Conpet. Hold. Dividends in the pipeline EQUITY RESEARCH. Utilities, Romania 29 June Maintained

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1 Utilities, Romania 29 June 2017 Conpet Dividends in the pipeline Hold Maintained Price: RON 105.4* Price target: RON (From RON 105.3) *adjusted for declared dividend We have updated our valuation for Conpet to account for the latest dividend distribution (RON 16.6/share) as the stock is trading ex-dividend as of 29 June. We also update our estimates to incorporate further potential dividend payments from the reserves after the government passed an emergency ordinance to facilitate such payments in the future. As a consequence, we have now also eliminated the discount applied to the cash position the company holds (from 40% before) and increased our dividend estimates going forward. On the other hand, the changes in our earnings estimates are only marginal (<10%). As a result of the changes in our dividend estimates, the discount applied to the cash and the adjustments for the dividend, for which the record date has passed, we increase our price target (PT) for Conpet by 2.6% to RON 108.0/share, implying 2.4% upside, and we maintain our HOLD rating. Stable earnings profile. We see the earnings as remaining stable over the coming years, given that a decline in volumes is likely to be offset by a cut in expenses, as well as some adjustments to tariffs in line with inflation. Transport volumes are likely to have reached a peak in 2016, in our view, as the Lukoil refinery was working at full capacity. We expect a decline in 2017E, especially on the imports side, where, according to the contracts signed with Lukoil, the decline is likely to be in the range of 10-15%. However, we believe that the company has some scope to cut other costs too (third parties, development quotas), and thus halt the drop in profit. Special dividend distribution. Conpet held a total of RON 437m in cash and equivalents at the end of 1Q17. Out of this, RON 69.8m will be distributed as a regular dividend and RON 73.7m as a special dividend. This comes after the government changed the legislation to make dividend payments from the reserves easier. While the cash resulting from the modernisation quota cannot be distributed, we estimate that Conpet can still pay a special dividend from the regular reserves in the coming years. Dependency on a small number of clients. Petrom and Lukoil being Conpet s two major clients creates some risks related to its financials. While the transport of oil via pipelines is definitely cheaper than by other means, the volumes contracted by Petrom and Lukoil depend on market conditions and the domestic transport is likely to decline due to Petrom s mature field profiles. Still, we believe that a cut in expenses should offset the decline in volumes. Risk of dilution with land plots. The risk of the dilution of the minority shareholders with the value of the land plots held by the state (valued at RON 54m) is still present. Even if the decision did not reach the necessary shareholders quorum, a potential change in the legislation is being debated currently in the senate and this could facilitate the process. We have incorporated the dilution into our forecasts, at 5%. Fairly valued. On a 2018E EV/EBITDA (adjusted for the development quota) of 4.5x, Conpet trades at a 32% discount vs. its peers. At the same time, given our forecast of a special dividend, the dividend yield may reach 9%, more than double its peers average. On the other hand, given the high cash position, which produces a low yield, its 2018E P/E of 13.2x is 14% above its peers. Expected events 2Q17 results Results conference call Key data 10 August 11 August Market Cap RON 912m Free float 41% Shares outstanding 8.65m 3M ADTV EUR 75,000 Major shareholder RO State Bloomberg code COTE RO BET Index 8,168 Price Performance 52-w range RON w performance 63% Relative performance 36% Conpet 12M share price performance COTE RO BET Index EQUITY RESEARCH Year Sales Net profit Shares out EPS EPS P/E EV/EBITDA ROE DPS Dividend (RON m) (RON m) (m) (RON) growth (x) (x) (%) (RON) yield % % % % % % % % % 2017E % % % 2018E % % % 2019E % % % Analysts: Lucian Albulescu, CFA; Jonathan Lamb Prague: lucian.albulescu@wood.cz, jonathan.lamb@wood.com Website:

2 Contents Valuation... 3 Risks... 6 Financials... 7 Important disclosures... 9 Closing Prices as of 28 June 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//: Conpet 2 WOOD & Company

3 Valuation Our valuation for Conpet is based on an average of: i) our DCF calculations; and ii) a DDM valuation. As the company can more easily distribute the cash it holds as special dividends, we are not discounting the cash in the DCF valuation anymore. Still, as our dividend estimates for the next few years do not include distributing the entire cash position, the DDM valuation results in a lower price target than the DCF valuation, thus accounting for the delay in the distribution of cash, or that it may not all be distributed in the near term. Valuation summary Equity value (RON m) Per share (RON) 1. DCF DDM Average (50:50) Value of land plots that belong to the state Resulting price Adjusted with cost of equity for the next 12 months Current price Upside 2.4% Source: WOOD Research DCF assumptions: A risk free rate (RFR) of 4.5% (versus the current Romanian 10-years bond yield of 3.8% and the average of the past five years of 4.4%). An equity risk premium (ERP) of 4.5% and a beta of 1.1x. DCF valuation A terminal growth rate of 1.0%. 2017E 2018E 2019E 2020E EBIT Corporate tax rate [T] 16.0% 16.0% 16.0% 16.0% EBIT*(1-T)=NOPAT Depreciation & amortisation Development quota (net) Cash from working capital CAPEX [I] Unleveraged free cash flow [FCF] Discount factor Present value of FCFs [PV:FCF] Sum of [PV:FCF] 216 Long term FCF growth rate 1.0% Residual value at horizon (modernisation quota adjusted) 690 PV of residual value 503 Net cash 259 EV 978 Number of shares 8.66 Equity value per share Source: WOOD Research WACC calculation WACC E Beta 1.1 Risk free rate 4.50% Market premium 4.50% Cost of equity 9.45% Cost of debt pre tax 6.0% Marg. tax rate 16.0% Cost of debt after tax 5.0% Weight k(e) 100.0% Weight k(d) 0.0% WACC % 9.5% Source: WOOD Research Conpet 3 WOOD & Company

4 DDM assumptions We use a cost of equity of 9.45%, a 4.5% RFR, a 4.5% ERP and a beta of 1.1x. To forecast the dividends, we have applied a payout varying from 130% to 95% (in 2020E, at the end of our forecast period). A 1.0% terminal growth rate. DDM valuation 2018E 2019E 2020E 2021E Dividends Discount factor Present Value Sum 260 Long term FCF growth rate 1.0% Residual value at horizon 821 PV of residual value 578 EV 838 Number of shares 8.66 Value per share 96.8 Source: WOOD Research Income statement: old vs. new (RON m) 2017E 2018E 2019E New Old Diff. New Old Diff. New Old Diff. Turnover % % % Domestic transport % % % Import % % % Modernisation quota % % % Total operating revenues % % % Total volumes transported (mt) % % % Personnel % % % Depreciation % % % Third parties % % % Royalties % % % Others % % % Modernization quota % % % Total operating expenses % % % EBITDA % % % EBIT % % % Financial profit 3 3 0% 3 3 0% 3 3 0% Pre-tax profit % % % Net profit % % % Dividends % % % Conpet 4 WOOD & Company

5 Conpet: peer comparisons Market cap P/E (x) EV/EBITDA (x) Div yield (%) Company Country (EUR) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Transgaz Sa Medias RO Transelectrica Sa RO Societatea Energetica Electr RO 1, Enagas Sa SP 6, Snam Spa IT 13, Engie FR 33, Red Electrica Corporacion Sa SP 10, Terna Spa IT 9, Elia System Operator Sa/Nv BE 3, n.a Cez As CZ 8, E.On Se GE 18, PGE PD 5, Enea PD 1, PGNiG PD 8, Tauron PD 1, Rwe Ag GE 10, Energa Sa PD 1, Average Conpet discount/premium 13.4% 13.7% 14.3% -36.4% -31.6% -23.3% 137.6% 144.2% 63.2% Conpet 5 WOOD & Company

6 Risks Regulatory risk: we assess the regulatory risk as being high, as we believe that the regulatory framework is less complex and is obsolete versus that for other regulated monopolies, such as Transgaz or Transelectrica, leaving room for several interpretations and implying much higher dependency on the regulator's decision, which may directly influence the profit that Conpet can achieve in the future. Investments needed to maintain the system in an active fashion: the company might be subject to several investments needed in order to maintain the system as operational and in line with the environmental regulations. High dependency on a single client: the revenues related to the services performed for OMV Petrom represented close to 80% of the total revenues in Petrom's oil fields are mature and production is on a downward trend. We assess the dependency as high and representing a significant risk related to the future of Conpet. Political risk: Conpet is state-owned, with the state's decisions regarding the operation of the company affecting its profitability and financial position. While corporate governance practices (as defined by OUG 109/2011) have been implemented, there might still be misalignments between the interest of the minority shareholders and those of the state. Legal risks: the court of accounts has asked the company to increase the value of the share capital with some state-owned land plots that the company is using. The share capital can only be performed with the presence of shareholders holding more than 75% of the shares, a quorum that was not reached. As a consequence, the decision of the court of auditors could not be implemented. If implemented, the company would need to increase the share capital by RON 54m (the value of the land plots), representing 7% of the market cap. We have already adjusted our valuation with the value of the land plots. Low market liquidity: the average traded volumes over the past 12 months have been as low as EUR 50k per day, which creates a risk of higher price fluctuations. A switch from domestic system volumes to import volumes might cause a loss of margin: our assumptions are that the overall volume of oil processed in the country should not decline significantly; instead, the decline in the oil produced internally by OMV Petrom should be replaced with imports. However, currently, the profit on the import lines is lower than on the domestic pipelines, due mainly to the low capacity utilisation; however, once volumes increase, the economies of scale (as the costs are fixed, to some extent) could also help to improve margins. Lukoil can switch production to Burgas: according to company representatives, a significant increase in the tariffs charged to Lukoil for imports may not be possible as the company could switch production to the Burgas refinery. Oil Terminal tariffs influence import tariffs: the amounts paid by Lukoil for importing oil are dependent on both the transport tariffs charged by Conpet and the tariffs charged by Oil Terminal, which operates the discharge of oil from ships and loading into the pipelines. Conpet 6 WOOD & Company

7 Financials Income statement RON m E 2018E 2019E Turnover Domestic transport Import Modernisation quota Total operating revenues Total volumes transported (mt) Personnel Depreciation Third parties Royalties Others Modernisation quota Total operating expenses EBITDA EBIT Financial profit Pre-tax profit Net profit Dividends Balance sheet RON m E 2018E 2019E FIXED ASSETS CURRENT ASSETS Trade and other receivables Cash and bank balances TOTAL ASSETS EQUITY LONG TERM DEBT SHORT TERM DEBT Trade and other payables Other liabilities TOTAL EQUITY AND LIABILITIES Cash flow statement RONm E 2018E 2019E Pre-tax income Tax Depreciation & amortisation Other non-cash adjustments Changes in working capital Other adjustments Operating cash flow Purchase of fixed assets Investing cash flow Dividends, net Long-term debt issued (repaid) Financing cash flow CASH BALANCE CHANGES Beginning cash change in cash flow Ending cash Conpet 7 WOOD & Company

8 Ratios E 2018E 2019E Number of shares Price Net debt EPS (RON) EPS growth 61% 25% 13% -4% 1% 0% Dividend (RON m) DPS (RON) Payout ratio 102% 100% 201% 130% 130% 100% Dividend yield 11% 9% 16% 10% 10% 8% BVPS (RON) ROE 7% 8% 9% 9% 10% 10% PER (x) EV/EBITDA (x) EV/EBITDA (x) -adj for dev quota P/BV Conpet 8 WOOD & Company

9 Important disclosures This investment research is published by Wood & Company Financial Services, a.s. ( Wood & Co ) and/or one of its branches who are authorised and regulated by the CNB as Home State regulator and in Poland by the KNF, in Slovakia by the NBS, in Italy by the CONSOB and in the UK by the FCA as Host State regulators. Wood s ratings and price targets history for Conpet Rating Price target 22/10/2015 HOLD 22/10/2015 RON /02/2017 RON /06/2017 RON Explanation of Ratings BUY: The stock is expected to generate total returns of over 15% during the next 12 months as measured by the target price. HOLD: The stock is expected to generate total returns of 0-15% during the next 12 months as measured by the target price. SELL: The stock is expected to generate a negative total return during the next 12 months as measured by the target price. RESTRICTED: Financial forecasts, and/or a rating and/or a target price is restricted from disclosure owing to Compliance or other regulatory/legal considerations such as a blackout period or a conflict of interest. NOT RATED: Suspension of rating after 30 consecutive weekdays where the current price vis-à-vis the target price has been out of the range dictated by the current BUY/HOLD/SELL rating. COVERAGE IN TRANSITION: Due to changes in the Research team, the disclosure of a stock s rating and/or target price and/or financial information are temporarily suspended. Equity Research Ratings (as of 29 June 2017) Buy Hold Sell Restricted Not rated Coverage in transition Equity Research Coverage 46% 46% 7% N.A. N.A.% 1% IB Clients 1% 1% N.A. N.A. N.A. N.A. Securities Prices Prices are taken as of the previous day s close on the home market unless otherwise stated. Valuation & Risks Analysis of specific risks to set stock target prices highlighted in our investment case(s) are outlined throughout the report. For details of methodologies used to determine our price targets and risks related to the achievement of the targets referred to in the main body of the report or at in the Section Corporate Governance or via the link Users should assume that the investment risks and valuation methodology in Daily news or flash notes not changing our estimates or ratings is as set out in the most recent substantive research note on that subject company and can be found on our website at Wood Research Disclosures (as of 29 June 2017) Company Disclosures Alior Bank 5 AmRest 5 Astarta 5 AT&S 5 Bogdanka 5 BRD 5 Bucharest Stock Exchange 5 BZ WBK 5 CA Immo 5 CCC 5 CD Projekt 5 CETV 5 CEZ 5 Ciech 5 Conpet 1 Cyfrowy Polsat 5 Dino 5 DO&CO 1, 5 Electrica 5 Enea 5 Energa 5 Erste Group Bank 5 Eurocash 5 Fortuna 5 S.C. Fondul Proprietatea S.A. 1, 4, 5 Getin Noble Bank 5 GTC 5 Handlowy 5 ING BSK 5 ITG 1, 3 Immofinanz 5 IPF 5 JSW 5 Kernel 5 KGHM 5 Komercni 5 Kruk 5 Lotos 5 LPP 5 mbank 5 MedLife 1, 2, 3 Millennium 5 MOL 5 MONETA Money Bank 1, 2, 3, 5 Netia 5 OMV 5 Orange PL 5 Pekao 5 PGE 5 PGNiG 5 Philip Morris 5 PKO BP 1, 2, 3, 5 PKN Orlen 5 PKP Cargo 5 PZU 5 RBI 5 RC2 4 Romgaz 5 SIF2 10 SNP OMV Petrom 3, 5 Stock Spirits 5 O2 CR 1, 4, 5 Banca Transilvania 5 Transelectrica 5 Transgaz 1, 5 Unipetrol 5 WSE 1 Warimpex 1, 5 # Description Conpet 9 WOOD & Company

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11 CONTACTS Czech Republic namesti Republiky 1079/1a Palladium Praha 1 Czech Republic Tel Fax Romania Metropolis Center Grigore Alexandrescu St Bucharest 1 Tel.: Research Co-Head of Research/ Head of Research Poland Marta Jezewska-Wasilewska marta.jezewska-wasilewska@wood.com Poland Skylight Zlote Tarasy Zlota Warszawa Poland Tel Fax Co-Head of Research/Head of Greek Research Alex Boulougouris alex.boulougouris@wood.com UK City Point, 15 th Floor 1 Ropemaker Street London EC2Y 9HT Tel Italy Head of Turkish Equity Research Oytun Altasli oytun.altasli@wood.com Via Vittor Pisani, Milan Italy Tel Macroeconomics Kristen Andrasko/ Sadiq Razak Co-Heads of Equities / kristen.andrasko@wood.com sadiq.razak@wood.com Bloomberg page WUCO Raffaella Tenconi raffaella.tenconi@wood.com Head of Consumer/Industrials Lukasz Wachelko lukasz.wachelko@wood.com Romania Lucian Albulescu lucian.albulescu@wood.com Utilities/Mining/Pharma Bram Buring bram.buring@wood.com Macroeconomics Leo Wang leo.wang@wood.com Energy Jonathan Lamb jonathan.lamb@wood.com Financials/Turkey Can Demir can.demir@wood.com Non-banks financials Jerzy Kosinski jerzy.kosinski@wood.com Metals/Mining Andy Jones andrew.jones@wood.com Real Estate Jakub Caithaml Consumer/Industrials Maciej Wardejn maciej.wardejn@wood.com Poland Pawel Wieprzowski pawel.wieprzowski@wood.com Poland Piotr Raciborski piotr.raciborski@wood.com Consumer/Industrials Gabriela Burdach gabriela.burdach@wood.com Ondrej Slama ondrej.slama@wood.com Jakub Mician jakub.mician@wood.com Sales Head of Sales Kristen Andrasko kristen.andrasko@wood.cz Jan Koch jan.koch@wood.com Piotr Kopec piotr.kopec@wood.com Ioana Pop ioana.pop@wood.com Vinay Ruparelia vinay.ruparelia@wood.com Grzegorz Skowronski grzegorz.skowronski@wood.com Jan Thomson jan.thomson@wood.com Jarek Tomczynski jarek.tomczynski@wood.com Kostas Tsigkourakos kostas.tsigkourakos@wood.com Markus Ulreich markus.ulreich@wood.com Tatiana Sarandinaki Enclave Capital in association with WOOD & Company tsarandinaki@wood-enclave.com Sales Trading and Execution Services Ashley Keep ashley.keep@wood.com Jennifer Ewing jennifer.ewing@wood.com Jan Jandak jan.jandak@wood.com Zuzana Mora zuzana.mora@wood.com Ermir Shkurti ermir.shkurti@wood.com Martin Stuchlik m.stuchlik2@wood.com Vladimir Vavra vladimir.vavra@wood.com RECENTLY PUBLISHED REPORTS Date Company/Sector Title Analyst 21/06/17 Ciech A notch better than before Maciej Wardejn, Lukasz Wachelko 16/06/17 CEE Macro A closer look at the tightening cycle Raffaella Tenconi, Leo Wang 09/06/17 Kernel New acquisition priced in already Maciej Wardejn, Gabriela Burdach 08/06/17 EME Strategy: MSCI 2017 Annual Market Review Romania: FM on the verge of EM Pawel Wieprzowski, Lucian Albulescu 07/06/17 Cyfrowy Polsat Not much upside left Piotr Raciborski, Bram Buring 07/06/17 Coca-Cola Bottlers Time to switch horses Jakub Mician, Lukasz Wachelko 06/06/17 Inter Cars Time to take the foot off the pedal Maciej Wardejn 02/06/17 The Rear-View Mirror CEE markets Greek equities shone in May 2017 Research Team 02/06/17 AmRest Ride the lightning Lukasz Wachelko, Jakub Mician Although the information contained in this report comes from sources Wood & Company believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.