Romanian Oil and Gas

Transcription

1 Energy, Romania 03 March 2017 Romanian Oil and Gas Sector report Growth in the pipeline In this report, we reiterate our bullish view on Romgaz and Petrom, increasing our price targets (PTs) for Petrom (to RON from RON 0.302) and Romgaz (to RON 36.6 from RON 36.4). The natural gas price recovery since October 2016 should rescue the Romanian market and players from the asymmetric risks associated from being an import-only market, in our view. In the near team, we see a recovery in volumes, as well as prices, a renewal of the taxation and royalty system, and investments in infrastructure and new development projects from both companies as driving sentiment, production volumes and earnings. Of the two companies, we prefer Romgaz slightly, which we see as a bigger beneficiary of the recovery, and able to capitalise faster on new markets when the infrastructure is completed. On the other hand, we like Petrom s management, its lower risk diversified business model, and its long term prospects. However, the company is not as well-positioned to take advantage of the market changes, in our view. Nonetheless, although Petrom s share price performance since the SPO in October 2016 has reduced the level of potential upside, the company is still undervalued, in our view. Romgaz BUY (maintained) Price: RON 28.5 Price target: RON 36.6 (from RON 36.4) Petrom BUY (maintained) Price: RON Price target: RON (from RON 0.302) Romanian macro. We expect the Romanian economy to enjoy high GDP growth (+4.5% in 2017E and +4.0% in 2018E), and see upside in energy demand in such a scenario. Petrom s retail business should be a beneficiary here, in our view. Emerging Romania. With increased liquidity of existing stocks and an eventual listing of Hidroelectrica, which we expect in the next months, we see a greater chance of Romania being upgraded from Frontier to Emerging Market status. As two of the largest companies, Romgaz and Petrom would benefit from the resulting inflows. Gas price recovery. European gas prices reached extremely low levels in 2016, driven by low oil prices and excess natural gas volumes. There was a correction in 4Q16, with prices 33% higher than the first nine months, and prices have been even better so far in 2017, up a further 19% ytd. Refinery margins. We believe that 2017E could turn out to be a good year for refining margins in Europe. We estimate that Petrom will generate 30% of its EBITDA from downstream in 2017E. Royalties and taxes. With the election of a new government in December 2016, we expect to see the issue of royalties decided once and for all. We believe that there will be no significant increases in rates and that the separate treatment of offshore projects would catalyse investments. Unexploited resources. Both companies have significant undeveloped resources that can be developed, once the export infrastructure is in place. Export infrastructure. Pipeline infrastructure connecting Romania with markets elsewhere in Europe, which should be completed in the next two years, in our view, should be a big game changer for both companies, in our view. EQUITY RESEARCH Price Upside Mkt EV/EBITDA Div yield Rating target potential Cap 12M Perf 2016E 2017E 2018E 2016E 2017E 2018E Romgaz BUY % 2, % 4.9x 4.1x 4.2x 10.5% 9.9% 9.2% Petrom BUY % 3, % 5.0x 4.1x 3.9x 5.0% 5.6% 6.0% Analysts: Jonathan Lamb, Lucian Albulescu, Ondrej Slama London: jonathan.lamb@wood.com, lucian.albulescu@wood.com Website:

2 Contents Investment summary... 3 Valuation... 5 Financial forecast changes... 7 Sector discussion... 8 Romania s potential for reclassification to Emerging Markets Company sections Romgaz OMV Petrom Important disclosures Closing Prices as of 01 March by WOOD & Company Financial Services, a.s. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means electronic or mechanical without written permission from WOOD & Company Financial Services, a.s. This report may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without written permission from WOOD & Company Financial Services, a.s. Requests for permission to make copies of any part of this report should be mailed to: WOOD & Company Financial Services a.s. Palladium, Namesti Republiky 1079/1a, Prague 1 Czech Republic tel.: fax: http//: Energy, Romania 2 WOOD & Company

3 Investment summary We believe the Romanian macro environment should be supportive for energy demand going forward. In 2016, the European gas price was below Romania s, which created a major problem, by drawing imports into a market where gas transfers can only go one way. Romgaz was forced to reduce production, as well as accept a lower price. A 33% recovery in gas prices in 4Q16 bodes well for 2017E, in our view, as it removes this asymmetric risk. In the longer term, the risk should be eliminated by interconnection with the other major markets of Eastern and Central Europe, which we expect in 2019E. In addition, we see the renewal of the royalties system as a catalyst that should drive further investment, as well as remove uncertainty from both names. Romanian macro. Romania shares a positive economic outlook for 2017E with many of its neighbours, and is also enjoying a newly-elected centre-left government, which is largely a known entity and poses few risks, in our view. Growing prosperity and increasing vehicle numbers should drive the demand for energy in the coming years, providing a positive outlook for doing business in Romania, in our view. Gas price recovery. European gas prices reached extremely low levels in 2016, driven by low oil prices and excess natural gas volumes. However, from 4Q16, there has been a substantial improvement in prices, removing the incentives to import gas. Therefore, we see less competitive pressure in the gas market in 2017E, as well as better unit costs. Quarterly European spot gas prices (EUR/MWh) Q 2Q 3Q 4Q Source: Bloomberg, WOOD Research Refinery margins. Margins in the region have continued to be strong in 2017 ytd, continuing to benefit from a mixture of low oil prices, recovering regional demand and a slowdown in capacity additions. Our expectation for margins in the region in 2017E is about 10% higher than in Current margins are even better than this, suggesting that there is upside potential, as well as downside, for our expectations. Royalties and taxes. After three years of uncertainty, we expect to see the finalisation of a new taxation and royalty system in 2017E. The temporary system in place for the past three years solved the problem of the government revenue raising in a high oil price environment, but added a new element of uncertainty to the companies investment thesis. We see a new system as positive for investor perceptions, but also as a possible catalyst for new investment. Special treatment for offshore investments is particularly important here as tax incentives can have a very significant impact on the feasibility of capitally-intensive offshore investments. The government stated publicly last year that it was its aim to treat offshore in a different way, for this reason. Unexploited resources. Both companies have major resources that are potential development projects. If the decision is made to proceed with these projects, the future outlook for reserves and production replacement is better than in the recent past. Decisions will be based on infrastructure investments and favourable royalties, which we believe are likely to be forth coming. Export infrastructure. The construction of a natural gas pipeline link between Romania and Hungary should substantially change the nature of the market, in our view. It would enable gas produced in the companies growth projects to be exported, improving the returns on large projects in particular. It would also better enable the complete liberalisation of the market, as Romanian gas prices move into line with the large markets of Central Europe. Investment opportunities. Both companies have investment opportunities that required the confirmation of the new royalty system, as well as investments in pipeline infrastructure. The pipelines are already under construction, and we believe that 2017E is likely to be a year of big decisions for both companies. Energy, Romania 3 WOOD & Company

4 The potential of the deep. In June 2016, Romgaz announced that it had discovered a substantial new natural gas reservoir. Although the results are very preliminary, it estimated the resource at m boe. The gas was discovered at a depth of 4,000 metres. Beyond the immediate impact of this specific discovery on Romgaz, we believe that it increases the likelihood of further discoveries at depth, in the only substantially unexplored area in Romania. Romania no longer frontier. Growing liquidity has put the Romanian stock market in a position where it may be upgraded from Frontier to Emerging Market status. The increase in Petrom s free float, following the SPO in 2016, should help Romania to gain Emerging Market status, in our view. We are seeing greatly increased interest in the market, as well as passive inflows, which should be a catalyst for market performance. As two of the largest companies in Romania, Petrom and Romgaz would be substantial beneficiaries of this reclassification. Energy, Romania 4 WOOD & Company

5 Valuation European peers, group multiples European integrateds Romgaz trades at a P/E of 8.6x for 2017E and 8.7x for 2018E, based on our estimates, while Petrom trades at a P/E of 8.2x for 2017E and 7.6x for 2018E. The European integrated peer companies average P/E ratios of 10.1x for 2017E and 9.2x for 2018E, based on consensus estimates, suggest that Petrom is undervalued and Romgaz is fairly valued, compared to their peers. On a price to book metric, the peer average ratio is 1.0x for 2017E and 0.9x for 2018E, based on both consensus and our estimates. In comparison, Romgaz is trading at 1.1x for both 2017E and 2018E, while Petrom trades at 0.6x for both 2017E and 2018E, suggesting that Petrom is relatively undervalued vs. the peer group, in our view. MCAP USD m P/E (x) P/CF (x) P/BV (x) Local price E 2018E E 2018E 2016E 2017E 2018E OMV AT 12, MOL HU 7,329 20,865.0 n.m Petrom RO 3, PGNiG PL 8, Romgaz RO 2, Average European downstream MCAP USD m P/E (x) P/CF (x) P/BV (x) Local price E 2018E E 2018E 2016E 2017E 2018E PKN PL 9, TUPRAS TR 5, HELLENIC PETROLEUM GR 1, (1.7) MOTOR OIL (HELLAS) GR 1, LOTOS PL 2, UNIPETROL CP 1, NESTE OYJ SF 9, SARAS SPA IT 1, Average Source: Bloomberg, WOOD Research On EV/EBITDA, Petrom s ratios are 4.1x for 2017E and 3.77x for 2018E, while Romgaz s ratios are 4.1x for 2017E and 4.2x for 2018E, on our estimates, compared with 4.6x and 4.2x for its peer group, on consensus estimates. On this metric, both Petrom and Romgaz look undervalued, in our view. Energy, Romania 5 WOOD & Company

6 EV/EBITDA and dividend yields EV/EBITDA (x) Div yield European integrateds E 2018E E 2018E OMV AT % 3.1% 3.5% MOL HU % 2.8% 3.3% Petrom RO % 5.6% 6.0% PGNiG PL % 3.4% 3.8% Romgaz RO % 9.2% 10.7% Average % 4.8% 5.0% EV/EBITDA (x) Div yield European downstream E 2018E E 2018E PKN PL % 3.9% 4.0% TUPRAS TR % 8.3% 9.1% HELLENIC PETROLEUM SA GR % 3.2% 3.5% MOTOR OIL (HELLAS) SA GR % 4.8% 5.0% LOTOS PL % 0.0% 0.0% UNIPETROL CP n.m. 2.4% 2.8% NESTE OYJ SF % 3.7% 3.7% SARAS SPA IT % 5.5% 5.4% Average % 4.0% 4.4% Source: Bloomberg, WOOD Research Energy, Romania 6 WOOD & Company

7 Financial forecast changes Since our previous report, published on 15 April 2016 (CEE Oil and Gas_Transfer of Coverage_15Apr2016.pdf, (2 MB)), the problems with natural gas imports cut Romgaz s sales and revenues to below our expectations for We had previously assumed that gas price deregulation would proceed as planned. However, as the planned increase did not happen in 2016, we have taken a more conservative view on the process. On the positive side, we assume that exports will start in 2019E, enabling the company to take advantage of its spare capacity and new discovery. Therefore, the company s EBITDA is lower from E, but higher after that. In the case of Petrom, once again, 2016 was below our expectations, but successful cost cutting means that earnings should be higher from 2017E-onwards, in our view. EBITDA forecast changes since our last report (RON m) Romgaz OMV Petrom 3,500 3,000 2,500 2,000 1,500 1, ,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2018E 2019E 2020E E 2018E 2019E 2020E Previous Current Previous Current Source: WOOD Research Energy, Romania 7 WOOD & Company

8 Million Barrels per Day Sector discussion Oil price update At the end of a year when oil prices had recovered from their early lows, the announcement of production cuts made by OPEC on 30 November appears to have stabilised oil prices. Brent crude averaged USD 54.9/bbl in December 2016, USD 55.5/bbl in January 2017 and USD 56.6/bbl in February Compared to the recent past, this is an unprecedented low level of volatility. The key drivers of oil prices in 2017, in our view, are the OPEC cuts, drawdowns of global inventories, and the recovery of US tight oil production, as well as the usual supply shocks. OPEC oil production In December 2016, OPEC was producing million barrels per day (m bpd), which fell to 32.3m bpd in January This cut has successfully stabilised the global oil price at around USD 55/barrel. The plan is to cut production by 1.8m bpd for six months, but this may be extended for a longer period if necessary, according to OPEC. On their own, the cuts will not be enough to completely balance the market, but should significantly reduce excess stocks, in our view. OPEC oil production Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min / Max Average Source Bloomberg There are a number of OPEC wildcards that may have a significant impact on crude production volumes. The most important of these is Libya, which has potential output of 1.5m bpd, but was only producing 380,000 per day on average in In January 2017, this rose to 670,000 bpd, and we expect this to increase further. Meanwhile, Iraqi production grew by 400,000 bpd in 2016 and, given the improving security situation, could continue to grow over 2017E. The tight oil reaction The oil price of above USD 50/barrel has already triggered a greater level of activity in the US oil patch in 4Q16 and so far this year. The rig count reached a nadir of just 323 active rigs in May 2016, which rebounded to 502 by the end of the year, and 534 in January Meanwhile, since reaching its lowest level of 8.48m bpd in July 2016, US crude oil production has increased by nearly 500,000 bpd as of February This is still 650,000 bpd below the 2015 peak, which in itself understates the maximum short-term potential, in our view, given the improvements in pipeline infrastructure that have been made since that date. Energy, Romania 8 WOOD & Company

9 Million Barrels per Day US rig count and production US oil rig count US crude production 1,800 1,600 1,400 1,200 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min / Max ( ) 2015 Max/Min Average Average Source: EIA, Baker Hughes, WOOD Research Crude inventories During 2016, the oil market was in contango, with 12-month futures prices approximately USD 4.5/barrel higher than spot prices for the first 11 months of the year. This situation means that oil can be stored at a profit, with no price risk. This drives inventory levels up. Following the announcement of the OPEC production cut, spot prices rose, but forward prices did not. The price differential between today and in 12 months time fell to USD 1.8 in December and just USD 0.73 for January We believe that the disappearance of the contango means that inventories should be released to the market as their related contracts finish. Therefore, in our view, the primary trend in the oil markets in 2017E should be a drawdown of inventories, rather than significant changes in price. Brent crude forward curves Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan Month 6 Months 12 Months Source: Bloomberg, WOOD Research Energy, Romania 9 WOOD & Company

10 European natural gas markets Given the global glut of natural gas, and the lack of bullish catalysts for oil prices, we expect gas prices to remain moderate in Europe in the medium term. The German market is the largest and most liquid, so we use it to illustrate the general European price trends. The Romanian spot price does not currently follow its German counterpart given that gas can only flow in one direction. German natural gas spot prices (EUR/MWh) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min / Max ( ) Average Source: Bloomberg, Wood Research Despite talk over recent years by many industry spokespeople of a decoupling of gas prices from oil prices and alterations to some supply contracts when oil prices were high, the lagged correlation between the two still appears to be in place. The graph below compares the current spot price for gas to the average Brent price for the previous six months, and illustrates nicely, we believe, that the oil price gas price linkage is still in place. Crude oil/natural gas price relationship Gas price/trailing 6M oil price Source: Bloomberg, WOOD Research Romanian natural gas business Although Romania has a connection to pipelines bringing gas from Russia, it remains a gas island, with the majority of the gas consumed produced locally, and no exports. The market is also heavily regulated, which is unavoidable given Petrom and Romgaz s dominance, and the lack of connectivity with other markets. With mature fields, gas production volumes have been falling gradually for many years. Improvements in technology are slowing the declines, but current prices have led to reduced budgets and a reversal of this trend. Significant potential exists offshore, but will not be producing this decade because both companies have a lot of preparation before the final investment decisions (FIDs) can be reached. Energy, Romania 10 WOOD & Company

11 Natural gas infrastructure The natural gas transmission system is operated by Transgaz. It was built largely as a closed system, for delivering domestically-produced gas to domestic customers. The pressure in the lines is lower than in neighbouring countries, which makes exporting technically impossible. Imports, however, are possible and happen when prices or volumes necessitate them. It is a priority for the European Union to see energy markets integrated, to reduce the risks to energy supplies, and it has pressured the Romanian government to speed up investments to integrate its markets. Transgaz is constructing a gas corridor between Bulgaria and Hungary, which is expected to be completed in 2019E. With this in place, Romanian gas producers would be able to export gas and consumers would have a greater choice of suppliers. Further enhancements in this pipeline would also enable bigger volumes to be exported from Black Sea projects if necessary. The European Union has contributed EUR 179m to the project already, which it views as an enhancement for energy security and vital for the integration of gas markets in the region. Romanian natural gas consumption and production (mcm) Production Consumption Source: WOOD Research, BP Regulation As of 1 July 2007, the Romanian gas market became fully open for all consumers, allowing them to freely choose a gas supplier from the ones licensed by ANRE, and directly negotiate the gas supply clauses and prices (law no.123/2012 sets the legal framework to converge the domestic gas price with the import gas price; while government decision no.22/2013 provides for a calendar of domestic gas price increases with respect to the regulated market). In June 2016, the Romanian government decided to suspend the price increase for domestic consumers for nine months. Prices were to have risen from RON 60 to RON 66 as of the beginning of July 2016, but the government decided against it at the last minute. The regulator is trying to make it a true market, with gas traded on centralised platforms, while a really competitive market would be created by connecting Romania to other regional markets. The wholesale markets for gas were deregulated at the beginning of 2015, and domestic gas prices are going through the process of deregulation. Current low gas prices make this process politically smoother, but there are always political risks associated with such moves. Currently, the regulator is attempting to increase the volumes of gas sold through the trading exchange. The combination of deregulation and interconnection offers opportunities for the two main players, but comes with risks attached, especially in light of the current global gas glut. European refining sector The European refining sector continues to benefit from a mixture of low oil prices, recovering regional demand and a slowdown in capacity additions. As a method of monitoring the market conditions, we have created our own benchmark, which we calculate from daily product prices. It is based on a mixture of heavy Middle Eastern crude oils, a 50% diesel yield, 25% gasoline and 25% fuel oil. This margin was very strong in 4Q16, and has continued to be so in 1Q17 qtd. Energy, Romania 11 WOOD & Company

12 Capacity, million tonnes WOOD s Mediterranean benchmark margin Med 2,1,1 margin Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min / Max Average Source: Bloomberg, WOOD Research Romanian refining sector There are three refineries operating currently in Romania: Petrom s Petrobrazi Refinery, LUKOIL s Ploiești Refinery and Rompetrol s Petromidia plant. All are relatively small but high complexity plants. They process predominantly Russian and domestically produced crude oil. Previously, Romania had a number of other refineries, which have all been closed or are used for the production of niche products. Capacity and complexity of Romanian refineries Rompetrol Petrom Lukoil Nelson Complexity Source: WOOD Research The Romanian market is also supplied with products from Bulgaria, Hungary, Belarus and elsewhere. Romanian petrol retail sector Car numbers The Romanian car parc is one of the fastest growing in the region. In the five years to 2015, the number of cars in Romania grew by an average 3.9% per year to reach more than 5m. In addition to new car sales, large numbers of second-hand cars are imported from other EU countries, which lowers the cost of increasing motor vehicle penetration and therefore speeds the process up. Energy, Romania 12 WOOD & Company

13 Million tonnes Millions Number of cars in Romania (millions) Source: ACEA, WOOD Research Romanian refined product demand, monthly (m tonnes) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min / Max Average Source: Bloomberg, WOOD Research The main players in the Romanian market are: Petrom/OMV, MOL, Rompetrol, LUKOIL, as well as some other small players. Energy, Romania 13 WOOD & Company

14 Romania s potential for reclassification to Emerging Markets Investors attention has started to focus on the potential chances of Romania being reclassified to the Emerging Markets group. In our view, the chances for such a development have increased along with OMV Petrom s free float being boosted by the MSCI in December 2016 (as announced along with the SAIR in November 2016) from 9% to 20%. As a general rule, the MSCI requires a stock market to have three companies meeting (simultaneously) the criteria below (in use for the November 2016 SAIR; updated on a semi-annual basis) to put it on the watch list for potential reclassification from frontier to the emerging markets group: a) A minimum of three companies with full market capitalisation of a minimum of USD 1,269m; b) A minimum of three companies with free float adjusted market capitalisation at a minimum of USD 635m; and c) A minimum of three companies with both 3M and 12M ATVRs at a minimum of 15%. According to our calculations, out of the five members of the MSCI Romania index, three stocks met these requirements as of the end of January In our view, this means that Romania s stock market fulfils (in theory) the very basic size and liquidity criteria set by the MSCI for a market to be put on its watchlist. MSCI Romania index members (closing prices as of 1 March 2017; ATVRs calculated as of 28 February 2017)* Weights in MSCI RO Index MCap (USDm) MSCI FF FF-Mcap (USDm) 3M ATVR 12M ATVR Banca Transilvania SA 38.9% 2, ,642 24% 25% ROMGAZ SA 18.1% 2, % 22% Electrica SA 12.2% 1, % 12% BRD-Groupe Societe Generale SA 11.5% 1, % 17% OMV Petrom SA 19.2% 4, % 17% Source: WOOD Research, Bloomberg, MSCI; *shaded areas denote that the mentioned figures meet the MSCI s minimum requirements However, we also note that the MSCI also requires these criteria to be met with a comfortable margin. Moreover, the index provider always has certain discretion over its final decisions on reclassification, so fulfilling the criteria does not automatically guarantee inclusion. Given that, from our point of view, it seems that the 2ppts margin with which OMV Petrom meets the 12M ATVR requirement is unlikely to be deemed comfortable, we stress that Romania fulfils the requirements only in theory. However, if the liquidity of the stock continues to improve, and the margin widens, the probability of placing Romania on the list improves as well, in our view. Therefore, we stress that it is definitely worth monitoring the situation on Romania s stock market, as its chances of joining the Emerging Markets group are increasing, in our view. Energy, Romania 14 WOOD & Company

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17 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Energy, Romania 03 March 2017 Romgaz Not just a pipe dream We maintain our BUY recommendation on Romgaz, with an updated 12- month price target (PT) of RON 36.6, offering upside of 28%. Romgaz had a terrible 2016, driven by competition from imports: a function of the very low natural gas prices in Europe. The company had to cut production and prices in response to the intense level of competition. We see 2017E as a potentially better year, due to a recovery in natural gas prices. We also see Romgaz as well-placed to benefit from changes in the Romanian gas market, driven by pipeline connections to the European markets and price deregulation. Romgaz has spare capacity and is sitting on a major new discovery, both of which are awaiting suitable customers. With the completion of the pipeline connection due in 2019E, Romgaz should add a substantial export business to its current domestic one, in our view. Higher prices. Better prices for gas would boost the company s results in 2017E and beyond. The recovery in gas prices should be beneficial as importers are deterred from the market. As the biggest loser last year in terms of sales, we see Romgaz as potentially the biggest winner in 2017E. MSCI potential. In our view, the chances of Romania gaining reclassification to the Emerging Markets group has increased with Petrom s better free float following the deals in 2016, and the potential transactions to come in 2017E. As one of the Romanian market s biggest companies, Romgaz stands to benefit from any upgrade, in our view. Dividends. Romgaz is one of the best dividend payers among its peers and we see its ability to pay dividends increasing with rising gas prices and potential improvements in its sales volumes. New rules demand a 90% payout from state-owned companies for this year. We forecast lower payouts in the following years, but 90% may be also imposed in the future. Deregulation. Although we are aware that the timelines for deregulation have not been set in stone, the biggest participant in the regulated market should, by definition, be the biggest beneficiary once the rules are changed. Exports. From 2019E-onwards, we see Romgaz becoming an exporter of natural gas, making use of its spare capacity and newly-discovered resources. This would enable revenues to grow by 33% between E, on our estimates. Big new resource. Romgaz discovered a large new gas resource last year, beneath its existing operations. The contingent resource is estimated at m boe. We believe this can be fast-tracked at a relatively low cost, and exported. Reserves replacement. Romgaz has a better reserves replacement track record than its competitor OMV Petrom, with an 85% RRR over the past three years. This should also improve once the new discovery can be classified as reserves, following an investment decision. Expected events 1Q17 results 2Q17 results Key data Buy Maintained Price: RON 28.5 Price target: RON 36.6 (From RON 36.4) 12 May 11 August Market Cap USD 2,540m Free float 30% Shares outstanding 385.0m Major shareholder Government 70% Reuters code ROSNG.BX Bloomberg code SNG.RO Price performance 52-w range RON w performance 21% Relative performance -3.5% Romgaz 12M share price performance SNG RO Equity BETI Index EQUITY RESEARCH Sales EBITDA EBIT Net income EPS P/E P/CF P/BV EV/EBITDA ROCE DPS Div yield RONm RONm RONm RONm RON x x x x % RON % ,493 2,541 1,764 1, % % ,053 2,242 1,449 1, % % ,412 1,573 1,262 1, % % 2017E 4,079 1,947 1,521 1, % % 2018E 4,202 2,021 1,566 1, % % 2019E 4,853 2,412 1,938 1, % % Analysts: Jonathan Lamb, Lucian Albulescu, Ondrej Slama London: jonathan.lamb@wood.com, lucian.albulescu@wood.cz Website:

18 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Company snapshot BUY, PT RON 36.6 Romgaz BUY SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker SNG RO Romgaz is the largest domestic natural gas exploration and production (E&P) company in Romania, Closing price (RON) 28.5 producing c.50% of the Romanian output (4.2bcm in 2016 ). Romgaz had 62bcm of proved (1P) and 75bcm of proved and probable (2P) reserves as of end Romgaz has 147 commercial reservoirs in Transylvania its 34.0 Price target (RON) 36.6 largest producing basin, with 90%+ of production, Moldavia and Muntenia, mostly in mature fields, which it 30.0 Upside to PT 28.3% has been producing for 30+ years, in most cases. Romgaz also has successful exploration activities, with a Shares outstanding (m) c.65% drilling success rate and a very major find in The company has non-operated stakes in some 26.0 MCAP (USD m) 2,582 Black Sea offshore fields, exploration interests in Slovakia and Poland, and some JVs for the production enhancement of depleted fields. Romgaz owns and operates six underground gas storage (UGS) facilities, 22.0 Free float 30.0% with a total capacity of 2.76bcm. Storage is a fully regulated. ADTV (USD m) Week Range (RON) SNG RO Equity BET Index RATIOS PER SHARE RATIOS E 2018E 2019E FINANCIAL RATIOS E 2018E 2019E EPS Working capital to sales, days CEPS Capex/depreciation 0.9x 1.5x 1.0x 1.0x 0.9x 0.8x BVPS Capex/net fixed assets 0.29x (0.07)x 0.20x 0.10x 0.09x 0.12x DPS Op. cash flow/capex 1.3x (5.5)x 1.4x 2.6x 2.6x 2.1x EBITDA margin 56.5% 55.3% 46.1% 47.7% 48.1% 49.7% VALUATION RATIOS E 2018E 2019E EBIT margin 61.4% 61.0% 60.2% 70.4% 69.4% 71.8% P/E 9.4x 8.4x 10.6x 8.6x 8.7x 7.0x Pre-tax margin 39.8% 36.2% 37.5% 37.3% 37.3% 39.9% P/CF 5.5x 4.9x 5.5x 5.2x 5.0x 4.8x Net margin 31.4% 29.5% 30.0% 31.1% 29.8% 31.9% P/BV 1.4x 1.1x 1.1x 1.1x 1.1x 1.0x ROE 14.5% 12.3% 10.6% 12.9% 12.6% 14.7% EV/EBITDA 3.2x 3.6x 4.9x 4.1x 4.2x 3.6x ROCE (avg) 18.5% 16.0% 14.4% 17.1% 15.4% 17.4% EV/CE 1.1x 1.1x 1.1x 1.1x 1.0x 1.0x EV/Sales 1.8x 2.0x 2.3x 1.9x 2.0x 1.8x EV/EBIT 2.9x 3.2x 3.8x 2.8x 2.9x 2.5x FCF, RON m 569 2, ,082 1,031 1,016 FCF yield 5.2% 26.6% 4.0% 9.9% 9.5% 9.3% Dividend yield 9.2% 11.3% 10.5% 9.9% 9.2% 10.7% COMPANY FINANCIALS INCOME STATEMENT, RON m E 2018E 2019E BALANCE SHEET, RON m E 2018E 2019E Net Sales 4,493 4,053 3,412 4,079 4,202 4,853 Cash & cash equivalents 1, Operating Expenses -1,231-1, ,003-1,080-1,111 Accounts receivable 1, EBITDA 2,541 2,242 1,573 1,947 2,021 2,412 Inventories DD&A Other CA 1,018 2,286 3,034 3,034 2,534 2,284 EBIT 1,764 1,449 1,262 1,521 1,566 1,938 Total current assets 4,364 4,188 4,719 4,274 3,789 3,743 Other Expenses -1,035-1, ,252-1,249-1,445 PP&E 5,963 5,996 5,787 6,365 7,035 7,720 Pre-tax profit 1,788 1,469 1,280 1,521 1,566 1,938 Other LT assets Net profit 1,410 1,194 1,025 1,268 1,253 1,550 Total fixed assets 6,448 6,497 6,257 6,835 7,505 8,189 Total assets 10,812 10,685 10,976 11,109 11,293 11,932 Accounts payable CASH FLOW, RON m E 2018E 2019E Other ST liabilities Total current liabilities ,051 CF from Operations 2,327 2,454 1,595 1,747 1,656 1,925 Thereof depreciation Asset retirement obligations Thereof changes in w/c Pension obligation CF from Investments -1, , Other Dividends ,215-1,041-1,141-1,078-1,002 Total LT liabilities Change in Net debt , Minority interest Total shareholders' equity 9,712 9,692 9,676 9,803 9,978 10,526 Total liab. & equity 10,812 10,685 10,976 11,109 11,293 11,932 OPERATIONS E 2018E 2019E Net Working Capital 2,194 3,260 3,870 3,623 3,176 3,025 Production, mmcm 5,664 5,563 4,218 5,100 5,000 5,500 Production, boepd 97,000 95,000 72,000 87,000 85,000 94,000 MACRO ASSUMPTIONS E 2018E 2019E Growth, % 0% -2% -24% 21% -2% 10% Brent crude, USD/bbl German hub price, EUR/MWh Regulated gas price, RON/mcm RON/USD Market gas price, RON/mcm PROFITABILITY TRENDS Per barrel economics (USD/bbl) Revenues, USD/boe EPS DPS Revenue / Bbl Ebitda / Bbl EBITDA, USD/boe Opex. USD/boe E 2018E 2019E E 2018E 2019E Romgaz 18 WOOD & Company

19 Investment case We see Romgaz as a major potential beneficiary from the recovery in European gas prices from the extremely low levels seen in We believe that, in the longer term, Romgaz should be the biggest beneficiary of interconnection between the Romanian and other European gas markets. Given that it is purely a gas company, Romgaz was the biggest loser in volume terms from the extremely low price environment that we saw in It also has a bigger share of the regulated domestic market than OMV Petrom. Conversely, we would expect it to be the biggest beneficiary of a purely market price-based environment, which we expect to see in 2019E. Access to a bigger market should also enable it to utilise its spare capacity and to develop its new gas discovery, in our view. We also see few other companies with the same dividend yield as Romgaz in our universe. European gas prices. So far in 2017, the European spot gas price has averaged EUR 21.2/MWh vs. EUR 14.2/MWh in Although we do not see this affecting Romanian prices to the same degree, we believe that it should stem the flow of cheap imports, which was such a problem in For 2017E, we believe that Romgaz should obtain better prices and be able to produce higher volumes on the back of this price trend. Reserve replacement. Compared to its competitor OMV Petrom, Romgaz has a better track record of reserve replacement, which has been at 85% in the past three years. When the major discovery from 2016 is added in, this should improve to over 100%, in our view. Dividends. Traditionally, Romgaz has paid out around 70% of its earnings, which already put it on an attractive dividend yield. New state-imposed rules this year are forcing a 90% payout ratio, and we see dividend yields of 9.2% and 8.1% for 2017E and 2018E, respectively. Romgaz: expected DPS, RON E 2017E 2018E 2019E 2020E 2021E Source: Wood Research Deregulation. The liberalisation of the prices for the domestic consumption and district heating segments has been delayed from 2016, but will eventually have to be implemented over the coming years, in our view. Romgaz should benefit disproportionately from this because a great percentage of its sales comes from this segment. Export infrastructure. The construction of a natural gas pipeline link between Romania and Hungary should benefit Romgaz the most, in our view, thanks to its significant spare capacity, as well as its newly discovered resources, which we believe can be fast-tracked into production, if demand necessitates it. Given the oversupply in the Romanian market, we see the export pipeline as the only way of unlocking this potential. Spare capacity. Romgaz already has significant spare capacity, which management estimates to be at least equivalent to 25% of current production. The only thing missing is customer demand. The ability to export should unlock this, and we see this as a significant driver of earnings in 2019E and beyond. Big new resource. In 2016, Romgaz discovered a large new hydrocarbon resource, beneath its existing operations. The contingent resource is estimated at m boe. We believe this could be fast-tracked at a relatively low cost, depending on access to new customers. Moreover, as the first major deep-level find onshore, there is a possibility that there may be more such discoveries to come. Romgaz 19 WOOD & Company

20 Valuation Romgaz: 10-year DCF DCF Our valuation for Romgaz is derived using a 10-year DCF, with -5% terminal growth. We calculate a 12- month price target (PT) of RON 36.6, offering upside of 28%. RON m 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E EBITDA 1,947 2,021 2,412 2,851 3,165 3,146 3,127 3,107 3,068 3,011 Taxes Capex 1,004 1,125 1,159 1,194 1,229 1,266 1,304 1,343 1,384 1,425 Change in WC FCF ,100 1,505 1,753 1,638 1,606 1,570 1,507 1,413 PV of FCF ,064 1, Source: WOOD Research WOOD vs. the consensus Romgaz: DCF summary and WACC calculation SUM of PV 7,509 Risk free rate 4.5% PV of TV 2,129 ERP 4.5% Levered beta 1.10 Total EV 9,639 Cost of equity 9.5% Net debt 3,173 Tax rate 16.0% Equity value 12,812 After-tax cost of debt 5.5% Per share (RON) 33.3 % of debt 10.0% % of equity 90.0% 12M PT (RON) 36.6 WACC 9.1% Source: WOOD Research Ratios At current prices, Romgaz trades at P/E ratios of 8.6x for 2017E and 8.7x for 2018E, on our estimates, vs. 10.1x and 9.2x for its European peer group, on both WOOD and consensus estimates. On EV/EBITDA, the company s ratios are 4.1x for 2017E and 4.2x for 2018E, on our estimates, compared with 4.6x and 4.2x for its peer group. On these metrics, Romgaz looks slightly undervalued, in our view. We see the company becoming cheaper as its sales volumes increase from 2019E-onwards. Romgaz: valuation ratios E 2017E 2018E 2019E 2020E P/E P/CF P/BV EV/EBITDA EV/CE EV/sales EV/EBIT FCF, RONm 569 2, ,082 1,031 1,016 1,124 FCF yield 5.2% 26.6% 4.0% 9.9% 9.5% 9.3% 10.3% Dividend yield 9.2% 11.3% 10.5% 9.9% 9.2% 10.7% 12.1% Source: WOOD Research WOOD vs. the consensus We are slightly below the consensus on EBITDA for both 2017E and 2018E, but above the consensus in 2019E. We believe this is due to the consensus numbers not including the impact of the export business in 2019E and beyond as of yet. RON m Revenues EBITDA EBIT Net profit 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E WOOD Research 4,079 4,202 4,853 1,947 2,021 2,412 1,521 1,566 1,938 1,268 1,253 1,550 Consensus 3,775 3,933 3,866 2,031 2,185 2,325 1,310 1,435 1,434 1,130 1,203 1,309 % difference 8.1% 6.8% 25.5% -4.12% -7.50% 3.72% 16.11% 9.13% 35.11% 12.18% 4.18% 18.40% Source: Bloomberg, WOOD Research Romgaz 20 WOOD & Company

21 Company background Romgaz is the largest natural gas producer and the main gas supplier in Romania. It has three production areas: the Transylvanian Basin, which accounts for around 90% of production; the Muntenia Moesian Platform; and the Moldavia Platform. Reserves The company has a mature onshore natural gas reserves base of 62bcm 1P and 75bcm 2P reserves. Its 25 largest fields contain c.70% of Romgaz s reserves (the average size of the proved reserves per average field is 450m m 3 ; with 17 fields with over 1bcm). The recovery factors are between 55% and 85% for most fields, with 90% in the more mature fields. Reserves replacement ratios 350% 323% 300% 250% 200% 150% 100% 50% 57% 49% 92% 155% 70% 94% 82% 0% Source: Romgaz, WOOD Research Ownership structure Romgaz is a joint stock company whose majority shareholder is the Romanian sate, which owns a 70% stake. The company is listed on the Bucharest Stock Exchange, and its GDRs are also traded on the London Stock Exchange. Following Fondul Proprietatea s disposal of its 5.85% stake in April 2016, 30% of the shares are now in free float. Company history In 1991, the Romanian national gas company was named Romgaz, which became a brand for natural gas exploration, production and storage in Romania after In 2013, Romgaz acquired the lernut electricity power plant, in lieu of the payment of outstanding debts. In 2016, it made the most significant onshore discovery for years, at Muntenia Nord-Est. Operations Exploration and production Romgaz is the titleholder of petroleum operations for exploration, development and production in nine blocks in Romania, with 100% participation interest, and is co-titleholder in four blocks, based on concession contracts. These blocks include 141 commercial fields, and five fields recording experimental production. It also holds exploration and production rights in Slovakia and Poland. The Transylvanian Basin accounts for around 90% of Romgaz s production. Production was 4.2bcm in 2016, which was a 24% yoy decline. Development areas The company has been exploring deeper layers beneath its existing gas fields, which it believes hold a lot of potential. In June 2016, gas was discovered in the Moesian Platform, within the Caragele structure. The contingent resources were estimated at mboe, or between 25-28bcm. Romgaz has also been exploring two blocks in the Black Sea, in partnership with Lukoil and PanAtlantic Petroleum: EX29 Est Rapsodia and EX30 Trident. In February 2016, the Rapsodia block was relinquished, following disappointing results. Exploration activities are continuing in the Trident Block, Romgaz 21 WOOD & Company

22 where a major gas accumulation was discovered in 2015 (potentially 30bcm of gas). Romgaz s participation in these blocks is 10% in each. Electricity generation Romgaz owns CTE Iernut, a condensation electric power plant with intermediate superheating and 800MWh of installed power. Its capacity accounts for 5% of the domestic/national market share of electricity production. However, it requires significant investment to remain competitive. Gas storage The underground gas storage business operates six storage units, with total active capacity of 2.77bcm/cycle, equivalent to a market share of over 90% in Romania. Sales In 2015, 54.1% of Romgaz s gas sales were to households and thermal plants for the gas used for household heating, which are sold at regulated prices. The other 45.9% of sales were to industry. Around 63% of Romgaz s gas sales, in terms of volumes, were to E.ON Energie and Engie (formerly GDF Suez). Management The board of directors consists of seven members, three of which are independent. Romgaz 22 WOOD & Company

23 Risks We associate the following risks with Romgaz As the dominant supplier of gas to the Romanian regulated domestic and district heating segments, Romgaz has the most to lose from delays in price liberalisation. As a pure-play natural gas company, a repeat of the very low gas prices of 2016 would suppress volumes and earnings significantly. The district heating business, in particular, is susceptible to bad payment problems. These could lead to write-offs, or the company taking ownership of low-value assets as payment. With 70% state ownership, management is susceptible to interference. Romgaz 23 WOOD & Company

24 Financials Romgaz: income statement RONm E 2018E 2019E Revenues 4,493 4,053 3,412 4,079 4,202 4,853 Cost of commodities sold Gross profit 4,318 4,012 3,362 3,775 3,865 4,465 Investment income Other gains and losses Changes in inventory Raw materials and consumables used Depreciation, amortisation and impairment Employee benefit expenses Finance cost Operating profit 2,759 2,472 2,054 2,873 2,915 3,486 Exploration expense Other expenses -1,035-1, ,252-1,249-1,445 Profit before tax 1,788 1,469 1,280 1,521 1,566 1,938 Income tax expense Net profit 1,410 1,194 1,025 1,268 1,253 1,550 Depreciation EBITDA 2,541 2,242 1,573 1,947 2,021 2,412 EBIT 1,764 1,449 1,262 1,521 1,566 1,938 Source: Romgaz, WOOD Research Romgaz: cash flow RONm E 2018E 2019E Net profit 1,410 1,533 1,025 1,268 1,253 1,550 DD&A Other non-cash (FX, impairment) Cash earnings 2,837 2,836 2,068 1,947 2,021 2,412 Change in NWC Operating cash flow 2,327 2,454 1,595 1,747 1,656 1,925 Capex -1, , M&A/divestiture Dividends ,215-1,041-1,141-1,078-1,002 Net flows , New capital Net financing need/excess , Source: Romgaz, Wood Research Romgaz 24 WOOD & Company

25 Romgaz: balance sheet RONm E 2017E 2018E 2019E PPE 5,963 5,996 5,787 6,365 7,035 7,720 Intangible assets Other long-term assets Fixed assets 6,448 6,497 6,257 6,835 7,505 8,189 Inventories Receivables 1, Cash & cash equivalents 1, Other short-term financial assets 916 2,147 2,893 2,893 2,393 2,143 Other short-term assets Current assets 4,364 4,188 4,719 4,274 3,789 3,743 Total assets 10,812 10,685 10,976 11,109 11,293 11,932 Share capital Reserves 2,142 2,582 3,020 3,020 3,020 3,020 Retained earnings 7,184 6,725 6,271 6,398 6,573 7,121 Equity 9,712 9,692 9,676 9,803 9,978 10,526 Decommissioning provisions Pension liabilities Total non-current liabilities Trade and other payables Short-term debt Other short-term liabilities Total current liabilities ,051 Total liabilities and equity 10,812 10,685 10,976 11,109 11,293 11,932 Net debt -1, Working capital 2,194 3,260 3,870 3,623 3,176 3,025 Net capital employed 7,623 7,471 7,093 7,425 8,067 8,760 Source: Romgaz, WOOD Research Romgaz 25 WOOD & Company

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27 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Energy, Romania 03 March 2017 OMV Petrom Patience is a virtue We maintain our BUY recommendation on OMV Petrom (Petrom), with an updated 12-month price target (PT) of RON 0.361, offering upside of 18%. We see Petrom as a disciplined, low-cost producer, with a balanced business model. It has a small, but profitable, downstream business, which mitigates the downside risk; and also dominates its own retail market. Important catalysts include government decisions on the fiscal regime, and further news on the Neptun Deep offshore project. However, we see few major catalysts in the short term, with the final investment decision (FID) for the Neptun project not expected until 2018E. Prior to the secondary offering in 2016, we believed that liquidity was a major impediment to performance. Following that offering, however, the share price has risen 36%. Despite this, we believe the company is still undervalued, given the low multiples and improving macro outlook. Reserves replacement a worry. Petrom has done a very good job of maintaining production, but has lagged in reserve replacement (RR) in recent years. Currently, only the Neptun project offers RR upside. Higher prices. Better prices for oil and gas should boost the company s results in 2017E and beyond. The recovery in gas prices, in particular, should to be beneficial as importers are deterred from the market. Liquidity. Since October, when the offering occurred, daily trading volume in the stock has been about five times higher than before. We believe this has led directly to a rerating of the stock. The existence of a GDR, though accounting for less than 1% of trades currently, should make it easier to attract new investors to the company. MSCI potential. In our view, the chances of Romania gaining reclassification to the Emerging Markets group has increased along with OMV Petrom s free float being boosted by the MSCI in December 2016, from 9% to 20%. Dividends. The return of the dividend, and at a level above that which we (and our peers) had expected, is a welcome development. Given the strength of the balance sheet, we see further opportunities for increased payouts. Lower costs. Operating costs/bbl have been trending down, as cost control became a major priority, due to lower prices. This improves leverage to rising prices, and strengthens cash flow. Resilient downstream. As the period of low oil prices has shown, Petrom s downstream segment provides a hedge against upstream problems. The refinery is complex, with incremental upgrade potential and its retail business is the market leader. Neptun Deep. This is be an investment that could transform the company s prospects, but its realisation is still years in the future. Expected events Buy Maintained Price: RON Price target: RON (From RON 0.302) 1Q17 results 11 May Q17 results 10 August 2017 Key data Market cap USD 3,374m Free float 28.3% Shares outstanding 56,644m Major shareholder OMV 51% Reuters code SNPP.BX Bloomberg code SNP.RO Price performance 52-w range w performance 29% Relative performance 2% OMV Petrom 12M share price performance SNP RO Equity BET Index rebase EQUITY RESEARCH Sales EBITDA EBIT Net income EPS P/E P/CF P/BV EV/EBITDA ROCE DPS Div yield RON m RON m RON m RON m RON x x x x % RON % ,541 8,144 3,338 2, % % ,145 6, % % ,247 4,932 1,469 1, % % 2017E 18,436 5,844 2,484 2, % % 2018E 18,342 6,040 2,675 2, % % 2019E 19,193 6,366 2,996 2, % % Analysts: Jonathan Lamb, Lucian Albulescu, Ondrej Slama London: jonathan.lamb@wood.com, lucian.albulescu@wood.cz Website:

28 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Company snapshot BUY, PT RON OMV Petrom BUY SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker SNP RO Petrom, majority-owned (51%) by OMV, is an integrated oil&gas company in Romania, with some activity in 0.32 Closing price (RON) Kazakhstan and the Balkans. It produces c. 180,000 boepd oil&gas (172,000 boepd in Romania) and is physically 0.30 integrated with refining (Petrobrazi, with 4.5m tpa capacity) to best monetise its oil. Petrom has a filling station Price target (RON) network of 777 sites (548 in Romania with c. 38% market share). Petrom E&P operates in a fixed fiscal regime until 0.28 Upside to PT 17.6% the end of 2015 with a benign royalty of c.7%. It has mature fields with an annual base-line decline rate of c.5-10%, 0.26 Shares outstanding (m) 56,644 on our estimates. Heavy capex is aimed at reducing the decline rate and achieving a 50% RRR. Petrom made a 0.24 MCAP (USD m) 3,374 major off-shore gas discovery in the Black Sea in 2012 with Exxon. While the oil market is liberalised, Romania used 0.22 to regulate gas prices until The natgas price deregulation is to be completed in The key risks relate to Free float 28.3% the oil macro, politics and regulation (gas prices, royalties and taxes), geology (reservoir quality) ADTV (USD m) Week Range (RON) SNP RO Equity BET Index rebased RATIOS PER SHARE RATIOS E 2018E 2019E FINANCIAL RATIOS E 2018E 2019E EPS (0.012) Working capital to sales, days 13.7x 23.1x 28.2x 22.3x 21.1x 20.7x CEPS Capex/depreciation 1.9x 1.0x 0.7x 1.1x 1.3x 1.4x BVPS Capex/net fixed assets 0.2x 0.1x 0.1x 0.1x 0.1x 0.1x DPS Op. cash flow/capex 1.1x 1.4x 1.8x 1.5x 1.3x 1.3x EBITDA margin 37.8% 34.3% 30.4% 31.7% 34.4% 34.7% VALUATION RATIOS E 2018E 2019E EBIT margin 15.5% -2.9% 9.0% 13.5% 14.6% 15.6% P/E 8.1x n.m. 16.4x 8.2x 7.6x 6.8x Pre-tax margin 13.5% -4.0% 7.8% 13.3% 14.5% 15.6% P/CF 2.5x 3.2x 3.8x 3.1x 3.0x 2.8x Net margin 9.7% -3.8% 6.4% 11.3% 12.2% 13.1% P/BV 0.6x 0.7x 0.6x 0.6x 0.6x 0.6x ROE 7.8% -2.7% 3.9% 7.5% 7.6% 8.2% EV/EBITDA 3.2x 4.2x 5.0x 4.1x 3.9x 3.6x ROCE (avg) 5.5% -1.9% 2.9% 5.7% 6.0% 6.5% EV/Sales 1.2x 1.4x 1.5x 1.3x 1.3x 1.2x Net debt/ebitda 7.3% 15.9% -9.0% -25.3% -30.7% -32.3% EV/EBIT 5.1x (32.2)x 11.6x 6.9x 6.4x 5.7x Cash flow from ops, RON m 6,830 5,283 4,454 5,473 5,679 5,990 EV, RON m 25,824 26,188 24,752 23,719 23,344 23,142 FCF, RON m 1, ,559 1,853 1,319 1,230 FCF yield 6.9% 1.9% 9.1% 10.9% 7.7% 7.2% Dividend yield 3.7% 0.0% 5.0% 5.6% 6.0% 6.8% COMPANY FINANCIALS INCOME STATEMENT, RON m E 2018E 2019E BALANCE SHEET, RON m E 2018E 2019E Net Sales 21,541 18,145 16,247 18,436 18,342 19,193 Cash & cash equivalents 1, ,996 2,829 3,104 3,206 EBITDA 8,144 6,231 4,932 5,844 6,040 6,366 Accounts receivable 1,424 1,318 1,540 1,553 1,457 1,472 Depreciation 3,344 3,947 3,566 3,360 3,400 3,501 Inventories 2,250 1,965 1,950 1,874 1,910 1,998 EBIT 3,338 (530) 1,469 2,484 2,675 2,996 Other CA EBIT by segments Total current assets 5,868 4,980 6,012 6,783 6,997 7,203 Exploration & Production 3,832-1, ,342 1,333 1,636 Long-term investments 2,192 2,628 2,593 2,593 2,593 2,593 Downstream ,208 1,299 1,141 1,365 1,422 PP&E 32,290 29,278 28,326 28,586 29,546 30,805 Corporate & Other Intangibles 1,657 2,430 2,536 2,536 2,536 2,536 Net financials Other non-current assets 1,104 1,684 1,675 1,675 1,675 1,675 Associates contribution Total fixed assets 37,243 36,020 35,129 35,389 36,349 37,609 Pre-tax profit 2,909 (726) 1,265 2,454 2,660 2,996 Total assets 43,125 41,118 41,414 42,445 43,619 45,084 Income tax Short-term debt Minority interest Accounts payable 2,899 2,318 2,290 2,292 2,291 2,368 Net profit 2,100 (690) 1,038 2,086 2,235 2,516 Total current liabilities 6,160 5,038 4,485 4,479 4,478 4,555 Long-term debt 1,589 1,424 1, CASH FLOW, RON m E 2018E 2019E Provisions 7,538 8,180 8,148 8,148 8,148 8,148 CF from Operations 6,830 5,283 4,454 5,473 5,679 5,990 Other non-current liabilities Thereof depreciation 4,806 6,761 3,464 3,360 3,400 3,501 Total LT liabilities 9,960 10,382 10,087 9,887 9,787 9,687 Thereof changes in w/c Minority interest (36) (55) (63) (63) (63) (63) CF from Investments -5,658-4,953-2,896-3,620-4,360-4,760 Total shareholders' equity 27,005 25,688 26,706 27,942 29,218 30,706 Dividends -1, ,028 Total liab. & equity 43,125 41,118 41,414 42,445 43,619 45,084 Net equity issues Net Debt (446) (1,479) (1,854) (2,056) Change in Net debt , Net Working Capital ,200 1,135 1,076 1,103 OPERATIONS E 2018E 2019E MACRO ASSUMPTIONS E 2018E 2019E Total production (m boe) RON/USD avg Total production (boepd) Brent oil price, USD/bbl growth, % -1.0% -2.7% -2.2% -2.0% -2.0% Urals/Brent differential, USD/bbl Liquids production, bpd Indicator Refining Margin Natgas production, boepd Refinery throughput, kt 4,010 4,180 4,220 4,200 4,123 4,123 Filling stations Profitability E&P EBITDA/bbl, USD R&M EBITDA/bbl, reported, USD PROFITABILITY TRENDS 9,000 8,000 7,000 6,000 5,000 4,000 3,000 EBITDA EBITDA margin E 2018E 2019E E&P EBITDA/bbl, USD R&M EBITDA/bbl, reported, USD E 2018E 2019E OMV Petrom 28 WOOD & Company

29 Investment case Higher oil and gas prices, improved cost control. At the beginning of 2016, oil and gas prices were below Petrom s breakeven level. However, it has since successfully reduced its operating expenses from the peak of USD 18.7/bbl in 2Q14 to USD 11.8/bbl in 4Q16, a 37% decline. As a result, even with a conservative set of expectations, we believe that future prices should remain well above its new breakeven price, which we believe to be about USD 35/bbl. Opex per barrel (USD) Q/14 2Q/14 3Q/14 4Q/14 1Q/15 2Q/15 3Q/15 4Q/15 1Q/16 2Q/16 3Q/16 4Q/16 Source: OMV Petrom, WOOD Research Improved liquidity. Back in 2014, Fondul Proprietatea announced that it wanted to reduce its stake in Petrom, which created an overhang in the stock and had a negative effect on liquidity. The SPO in 2016 increased the free float from 9% to about 15%, removed the overhang, and improved the liquidity. For the four months prior to the 2016 SPO, Petrom s daily turnover was RON 670,000, which increased to an average of RON 3.2m in the four months since (not including October), and the stock has risen 24%. We do not expect these levels to be sustainable in the long term, but liquidity has nevertheless increased structurally post deal. Daily liquidity (RON m) Source: Bloomberg, WOOD Research Neptun Deep. The potential production volumes from Neptun Deep should find buyers in the European market, in our view. The development of the project would also solve the company s reserve replacement and production decline problems for the next few years. Management states that the FID should be made in 2018E. We are confident that the project should go ahead as planned, but have yet to include the value of the project in our models, given that the FID is still a year away. Entering the European market. Once the pipeline connections are built and the Neptun project is completed, Petrom should be able to enter the European market, which would provide flexibility in its business model, as well as better growth prospects. Dividends. After a hiatus in 2016, the company should once again pay a dividend, from the 2016 earnings. Its proposed DPS of RON is above both our expectations and the market s, and would give the company a dividend yield of 5.2%. The Polyfuel project. This new, small downstream project was announced recently, and should add the capability to convert 50,000tpa of LPG into gasoline and diesel to the refinery. We believe this should add about USD 20 to the refining margin. The project is budgeted to cost EUR 60m and be completed in early-2019e, and illustrates, to us, that the company has not run out of ideas in downstream. OMV Petrom 29 WOOD & Company

30 Valuation DCF OMV Petrom: 10-year DCF Our valuation for Petrom is derived using a 10-year DCF, with a zero terminal growth rate for the downstream business and -3% for upstream. We calculate a 12-month price target (PT) of RON 0.361, offering upside of 18%. RONm 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Downstream 1,901 2,079 2,063 2,092 2,118 2,149 2,181 2,214 2,247 2,277 Upstream 3,942 3,910 4,252 4,390 4,504 4,655 4,791 4,936 5,082 5,174 Total EBITDA 5,844 5,990 6,314 6,482 6,623 6,805 6,972 7,150 7,330 7,451 Taxes Capex 3,620 4,360 4,760 4,838 4,918 4,999 5,081 5,166 5,252 5,340 Change in WC FCF 1,790 1,231 1,083 1,178 1,254 1,332 1,409 1,491 1,556 1,589 PV of FCF 1,641 1, Source: WOOD Research WOOD vs. the consensus OMV Petrom: DCF summary and WACC calculation SUM of PV 8,845 Risk-free rate 4.5% PV of TV 9,291 ERP 4.5% Levered beta 1.10 Total EV 18,137 Cost of equity 9.5% Net debt/cash 446 Tax-rate 16.0% Equity value 18,582 After-tax cost of debt 5.5% Per share (RON) % of equity 90.0% % of debt 10.0% 12M PT (RON) WACC 9.1% Source: WOOD Research Ratios At current prices, OMV Petrom trades at P/E ratios of 8.2x for 2017E and 7.6x for 2018E, on our estimates, vs. 10.1x and 9.2x for its European peer group, on WOOD/consensus estimates. On an EV/EBITDA, the company s ratios are 4.1x for 2017E and 3.8x for 2018E, on our estimates, compared with 4.6x and 4.2x for its peer group. On these metrics, Petrom looks undervalued, in our view. OMV Petrom: valuation ratios E 2017E 2018E 2019E 2020E P/E P/CF P/BV EV/EBITDA EV/CE EV/sales EV/EBIT FCF, RONm 1, ,559 1,853 1,919 1,152 1,209 FCF yield 7.1% 2.0% 9.1% 10.9% 11.3% 6.8% 7.1% Dividend yield 3.8% 0.0% 5.0% 5.6% 6.0% 6.8% 6.7% Source: WOOD Research WOOD vs. the consensus We are roughly in line with the consensus on EBITDA and EBIT for both 2017E and 2018E, but are a little above for 2019E. The figures are based on a small number of forecasts, however, and may not be up to date, which is almost certainly the case for the 2019E net profit expectations, where we are considerably higher than the consensus. RONm Revenues EBITDA EBIT Net profit 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E WOOD Research 18,436 18,342 19,193 5,844 6,040 6,366 2,484 2,675 2,996 2,086 2,235 2,516 Consensus 17,578 18,053 18,377 6,024 6,364 5,855 2,393 2,766 2,833 2,420 2,329 1,608 % difference 4.9% 1.6% 4.4% -3.0% -5.1% 8.7% 3.8% -3.3% 5.8% -13.8% -4.0% 56.4% Source: Bloomberg, WOOD Research OMV Petrom 30 WOOD & Company

31 Company background OMV Petrom is the largest oil and gas group in south-east Europe, with activities in upstream, downstream gas and downstream oil. It accounts for almost all crude oil production in Romania, and supplies around half of the internal gas production. OMV Petrom operates 239 commercial oil and gas fields in Romania, from which a combined volume of kboe/d was produced in OMV Petrom supplies gas through the natural gas division. Its annual oil and gas production is c.66m boe (mboe). The company also operates in the Caspian region, specifically Kazakhstan. As of 31 December 2015, the total proved oil and gas reserves in OMV Petrom Group s portfolio amounted to 582mboe, of which Romania represented 558mboe; while proved and probable oil and gas reserves amounted to 977mboe, of which Romania represented 930mboe. OMV Petrom processes crude at the Petrobrazi refinery, near Ploiesti, with refining capacity of 4.5mtpa. The refinery underwent a EUR 600m modernisation programme from , allowing it to process all of OMV Petrom s Romanian crude production, while improving energy efficiency and product yields. OMV Petrom is also present in the distribution market for oil products in Romania, the Republic of Moldova, Bulgaria and Serbia, through a network of c.780 filling stations, operated under two brands, Petrom and OMV. Ownership structure OMV, Austria s largest listed industrial company, holds a 51.0% share in Petrom. The Romanian state, via the Ministry of Economy, holds another 20.6%, Fondul Proprietatea (FP) holds 12.6% and 15.8% is free float on the Bucharest Stock Exchange. We expect to see further reductions in FP s stake, resulting in increases in free float, although there is a 12-month lock-up period following the recent SPO. OMV Petrom: shareholder structure Free Float 15.8% Fondul 12.6% OMV 51.0% Romanian State 20.6% Source: OMV Petrom, WOOD Research Company history Petrom was created from a number of companies in 1997, as the national oil company of Romania. In 2004, it was privatised and 51% of the shares were sold to OMV. The Arpechim refinery was closed in 2011 and a major upgrade of the Petrobrazi refinery was completed in In recent years, its most important hydrocarbon discovery was made in the Neptun Block of the Black Sea in Timeline 1997 Company Founded 2011 Arpechim Refinery closed 2014 Petrobrazi Refinery upgrade Completed 2004 OMV acquired 51% of Petrom 2012 Gas discovered in Neptun Block Source: OMV Petrom, WOOD Research In 2016, FP sold 6.4% of the company s shares in an SPO, increasing the free float to 16%. A GDR was also issued as part of the offering. OMV Petrom 31 WOOD & Company

32 Upstream operations The majority of the company s production comes from onshore oil and gas fields, many of which have been in operation for decades. These are mature and declining, and slowing this decline and maximising the recovery rates are the core activity in this market. It also has opportunities offshore and at deeper levels onshore. Its two major projects are currently Totea and Lebada, while Neptun is a potentially transformational project that may be undertaken in the longer term. Totea Deep Totea Deep is one of the most important onshore gas discoveries in Romania in recent years. Its three producing wells are the largest in OMV Petrom s portfolio and have significantly contributed to mitigating the production decline of its mature gas fields in the area. After the successful result of the 4539 Totea exploration well in 2011, an investment programme of c.eur 200m was started. In 2015, OMV Petrom continued to invest in optimising the output of the Totea Deep wells by performing workovers and debottlenecking surface facilities in order to be able to increase production rates to average daily production of 15kboe in The success of the Totea Deep development has highlighted the upside potential of the portfolio for new discoveries in deep layers through seismic and deep drilling technology. Lebada Est The field redevelopment project is aimed at optimising the exploitation value of Lebada Est by upgrading the existing gas compression system within the platform limits, in order to accommodate optimum non-associated gas production in parallel to the asset s associated gas for the next years. The project progressed according to plan and the first stage of execution was successfully completed in November 2015, consisting of increasing the low-pressure compression capacity. The remaining scope includes upgrading the non-associated gas compression system and was finalised in Neptun Block (deep water sector) The Neptun Block deep water sector covers an area of approximately 7,500km 2 in water depths ranging from 100-1,700 metres. In November 2008, ExxonMobil Exploration and Production Romania Limited and OMV Petrom signed an agreement for the former to acquire a 50% interest in the deep water sector of the Neptun Block. In 2012, ExxonMobil and OMV Petrom announced that the Domino-1 exploration well, located 170km offshore in water about 1,000 meters deep, had encountered natural gas. The field contains between 1.5tcf and 3tcf, or m boe. Kazakhstan In Kazakhstan, OMV Petrom holds development and production licences for the TOC fields (Tasbulat, Turkmenoi, Aktas) and Komsomolskoe. In 2014, its average oil and gas production in Kazakhstan was 8.9kboe/d. Downstream OMV Petrom processes crude at its Petrobrazi refinery, near Ploiesti, with a refining capacity of 4.5mtpa. The refinery has a Nelson Complexity of 11.4, making it one of the more complex in the region. It produces 34% gasoline and 45% middle distillates, with only 15% heavy products. Product yields HFO, 8% Petroleum coke, 7% LPG total, 6% Gasoline, 34% Kerosene/Jet fuel, 5% Diesel, 40% Source: Company data, WOOD Research OMV Petrom 32 WOOD & Company