and pipeline connectivity to key demand centres increases distribution efficiency. Storage supports pricing optimisation in both buying and selling of product. Pipelines cheapen the distribution cost, increasing margins. A high degree of supply chain integration represents a competitive advantage particularly in the Australian context due to the large land mass and the substantial capital

16 Page 16 of 28 investment required to build new infrastructure. Viva accesses 290 kilometres of key pipelines across Melbourne, Sydney, and Brisbane. It is more difficult for market participants without supply chain integration to supply fuel to retail and commercial customers on a nationwide basis. More difficult but not impossible, and certainly not impossible for capable, established competitors including Caltex, BP, and Mobil with similar infrastructure. We think even with infrastructure advantage, owners are unlikely to push too hard given the risk of it being declared, that is, becoming regulated, and more so the risk of retaliation where a position is weaker. The major players share and host across a range of geographies where duplication is not logical, and benefit from those arrangements in lesser strongholds. The pipeline and terminal infrastructure furnish competitive advantage, though we don't think sufficiently so to justify an economic moat. Exhibit 14 Perth Refined Fuel Pipeline and Terminal Infrastructure PORT OF FREMANTLE Kewdale (BP 100%) North Fremantle (Viva/Caltex 50/50) Legend Pipelines - BP 100% North Fremantle (BP 100%) - Viva 100% - Coogee Chemicals 100% - Gull 100% - Freemantle Ports - Terminal 5.5 Bn Lt - Refinery Capacity Kwinana Bulk Berths 3 & 4 Freemantle Ports Manifold KWINANA Kwinana Refinery (BP 100%) 7.3 Bn Lt Coogee Chemicals 100% Gull 100% Source: Morningstar Financial Health With pro forma net debt of just AUD 78 million at December 2017, Viva is in solid financial health. Net debt/equity sits at an almost negligible 3%, supporting a healthy balance sheet. Total debt of AUD 237 million is easily serviced with EBIT/interest expense in fiscal 2017 of over 17 times. However, with adjusted net debt of just under AUD 1.7 billion, significant lease commitments understate Viva's obligations. Following the sale and leaseback of retail sites to Viva Energy REIT in

17 Page 17 of , Viva owns less than 2% of its retail sites, but has retained a 38% stake in the REIT and its AUD 2.28 billion portfolio. The firm boasted operating cash flows of AUD 431 million, and free cash flow of AUD 138 million, in fiscal We continue to forecast solid free cash flows in the foreseeable future, growing to over AUD 500 million by fiscal 2022, which should comfortably support Viva's target dividend payout ratio of between 50% and 70% of underlying NPAT. Valuation Our DCF fair value estimate of AUD 3.00 per share implies a 2018 EV/EBITDA of 9.6 times, a P/E ratio of 19.3 times and an annualised fully franked dividend yield of 3.5%. Key drivers behind our base-case forecasts assume revenue and EBITDA CAGR of 5.9% and 5.2%, respectively over the five years to 2022, including Liberty Oil. Viva has not explicitly reported marketing margins, but on our measure, we forecast 25% improvement from approximately AUD 5.3 cents per litre in 2017 to a nominal AUD 6.6 cents by 2022, or 19% to AUD 6.0 cents in real terms. Margin improvement assumes Viva has a far keener eye on the marketing ball than when under the Shell umbrella, and introduction of the premium diesel offering, V-Power, will prove at least partially as successful as Caltex's hugely successful Vortex gains. Viva's gains are Caltex's pains, however, as reflected in our unchanged assumption for margin decline for Caltex from 2017's AUD 7.3 cents per litre to AUD 6.6 cents, as for Viva. Our DCF valuation assumes a 9.0% cost of equity, long-term 6.5% cost of debt, and a WACC of 8.6%. Exhibit 15 Morningstar's Viva Fair Value Estimate Breakdown (AUD million) (AUD per share) Contribution Refining 1, % Retail, Fuels and Marketing 9, % Supply, Corporate and Overhead -5, % Viv Energy REIT and Liberty % Net Debt Total 5, % Source: Morningstar Our valuation is above the top end of the prospectus pricing range of AUD 2.50 to AUD 2.65 per share which implies a forecast 2018 EV/EBITDA between 7.7 and 8.1 times and P/E ratio between 16.1 and 17.1 times. We think Viva looks attractively priced within the prospectus pricing range at a price/fair value of 0.83 to We have compared our fair value estimate for Viva to that of ASXlisted peer Caltex Australia Limited and NZX-listed Z Energy Limited (ZEL). Our Viva fair value estimate is higher than for Caltex and Z Energy fair value estimates based on 2018 EV/EBITDA

18 Page 18 of 28 multiples of 7.9 and 8.9 and forward P/E ratios of 12.3 and 13.9, respectively. However, we project stronger earnings growth for Viva and the 2022 multiple of 8.7 is near the 8.3 average for the two peers as per Exhibit 15. Viva is an attractive business and we think the offer price looks more than fair on a DCF fair value basis. Exhibit 16 Regionally Relevant Peers Covered by Morningstar Based 2018 Earnings Estimates Share Price FVE Company Code Currency Price FVE EV/EBITDA EV/EBITDA P/E FVE/E Yield Caltex Australia Limited CTX AUD % Z Energy Limited ZEL NZD % Average % Viva Energy Australia Limited Morningstar FVE VIV AUD N/A % Bottom of Range % Top of Range % Middle of Range % Based 2022 Earnings Forecasts Share Price FVE Company Code Currency Price FVE EV/EBITDA EV/EBITDA P/E FVE/E Yield Caltex Australia Limited CTX AUD % Z Energy Limited ZEL NZD % Average % Viva Energy Australia Limited Morningstar FVE VIV AUD N/A % Bottom of Range % Top of Range % Middle of Range % Note: 2022 metrics are discounted at WACC Source: Morningstar, Viva Note: Share prices as of close, June 26, Earnings Forecasts Our base-case DCF fair value estimate of AUD 3.00 per share assumes respective revenue and EBITDA CAGR of 5.9% and 5.2% over the next five years. We have adopted prospectus forecasts for 2018 and first-half However, unlike Viva, we include Liberty Oil contributions in underlying earnings. Consequently, our underlying 2018 and first-half 2019 NPAT forecasts are AUD 345 million and AUD 191 million, respectively, slightly higher than Viva's AUD 306 million and AUD 171 million on a like-for-like basis. Underlying earnings are reported on a replacement cost of profit, or RCOP, basis which removes the impact of fluctuations in the U.S. dollar price of crude and foreign exchange on cost of sales. At the headline level, an increase in the crude price on an Australian dollar basis will create a gain for the

19 Page 19 of 28 company, and a decrease a loss, a consequence of the first-in-first-out costing process. In addition to this, and the standard removal of profits from asset sales and marking derivatives to market, we exclude noncash expense pertaining to straight-lining of lease costs otherwise required by Australian accounting standards. Viva reports across three business segments including: refining; retail, fuels and marketing; and supply, corporate and overheads. For 2018, management forecasts pro forma underlying refining EBITDA to fall by 22% to AUD 217 million, reflecting an expected 10% decline in the gross refiner margin to USD 9.20/bbl from USD 10.20/bbl before energy cost. Further, Geelong refinery suffered an unplanned shut-down in February 2018 due to abnormal weather impacting cooling water supply, and energy expense has risen on higher prices. These will reduce Geelong's refining margin before expected improvement in first-half 2019 on a gross refiner margin closer to USD 10. Longer term, we anticipate little change in underlying refining EBITDA, still near AUD 270 million by 2022, with little growth in volumes and a midcycle gross refiner margin of USD 9.0/bbl (2018 dollars), approximately 10% below 2017's USD 10.20/bbl actual. Refiner margins are likely to experience ongoing pressure from efficiencies and scale-up in Asian refineries. In the retail fuels and marketing segment, 2018 underlying pro forma EBITDA is forecast to increase by 2.0% to AUD 935 million with the roll out of the premium Shell V-Power diesel offering, the addition of 18 new retail sites to the network in addition to new dealer-owned sites with contemporaneous increase in non-fuel income via lease and licence fee income. Commercial volumes are expected to benefit from increased margins on aviation fuel and specialty products. Further improvement in first-half 2019 underlying EBITDA anticipates more V-Power rollout and more new site openings. Longer term, we forecast five-year EBITDA CAGR of 5.6% to AUD 1,207 million by The forecast anticipates 1.7% CAGR in fuel volumes to 15.4 billion litres, and improvement in marketing margin to AUD 6.6 cents per litre nominally in 2022 or (AUD 6.0 cents 2018 real). Volume growth anticipates population growth and market-share inroads partially offset by fuel efficiencies and inroads by electric vehicles. Key market share inroads are via the V-Power roll-out, also featuring in marketing margin appreciation. Supply, corporate and overheads segment's underlying pro forma 2018 EBITDA result is forecast to marginally improve to negative AUD 548 million from negative AUD 561 million in 2017, with an increase in trading and spot sales. But first-half fiscal 2019 deteriorates to negative AUD 290 million with anticipated cessation of sublease income on Shell's former head office in Melbourne. Longer term, we anticipate growth in corporate and overheads associated with general expansion in business scale. We forecast five-year underlying EBITDA CAGR of 3.6% to negative AUD 675 million by 2022.

20 Page 20 of 28 Exhibit 17 Base Case Forecasts Yr CAGR Refining Output (BL) % Gross Refiner Margin (USD/bbl) % Refiner Margin (AUD cents/litre) % Sales (AUDm) 3,425 2,454 3,040 4,031 4,246 3,991 3,643 3, % EBITDA (AUDm) % EBITDA Margin 9.5% 5.9% 9.1% 5.4% 5.8% 6.2% 7.1% 7.3% -4.4% Retail, Fuels and Marketing Volume (BL) % Marketing Margin (AUD cents/litre) % Sales (AUDm) 16,408 13,932 15,282 18,315 19,220 19,251 19,159 20, % EBITDA (AUDm) ,000 1,053 1,112 1, % EBITDA Margin 4.7% 6.2% 6.0% 5.1% 5.2% 5.5% 5.8% 5.8% -0.7% Supply, Corporate and Overhead Sales (AUDm) % EBITDA (AUDm) GROUP Sales (AUDm) 20,085 16,783 18,764 22,806 23,918 23,696 23,263 25, % EBITDA (AUDm) % EBITDA Margin 2.7% 2.7% 3.4% 2.7% 2.7% 2.9% 3.2% 3.3% -0.7% Source: Morningstar Scenario Forecasts We assign Viva a high fair value uncertainty rating. Our bull-case fair value estimate is AUD 4.25 per share, a 60% to 70% premium on the indicative price range. In this scenario, we project a confluence of positives to drive respective group revenue and EBITDA CAGR of 9.0% and 12.7% over the next five years. Group 2022 EBITDA nearly doubles to AUD 1,150 million on 2017 s AUD 634 million. For refining, we project annual output of 6.6 billion litres, 10% ahead of our base case, assuming highly successful one-off refinery optimisation and efficiencies. We project a USD 10.90/bbl midcycle refiner margin in nominal terms, ahead of our base case USD 9.90/bbl, anticipating tighter than expected Asian refiner capacity creep, and/or higher than anticipated demand growth. This drives a higher midcycle refiner margin of AUD 5.9 cents per litre in nominal terms versus AUD 4.5 cents base. On the retail side, fuel volumes grow at 3.7% CAGR to a midcycle 17.0 billion litres versus 15.4 billion base. Higher than expected population growth and vehicle use outweigh engine efficiency and EV inroads. Greater-than-expected market share gains follow introduction of V-Power premium diesel. This, and higher loyalty card success rates and out-performance from nonfuel retail offerings support a mid-cycle marketing margin of AUD 7.3 cents per litre nominal versus AUD 6.6 cents base case. The mid-cycle group EBITDA margin is 4.0% versus 3.3% in for the base.

21 Page 21 of 28 Exhibit 18 Bull Case Forecasts Yr CAGR Refining Output (BL) % Gross Refiner Margin (USD/bbl) % Refiner Margin (AUD cents/litre) % Sales (AUDm) 3,425 2,454 3,040 4,485 4,724 4,444 4,062 4, % EBITDA (AUDm) % EBITDA Margin 9.5% 5.9% 9.1% 5.8% 6.9% 8.1% 9.3% 9.4% 0.7% Retail, Fuels and Marketing Volumes (BL) % Marketing Margin (AUD cents/litre) % Sales (AUDm) 16,408 13,932 15,282 21,168 22,246 22,330 22,300 24, % EBITDA (AUDm) ,098 1,175 1,237 1,307 1, % EBITDA Margin 4.7% 6.2% 6.0% 5.2% 5.3% 5.5% 5.9% 5.9% -0.5% Supply, Corporate and Overhead Sales (AUDm) % EBITDA (AUDm) GROUP Sales (AUDm) 20,085 16,783 18,764 26,112 27,421 27,228 26,823 28, % EBITDA (AUDm) ,056 1, % EBITDA Margin 2.7% 2.7% 3.4% 3.1% 3.3% 3.6% 3.9% 4.0% 3.4% Source: Morningstar On the downside, our bear-case Viva fair value estimate is AUD 1.75, or a 30% to 34% discount to the indicative price range. Under this unfavourable outlook, we posit a perfect storm of negatives to crimp group revenue CAGR to just 3.4% and EBITDA declines at 1.7% CAGR over the next five years to AUD 584 million. For refining, we project annual output at 5.5 billion litres, with limited success of optimisation programs exacerbated by unfavourable fuel mix on demand. We project a USD 9.20/bbl midcycle refiner margin in nominal terms, anticipating an oversupplied market with aggressive Asian capacity expansion and lower than expected regional demand growth. This drives a lower midcycle refiner margin of just AUD 3.5 cents per litre in nominal terms versus AUD 4.5 cents base. On the retail side, fuel volumes stagnate at 14.2 billion litres with lower-than-expected population growth and vehicle use, and higher-than-anticipated electric vehicle inroads. Softer-than-expected market share gains follow lacklustre customer uptake of new V-Power premium diesel. This, and loyalty card disappointment plus weak nonfuel earnings growth allow a midcycle marketing margin of only AUD 6.1 cents per litre nominal, versus AUD 6.6 cents base. The midcycle group EBITDA margin is 2.6% against 3.3% in our base case.

22 Page 22 of 28 Exhibit 19 Bear Case Forecasts Yr CAGR Refining Output (BL) % Gross Refiner Margin (USD/bbl) % Refiner Margin (AUD cents/litre) % Sales (AUDm) 3,425 2,454 3,040 3,675 3,871 3,636 3,315 3, % EBITDA (AUDm) % EBITDA Margin 9.5% 5.9% 9.1% 5.0% 4.9% 4.8% 5.6% 5.7% -8.9% Retail, Fuels and Marketing Volume (BL) % Marketing Margin (AUD cents/litre) % Sales (AUDm) 16,408 13,932 15,282 16,169 16,946 16,941 16,810 18, % EBITDA (AUDm) , % EBITDA Margin 4.7% 6.2% 6.0% 5.1% 5.1% 5.4% 5.8% 5.7% -0.9% Supply, Corporate and Overhead Sales (AUDm) % EBITDA (AUDm) GROUP Sales (AUDm) 20,085 16,783 18,764 20,304 21,268 21,030 20,586 22, % EBITDA (AUDm) % EBITDA Margin 2.7% 2.7% 3.4% 2.2% 2.2% 2.3% 2.6% 2.6% -4.9% Source: Morningstar Bulls Viva boasts significant refined fuel distribution, supplying around 24% of Australia's national requirement; second only to Caltex Australia. Australia's fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains. While not sufficient to warrant awarding an economic moat, Viva's pipeline and terminal infrastructure furnish competitive advantages notably the efficient scale with its jet fuel pipeline supplying Sydney Airport. Bears As technology improves, highly fuel-efficient vehicles, electric vehicles, and other alternative fuel vehicles will further detract from retail fuel demand. Environmental risks inherent to Viva Energy's business of transporting, storing, and refining fuel expose Viva to penalties, remediation costs, and reputational damage. Both retail and commercial fuel markets in Australia are intensely competitive. As competitors seek to increase market share, in the absence of an economic moat, Viva will likely need to sacrifice margin to avoid losing share. Viva is a price taker, and highly reliant on the input costs of crude oil, feedstocks, and refined products. Failing to pass increased costs to consumers would adversely affect profitability.