Petrom S.A. – Benchmarking with Investment Grade Companies

Petrom S.A. –Benchmarking with Investment Grade Companies

Sorana BaciuDirector Corporate Development and Investor Relations

November 13, 2008 – TBLI Conference Europe 2008, Amsterdam

2 Petrom S.A. – Benchmarking with investment grade companies

Presentation outline

The Romanian Macro EnvironmentThe Romanian Macro Environment

Petrom in Romania Petrom in Romania

Petrom’s Role in Sustainable DevelopmentPetrom’s Role in Sustainable Development

A New Way of Looking at ThingsA New Way of Looking at Things


Romanian macro environment:Economic growth to continue despite volatility

► EU member since 2007

► Continuous economic growth; 8.6% in 1H/08

► Large inflow of EU funds (EUR 33 bn estimated by 2013 i.e. >25% of 2007 GDP)

► Romanian market risk Perceived to be relatively high due

to the large C/A deficit and scarcity of global credit

Low level of public debt; relatively small budget deficits

Volatile FX environment; Inflationary pressures still remain

► Reform process supported by EU accession and all parties aligned

► Current government has only 20% of electoral support; elections in November 2008 Sources: EC Spring Economic Forecast, Eurostat and Petrom

1

0

4

8

12

16

Jan. 05 Jul. 05 Jan. 06 Jul. 06 Jan. 07 Jul. 07 Jan. 08EU-27 Romanian CPI Romanian PPI

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010

0

40

80

120

160

200

GDP in EUR bn (RHS) EU-27 Romania

Romanian and EU-27 GDP development

Romanian and EU-27 inflation rates in %


Sustainable Development in Romania

Romania has to overcome the economic and social disparities with the other EU members, and also to assimilate and implement the principles and the practices of sustainable development in the context of globalization

Progress in recent years, however the economy is still based on intensive consumption of resources, with a natural capital affected by the risk of irreversible deteriorations

An updated version of the National Strategy on Sustainable Development, in line with the objectives set by EU, currently under development








Petrom has a high degree of physical integration

Exploration and Production

Refining and Marketing

Gas and Power

► 4.7 mn t oil production► 5.8 bcm gas

production► 894 mn boe P1

reserves

5.9 mn t crude oil processed

807 filling stations 4.6 mn t marketing sales

5.3 bcm gas sales volumes

860 MW power plant planned

All figures from 2007


Continuous financial performance

EUR mn 2005 2006 2007 6m/08Turnover 2,972 3,715 3,689 2,254

EBITDA 767 1,022 934 700

EBIT 520 788 590 509Net income 391 649 534 453

Net cash generated from operating activities 755 874 688 n/aInvestments 309 834 1,147 922Employees at the end of period 43,546 32,837 26,397 34,120

•All P&L figures according to RAS, translated from RON to EUR at avg exch rate •All BS figures according to RAS, translated from RON to EUR at end year exch rate


Privatization in 2004 was critical for competitiveness and sustainable development

Challenges prior to privatization

Restructuring and modernization

Current position

Increasing efficiency and competitiveness in all business segmentsImproved processes and safer operationsImproved profitabilityImproved compliance and HSE standardsConsolidated position in the domestic marketExpansion into the international marketDiversification of value chain

Comprehensive and focused strategy Significant investmentsState-of-the-art systems: Petrom Solutions, SAPIntegration into OMV – transfer of know-howImproved management structureAcquisitions and growth: Shell Gas, Ring Oil, OMV and MOL retail stations, Petromservice activitiesSustainable development: Power, Future Energy Fund

Obsolete assetsOutdated equipmentOperational inefficiencyLack of ITUnderinvestmentBureaucracyExcessive regionalizationOverstaffingMassive HSE deficitsGovernment interference


Petrom: Significant economic influence in Romania

Substantial impact on other sectorsof the economy (over 5,600 suppliers)

3.1% of Romanian gross fixedcapital formation

Employment

Approx. 27,000 employed by Petrom SA(total maintained employment of 90,000 = 2.2% of Romania’s employment)

Capital investments

Support of economic growth

Petrom is the largest Romanian company by:

Turnover and profit No.of employees Stock market capitalization Contributions to the state budget

Petrom sales to GDP ratio 3.8% (total 7.8% including indirect effect)

Government budgetcontributions

11.7 % direct contribution to state budget (RON 5.7 bn)

Output

Data as of December 31, 2007 and referring to Petrom SA


Petrom - Role Model Company in Romania

►Performance journey►Management commitment►Size and impact on the Romanian economy

We have to lead the way towards sustainable development in Romania








Petrom – the road towards corporate sustainability

Corporate GovernanceCodes of Conduct and

ComplianceStakeholders dialoguePetrom Future Energy

Fund

Triple Bottom Line

Energy efficiency investments

Brazi Power PlantPetrom Future Energy

FundCorporate Social

Responsibility

Corporate Social Responsibility

Health and SafetyHuman Capital

Development

EconomicEconomic EnvironmentEnvironment Social Social


Questions 1:

What is the relation between the corporate governance and the

sustainability strategy of a company?


First things first:Improved corporate governance in Petrom

Complex current ownership structure

► Property Fund (state-owned) to be listed on BSE

► 8% of Petrom to be sold to employees by AVAS (state-owned)

No golden share Privatization agreement provides

for certain shareholder rights of the Romanian state

Dual management system (Supervisory Board with 3 state shareholding representatives)

Improved stakeholders relationship Management focus on core businesses, divestment of non core assets Financial discipline

Free float6.21%

EBRD 2.03%

Property Fund

20.11%

AVAS 20.64%

OMV 51.01%

Triple Bottom Line

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Petrom corporate governance structures

SupervisoryBoard

9 Members

Executive Board

7 Members

GeneralShareholders

MeetingOne Share – One Vote

Reports

•Authorized to convene meetings

•Reports

•For

mally app

rove

s

acts

ann

ually

•Formally approves

acts annually


•Reports

•Appoints members•Supervises managementSupervisory

Board9 Members

Executive Board

7 Members

GeneralShareholders

MeetingOne Share – One Vote

Reports


•Reports

•For

mally app

rove

s

acts

ann

ually

•Formally approves

acts annually


•Reports

•Appoints members•Supervises management

Elects Supervisory BoardDecides upon capital measures and dividendsReleases Articles of Association

Appoints the Executive BoardControls the Executive Board Supports the Executive Board in its decisionsDecides upon conflicts of interests

Determines the strategy Directs the businessDetermines structure and organizationImplements corporate regulations and reporting systems Actively meets public relations demandsPrepares meetings of supervisory board and submits reportsInforms and negotiates with representatives of the work force

Triple Bottom Line

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Corporate Governance: Open communication to investors – the premises for a liquid capital marketPetrom provides ad hoc and regular information on financial and non-financial topics:

► Company strategy► Directors dealings in company’s

securities (shares, bonds, derivatives, etc.)

► Financial situation (according to IFRS etc)

► Conflicts of interests – related party transactions

► External mandates/functions► Independence and its criteria for

supervisory board► Social performance report► HSE performance and systems

Triple Bottom Line

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Code of Conduct – living our values

Petrom Corporate Governance System is based on:

► Company values: Pioneering, Professionalism, Partnership

► Own statutory requirements► UN Global Compact

Framework, by the adherence to the OMV Group Code of Conduct

► Austrian Corporate Governance Code

Petrom actively participates in adopting a

Corporate Governance Code in Romania

Triple Bottom Line

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Dedicated resources to promote future energy

►Dedicated team in Petrom with clear tasks regarding the identification and the financial project support

►Strong partnership with OMV Future Energy Fund

►Main directions of actions: ► Renewable energy (e.g. geothermal, wind, solar, biomass)► Reduction of GHG (e.g. carbon capture and storage

combined with enhanced oil recovery)► Energy efficiency (e.g. nanotechnology)

Green light for five projects: geothermal potential in Romania, CO2 capture combined with EOR, nanotechnology, low energy building, biogas

Triple Bottom Line

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Corporate social responsibility – the core of our sustainability

► Main goal: Become a responsible company that acts as a role model in Romania

► CSR strategy aligned to business strategy, embedding the corporate vision, values and objectives

► Management support and involvement

►Budget: approx. around EUR 20 m during 2006-2008

Triple Bottom Line

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Highest commitment for corporate responsibility projects in Romania


Improving health and safety

Total number of lost working days incidents (LWDI) and fatality incidents for Petrom and contractors, 2005 - 2007

50

50

31

3

6

3

62

47

49

7

7

5

0 20 40 60 80 100 120 140

2005

2006

2007

Petrom LWDI Petrom fatality Contractor LWDI Contractor fatality

Focus on safety (personnel and operations)

► Personal protection equipment: 90% changed over last 3 years

Change of mentality 300,000 hours on HSE

training and campaigns in 2007

Compliance: Investments, integrated pollution prevention and control, environmental management accounting, Annex P

Carbon management and CO2 trading: Challenge and opportunity

Triple Bottom Line

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Developing an efficient organization

► Redefine corporate culture:• Develop and implement company

value: Pioneering, Professionalism, Partnership

• Code of conduct

► Manage change project: • Increase cooperation across the

businesses and consolidate change• Define matrix management principles

followed by successful implementation

► HR - staff and management:• Further initiate and implement

development programs (focus on local managers);

• Programs to attract and retain talent• Significant training budget

Triple Bottom Line

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Achieving potential and securing the future

Security of supply SustainabilityCompetitiveness

Stabilize and increase production

Step up exploration efforts

Regional E&P expansion Expand gas storage

capacities Access to international

gas markets (Nabucco) High Romanian market

coverage with high quality oil products

Significant investments for restructuring and modernization

Efficiency potential Competitive refinery EU quality standards for

products and services Improved HSE

performance

Energy efficiency Closing the

performance gap of refineries

Biofuels blend Gas-fired power plant Entry in renewable

energy market/ leverage large asset base

Reduce carbon intensity


Questions 2 & 3

Is sustainability an investing criterion for the companies listed

on less developed capital markets?

Is a Sustainability Index possible at BSE?


Capital markets reward sustainability

Petrom fact sheetMarket capitalization on October 30th, 2008: RON 9.5 bn (EUR 2.6 bn), 18.2% of BSE market capitalization; Closing price on October 30th, 2008: RON 0.1670 (67% down YoY)Highest market capitalization: EUR 10.3 bn (February 1st, 2006)20

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PETROM BET

Q4/07 Q1/08 Q2/08 Q3/08 Oct. 08

John Prestbo, President of Dow Jones Indexes: “Companies pursuing growth in the triple bottom line tend to display superior market performance with favourable risk return profiles”

Petrom shares and BET index evolution

(Dec. 2007 – Oct. 2008)



The Romanian macro environmentThe Romanian macro environment





Our journey has just started

Thank you!

Economy & Finance

Petrom S.A. – Benchmarking with Investment Grade Companies