Strictly Confidential

March 2014

UBSAlex Segal, Ilya Gladenko

Oil & GasSector aspects

1Crude oil prices evolution since 1861

Source: BP Statistical Review of World Energy 2013

2World oil production

World proved oil reserves

Source: BP Statistical Review 2013

World gas production

World proved gas reserves

Russias standing in the world Oil & Gas sector

Iran18.0%

Russia17.6%

Qatar13.4%

US4.5%

RoW37.2%

Turkmenistan9.3%

Venezuela17.8%

Saudi Arabia15.9%

Canada10.4%Iran

9.4%

Russia 5.2%

RoW41.2%

US 20.4%

Russia17.6%

Iran4.8%

Qatar4.7%

Canada4.6%

RoW48.0%

Saudi Arabia13.3%

Russia12.8%

US9.6%

China5.0%

Canada4.4%

RoW54.9%

Total: 187tcm Total: 1,700bn bbl

Total: 3,365bcm Total: 86mmbbld

3Russian Oil & Gas universekey provinces

West Siberiabasin

Volga-Urals basin

NorthCaucasus

basin

Timan-Pechorabasin

Precaspian basin

East Siberiabasin

Far East basin

Proved reserves by region

Source: The Ministry of Energy of Russia

West-Siberia59%

Volga-Urals14%

Timan-Pechora

8%

East-Siberia

7%

Offshore7%

Other5%

4Key industry playersThe industry is made up of several categories of players who participate in exploration and production for oil and natural gas

Integrateds Independent E&Ps

Pipeline

5100.4

74.7

43.936.7

27.8

19.813.7 11.7

0

20

40

60

80

100

120

(

U

S

$

b

n

)

Russian Oil & Gas key players

Market capitalisation Russian Oil & Gas sector performance rel. to Russia

Source: Bloomberg, UBS

6116

42

1711 9 8 6

20

20

40

60

80

100

120

140

(

b

n

b

o

e

)

Russian Oil & Gas key playersGazprom has the largest reserves base of which 91% is natural gas

9 74 77 9 77 78 100 100% of oil

Proved reserves Estimated crude oil reserves in Russia, (bn bbl)

Source: Company data, UBS

7Russian Oil & Gas key players

Hydrocarbon production Russian crude oil production

Source: Company data

9,362

4,000

2,120

1,429 1,198 1,097512 310

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

(

k

b

o

e

d

)

8Valuing oil companiesIntegratedsValuation in the integrated oil sector is a tricky issue

Market approach

Financial metrics

EV / EBITDA

EV / DACF

P / E

Dividends and FCF yield

Operational metrics

EV / Reserves

EV / Production

EV / Complex barrel

EV / Capacity

DCF

DCF analysis is both relative and subjective

Commonly used by analysts

Despite its faults, it has a value in helping to identify which companies deserve to trade at premium ratings relative to their peers

More flexible in terms of assumptions

9Trading performance

EV / EBITDA 2014E Sector performance

Source: Bloomberg

9.2

4.74.3

4.0

2.8 2.7 2.52.1

0

2

4

6

8

10

(

x

)

10

117.0103.3

95.081.9

66.059.3

40.3 34.7

0

20

40

60

80

100

120

140

(

U

S

$

/

b

o

e

)

6.6

3.7 3.4 3.32.9

2.52.1

1.1

0

2

4

6

8

(

U

S

$

/

b

o

e

)

Key operational multiples

EV / reserves

EV / production

Source: Company data, Bloomberg

11

Valuing oil companiesExploration and Production (E&P)Outside of the US, net asset value (NAV) is the dominant valuation approach

employed for the E&Ps. This is justified on at least three fronts

PSCs (production shares contracts) typically give the operator greater cash flow early in a fields life while costs are being recovered

as a result movements in near-term cash flow multiples are often not representative of the underlying health of the business but merely the maturity of the asset portfolio

E&Ps often have proportionately large development portfolios underpinning their medium term growth

given the length of the upstream industrys investment lifecycle, often these projects do not deliver cash flow during the forecast period however are clearly valuable - the NAV approach can capture this value

The NAV approach is able to attribute value to a companys exploration portfolio which consumes rather than produces cash flow in the short term, but in the longer term is often the key driver of value

12

There are three types of NAV used to value the E&Ps, each with a different attitude towards the value of a companys exploration portfolio

Core NAV Value of a companys producing fields and development projects and effectively values the current 2P reserve base

Add the PV of other sources of future revenue (such as tariff income), a charge for the running of the business, the PV of the current hedging portfolio and the net debt balance

Valuing oil companiesExploration and Production (E&P)

NAV types

Unrisked NAV Based on the (highly unlikely) assumption that every exploration well drilled yields a commercial discovery

Given the industrys historic exploration success rate of only 13% over the last ten years, this is an unrealistic assumption but is often used as a means of quantifying the upside potential on offer from a particular drilling programme

Risked NAV In order to capture the exploration potential, the risked NAV approach looks to risk the value of a prospect by the probability of the well being successful (high risk 010%, medium risk 1030%, low risk >30%)

The risked NAV however does capture the potential on offer on a risk adjusted basis and is typically the way the industry looks to value such uncertainty

The risked value of this exploration portfolio is then added to the core NAV to arrive at an overall valuation.

13

Collectively the E&Ps typically trade at a premium to core NAV but at a discount to the risked NAV demonstrating the markets willingness to pay at least something for the potential that exploration offers

Valuing oil companiesExploration and Production (E&P)

UK E&Ps aggregate market cap versus core and risked NAV

Source: Bloomberg, Wood Mackenzie, Lukoil, UBS estimates

14

Discount to NAV suggests significant valuation upside

Discount to NAV

Source: UBS Investment Research, FactSet, Company information

(66)

(49)(45)

(42)

(30) (30)

(19) (17)(15)

(12)

21

(75)

(50)

(25)

0

25

(

%

)

15

When performing sum-of-the-parts valuation we attempt to employ commonly used financial or physical multiples

Lukoil sum-of-the-parts valuation

Source: Bloomberg, Wood Mackenzie, Lukoil, UBS estimates

Sum-of-the-parts (SOTP)

Apply a valuation to proved reserves and know projects either by 1P or 2P reserves calculation or where it is possible on a project by project basis

Use an appropriate multiple, based on the location of the earnings

Specific multiple for each sub-sector (refining, sales and marketing)

16

How does typical reserves reports look like?

Source: Miller Lents

17

How does typical reserves reports look like?

Source: Miller Lents

18

Soviet Reserve Classification

Reserves types and reconciliationDespite the large differences in approach to determining reserves, the Russian and Western categories can be roughly reconciled

Explored / Commercial reservesA + B + 30% of C1

Geologically & geophysically examined Delineated by exploration & production Engineering data show recoverability Represented reserves in current production

AB

Reserve adjacent to A and B categories Geologically & geophysically evaluated Verified by mining drilling Engineering data show partial recoverability

(30% will shift to B and then A categories)

C130%

Probable or "P2"Incompletely defined reserves estimated to occur In known producing areas / extensions of endowed areas In undiscovered areas within known resource-bearing

geologic trends Recoverable under existing economic and operating

conditions

Prospective ReservesRemaining 70% of C1 + C2 + D1 + D2

As aboveC170%

Presume to exist, based on favourable geologic and geophysical data analogues to that of verified reserves

C2

Speculative reserves presumed to exit, based on geologic analogy to reference areas

Some will shift to "C2" category

D1

Speculative reserves presumed to exit, based on geologic analogy to reference areas

Less evaluated than "D1" Some will shift to "D1" category

D2

Western Reserve Classification

Possible or "P3"Inferred reserves estimated to occur In undiscovered areas analogous to other known resource-

bearing geologic trends Recoverable under existing economic and operating

conditions

Proved or "P1"Reserves which geological and engineering or drilling data demonstrate to be recoverable under existing economic and operating conditions

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Key assumptions

Brent (US$/bbl) 2014E 2015E 2016E 2017EDate of report

UBS 105.0 95.0 92.0 92.0 6-Feb-14

Deutsche Bank 97.5 100.0 100.0 27-Jan-14

Cannacord Genuity 104.0 98.0 104.6 24-Jan-14

Jefferies 108.0 100.0 100.0 23-Jan-14

Credit Suisse 101.8 97.5 95.0 95.0 23-Jan-14

RBC Capital Markets 103.0 102.0 102.0 102.0 23-Jan-14

Macquarie 112.0 115.8 116.0 19-Jan-14

JP Morgan 105.5 100.3 90.0 91.8 16-Jan-14

Societe Generale 107.0 105.0 112.0 114.5 15-Jan-14

Barclays 109.0 104.0 99.0 98.8 13-Jan-14

Morgan Stanley 108.8 102.9 97.1 10-Jan-14

BAML 105.0 95.0 95.0 95.8 8-Jan-14

Citi 97.5 92.5 99.9 103.1 6-Jan-14

Nomura 100.0 95.0 95.0 95.0 3-Jan-14

Broker average 105.0 101.6 100.2 98.7

Broker median 105.0 100.3 99.9 95.8

Oil price outlook

Source: Broker notes, Bloomberg

20

40

60

80

100

120

140

160

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

B

r

e

n

t

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/

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b

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Historical UBS forecastCurrent F. curve Jun-08 F. curve

Nominal terms with 2% LT inflation

Several oil price scenarios

Define Brent / Urals differential (usually US$1/bbl)

VAT is usually excluded

Forward curve

Summary assumptions

20

What is Netback price and netback parity?

Netback calculation

Urals priceTransportation

costs Export duty

Export price Domestic price

Netback parity

21

Profits tax (corporate income tax)

Value added tax (VAT)

Mineral extraction tax (MET)

Payments for the right to use subsurface resources (bonuses, rentals and fees)

Export duty

Customs and currency payments

Property tax

Withholding tax

Other corporate and local taxes (e.g., unified social tax, land tax, transport tax)

Fiscal regimesStandard fiscal regime (concession)Almost all oil and gas production licences are governed by the Concession type fiscal regime in Russia. Like many tax regimes around the world, it remains subject to regular change

22

Profits tax (corporate income tax)

Value added tax (VAT)

Mineral extraction tax (MET)

Payments for the right to use subsurface resources (bonuses, rentals and fees)

Cost oil

Profit oil

Export duty

Land / water area tax / rentals

Environmental impact charges

Payroll taxes (unified social tax)

There are a small number of PSCs signed by foreign investors (Sakhalin-1, Sakhalin-2 and Kharyaga)

Fiscal regimesStandard fiscal regime (PSC)

PCS mechanism to be inappropriate for use in the country and does not intend to award any new PSCs, with the possible

exception of cross-border projects such as Khvalynskoye in the Caspian Sea

23

Mineral Extraction Tax (MET)Oil

RR493/tonne in 2014, RR530/tonne in 2015 and RR559/tonne in 2016

C p = (P-15) * (R/261), where P is an average Urals price on Rotterdam and Mediterranean markets for the tax period. US$15/bbl is effectively the nontaxable threshold for a barrel of oil, R is an average RR/US$ exchange rate as set by the Central Bank of Russia for the tax period

C d = 3.8-(3.5 * N/V), where N is a cumulative oil production at the end of the calendar year preceding the year in which C d is applied, V is an initial recoverable reserves as determined by the Russian reserves classification (ABC1 + C2)

should N/V be less than 80%, then C d = 1 should N/V be equal to or greater than 80% then C d = 3.8-(3.5 * (N/V)) should N/V be greater than 100%, then C d = 0.3

R = 0.125 * V 3 +0.375, where V3 is the initial ABC1 + C2 recoverable reserves (the criteria is that fields must have initial reserves (ABC1 + C2) lower than five million tonnes and depletion less than 5% at 1 January 2012)

Oil MET rate

Price coefficient

Depletion coefficient

Decreasing coefficient

MET payable = oil MET rate * price coefficient (C p ) * depletion coefficient (C d ) * decreasing coefficient (C R ) * tonnes of production

24

Mineral Extraction Tax (MET)Oil

Viscous oil MET breaks

Tight oil MET breaks

MET regional holidays

Offshore MET terms

25

Oil & Gas taxation in RussiaExport dutyOil export duty is linked to the average Urals export oil price (Mediterranean and Rotterdam)

The base rate is due to decrease from 60% in 2013 to 59% in 2014, to 57% in 2015 to 55% in 2016

Oil Export Duty reliefs apply in East Siberia and the Caspian Sea

Export Duty = 45%*(Urals Oil PriceUS$50/bbl)

In addition, oil Export Duty reductions have been proposed for extra viscous oil and offshore projects. These need to be ratified before coming into Law

Actual Urals price (US$/bbl) Export duty (US$/bbl)Until US$15/bbl 0%

From US$15/bbl until US$20/bbl 35% * (actual priceUS$15)

From US$20/bbl until US$25/bbl US$1.75 + 45% * (actual priceUS$20)

From US$20/bbl until US$25/bbl US$4 + 65%1 * (actual priceUS$25)

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