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Annual Report 2017

Message to Shareholders

Tsotsoros

E. Tsotsoros

Chairman of BoD and CEO

Dear Shareholders,

In 2017, the Greek economy came out of the eight-year recession, with growth rising to + 1.4% of GDP, compared with -0.2% in 2016. The implementation of structural reforms provided a strong base for the recovery of the country's growth dynamics and helped to re-attract investment, which during 2017 increased by 15%. Through the structural changes that are currently underway, Greece is heading for a gradual normalization of its access to the international capital markets, while the potential of the economy is promising, especially if combined with the expected debt relief decisions and of a more investment friendly tax policy.

As far as the international environment is concerned, international crude prices recovered in the second half of 2017 - from $53 to $65/bbl for Brent at the end of the year - as a result of OPEC and Russia’s policy to cut production and the subsequent inventory reduction in OECD countries. At the same time, global demand remained strong and according to the International Energy Agency (IEA) settled at 97.8 mbpd in 2017 and is expected to exceed 99 mbpd in 2018. While uncertainties about long-term developments in the oil industry continue, reputable organizations and leading companies in the industry (e.g. BP, ExxonMobil) argue that strong demand will continue at least until the next decade.

The evolution of the euro/US dollar exchange rate from $1.03 to $1.20 at the end of 2017 reflects the monetary policy as well as the political developments in Europe and North America. It is indicative that dollar dropped 9.8% in 2017, the worst performance since 2003, while at the same time the euro recorded its strongest performance against the US currency in 14 years, an evolution that adversely affected European refining companies.

In the refining sector, the competitiveness of European refineries is affected by high regulatory costs due to the EU policy on climate change and sustainable development. For Greek refineries, competitive pressures increased further due to the modernization of refining capacity in neighboring countries, the Middle East and South East Asia, which are not burdened with correspondingly high environmental compliance costs.

For HELLENIC PETROLEUM Group, 2017 was the third consecutive year in which we managed to meet the important targets in regards to strengthening the balance sheet, increasing our raw material suppliers’ base and further improving performance of all business units, focusing on the refineries’ operation and supply and trading of oil products.

The successful enforcement of the Group is reflected on its ranking amongst the 2017 TOP 100 GLOBAL ENERGY LEADERS, according to Reuters Thomson.

The Group's operating profitability, production and total sales recorded new historical highs. Adjusted EBITDA reached €834 million, marking a significant increase of 14% compared to the previous year, while Adjusted Net Profits increased by 40% to €372 million.

The key drivers of those achievements included record production and sales volumes which exceeded 16 million tons signifying a 4% increase compared to 2016, the particularly strong refining over-performance, which increased by 50% due to supply optimization and improvements in the units’ operation, international commercial partnerships, continuous expansion into new markets, strengthening of marketing mainly in the domestic market, as well as the Group’s commitment to exports which accounted for over 50% of total output. HELLENIC PETROLEUM Group is now the largest exporter of products in the South Eastern Mediterranean, while the Aspropyrgos refinery's FCC unit is among the top two in the world, according to an international study conducted by Solomon.

The Group's high operating cash flows, 18% reduction in financial cost and €600 million reduction in total borrowing over the last two years combined with the successful planning and implementation of the refinancing of bank loans and bonds amounting to over €1 billion – resulting in a €20 million per year reduction in the cost of funding - now allow for better risk management whilst also maintaining net debt, over last few quarters, in line with business plan target levels. The continuous strengthening of the Group’s financial position and increasing cash flows are also reflected in the decision made by the Board of Directors to propose the payment of a FY17 dividend of €0.4 per share to the General Meeting of Shareholders.

With regards to marketing, the Group, with 1,760 service stations (EKO and BP brands), 550 tank vehicles and five owned vessels, continued to increase sales and market shares in 2017, sustaining profitability despite market challenges. In international marketing, the subsidiaries maintained high levels of operating profitability. With 300 operating service stations mainly bearing the EKO brand name, the Group continued its successful presence, holding a leading position in Montenegro and Cyprus, and is among the top five companies in the sector in Bulgaria, Serbia and FYROM.

In 2017, the improvement of working and safety conditions were also emphasized, through extending the application of the holistic safety system, reliable and fair management interventions and strengthening the role and contribution of personnel to achieving goals.

HELLENIC PETROLEUM’s human-centric social contribution and sustainable development focused on the environment and climate change, drove an action plan in the context of its Corporate Social Responsibility program, highlighting HELLENIC PETROLEUM’S social contribution to local and national development. Positive ratings for the Group's potential and outlook were reflected in HELLENIC PETROLEUM’S share price evolution recording significantly higher returns than its European peers.

These achievements reward the coordinated efforts and planning over the period, but also create obligations for everyone to intensify the efforts so that the Group maintains its leading position.

In this direction, the "Five-Year Development Program 2018-2022" was designed and implemented, based on export orientation, strengthening international competitiveness, continuously improving know-how and adopting innovative methods and new technologies. The main focus of the new Five Year Plan is to continue to maintain profitability at high levels regardless of refining margins volatility, while reducing debt and liabilities by €1 billion, reducing financial costs by 50%, with consistent and gradually increasing dividend pay-out.

Among the most important endeavors is the Group’s strategic choice to identify and exploit potential domestic hydrocarbon deposits, an activity with a strong business and geopolitical interest and growth outlook. Given its reputation, the Group has established partnerships with leading companies in the sector, been awarded exploration and production rights for hydrocarbons in a portfolio of areas in Western Greece, both offshore and onshore in various development steps.

HELLENIC PETROLEUM is very much focused on implementing its basic strategic objective concerning energy transformation based on the Group’s sustainable development in order for it to remain at the forefront in this respect and to continue to play a leading role in the rapid energy developments taking place in Greece, the Balkans and the South Eastern Mediterranean. It is conducting investments exceeding €500 million over the three-year period 2018-2020 for the three-year refining program, along with the Group’s Energy Efficiency improvement and Digital Transformation. At the same time, the Group's preparation for low sulphur bunkering fuels in 2020 and RES growth, further reflect this strategy.

With the successful implementation of the Group’s strategy, improvement of its capital structure, production and sales growth, historically high profitable results, improved competitiveness, enhanced export orientation and long-term planning considering global and regional developments in the energy sector, the mandate of this Board of Directors will conclude in the coming months.

The Management of HELLENIC PETROLEUM would like to thank all of the Group’s employees for their significant contribution to its growth as well as the shareholders for their continued support and trust.

HELLENIC PETROLEUM Group, now stronger than ever before, is one of the biggest Energy groups in the Mediterranean. Having exceptional and qualified personnel, the Group fulfil the conditions that will allow it to continue to take a leading role in the energy sector in the wider region, thereby maximizing the benefits that it can offer to the Greek society as well as the national economy.

Signature Image

E. Tsotsoros

Chairman of BoD and CEO