Energy Sector
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Transcript of Energy Sector
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Energy SectorMartina Gutik
Colleen HurleyBen Jekeli
Ben Smalley
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Agenda
• Size and Composition• Business and Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation
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SIZE AND COMPOSITION
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Energy Sector Summary
• Composed of companies involved in the production and sale of energy – Fuel Extraction– Refining– Distribution
• 41 Companies • 1.21 Trillion Market Capitalization
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S&P 500 BreakdownAs of 3/31/10
Compared to 9.76% SIM Weight
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% SIM Over/Under S&P 500 As of 4/30/10
Recommend increasing sector weight to market level
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Industries
• Oil & Gas Drilling
• Oil & Gas Equipment & Services
• Integrated Oil & Gas
• Oil & Gas Exploration & Production
• Oil & Gas Refining & Marketing
• Oil & Gas Storage & Transportation
• Coal & Consumable Fuels
Transocean Ltd.
Noble Corp.
National Oilwell Varco Inc.
Peabody Energy *Not currently owned
SIM Stocks
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Top 5 CompaniesAs of 4/29/10
Company YTD Change
Smith International Inc. 75.78%
Pioneer Natural Resources 33.13%
Rowan Companies, Inc. 31.63%
Denbury Resources Inc. 29.39%
Sunoco Inc. 25.59%
CompanyIndex
Weight RankMarket Cap
(billions)
Exxon Mobil 2.97% 1 319.96
Chevron 1.52% 11 163.56
ConocoPhillips 0.81% 26 88.01
Schlumberger 0.80% 27 85.35
Anadarko Petroleum 0.30% 66 30.62
Largest Companies Top Performers
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Sector PerformanceAs of 4/30/10
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Relative Strength
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BUSINESS & ECONOMICANALYSIS
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Five Forces Analysis• Threat of Entry
– High costs to enter all industries
• Threat of Rivalry– Slow industry growth rate, pretty much all mature companies– Relatively low industry-to-industry
• Threat of Substitutes– Coal, natural gas, oil, solar, nuclear etc– End consumer has few options
• Threat of Suppliers– OPEC and other strong suppliers
• Threat of Buyers– Currently buyers have very little power
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Key Drivers of Energy
• Demand• Oil Prices• Production Capacity• OPEC supply• Inventories• Political Influence
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2008 Oil Consumption by Nation(thousand barrels per day)
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Total U.S. Energy Consumption
0
20
40
60
80
100
120
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
Liquid fuels
Coal
Natural gas
Nuclear
Renewables
History Projectionsquadrillion Btu
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2008 Oil Production by Nation(thousand barrels per day)
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Annual Energy Outlook for 2010
0
25
50
75
100
125
150
175
200
225
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
Low oil price
High oil price
ProjectionsHistory2008 $/barrel
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MonthPrior
Open High Low VolumeSettle
Jun-10 86.19 86.09 86.24 82.86 310,546
Jul-10 89.15 89.02 89.33 86.19 115,454
Aug-10 90.77 90.54 90.9 87.8 43,821
Sep-10 91.67 91.51 91.73 88.75 24,864
Oct-10 92.25 92.12 92.33 89.42 11,178
Nov-10 92.7 92.11 92.17 89.85 7,732
Dec-10 93.06 92.81 93.08 90.2 28,461
Jan-10 93.31 92.3 92.3 90.67 3,366
Feb-11 93.55 91.81 91.82 90.77 1,216
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$/Euro versus Crude Oil Price
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FINANCIALANALYSIS
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Average Annual Revenue Growth
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Average Annual EPS Growth
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S&P 500 Energy SectorGrowth Q4 2009 – Q1 2010
EPS Revenue
Mean 8.9%Median 11.5%
Mean 3.2%Median 2.6%
Note : Above mean calculated without outlier (950% on far left)
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S&P 500 Energy SectorExpected Growth - 2010
EPS Revenue
Mean 48.4%Median 12.2%
Mean 15.9%Median 12.7%
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Sector ComparisonProjected EPS Growth - 2010
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Net Profit Margin
Relative to S&P 500
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VALUATIONANALYSIS
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Industry Valuation
Oil Drilling Relative to S&P 500Ratio High Low Median Current
Trailing P/E 5 0.27 1.6 0.54Forward P/E 2.1 0.28 0.92 0.91
P/S 10.5 1.4 3 1.5P/B 1.7 0.2 0.6 0.7P/CF 1.9 0.4 1.1 0.7
Energy Sector Relative to S&P 500Ratio High Low Median Current
Trailing P/E 1.6 0.5 0.8 1.1Forward P/E 1.3 0.57 0.8 0.89
P/S 1 0.6 0.8 0.9P/B 1.4 0.6 0.9 0.9P/CF 0.9 0.5 0.7 0.8
Oil Exploration Relative to S&P 500Ratio High Low Median Current
Trailing P/E 31.5 0.31 0.95 1.3Forward P/E 8.1 0.5 0.8 1.2
P/S 4.2 0.9 1.9 3.1P/B 2.3 0.4 0.8 0.9P/CF 0.8 0.2 0.5 0.7
Oil Integration Relative to S&P 500Ratio High Low Median Current
Trailing P/E 1.4 0.5 0.83 0.96Forward P/E 1.2 0.46 0.74 0.74
P/S 1 0.5 0.7 0.7P/B 1.4 0.6 0.8 0.9P/CF 1 0.5 0.7 0.8
Overvalued by >10%Inline with S&P
Undervalued by >10%
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Industry Valuation
Oil Storage Relative to S&P 500Ratio High Low Median Current
Trailing P/E 22 0.21 1 0.95Forward P/E 1.3 0.69 1.1 1
P/S 4.5 0.4 1.2 1.7P/B 1.1 0.6 0.9 0.9P/CF 1.3 0.5 0.7 0.7
Oil Equipment Relative to S&P 500Ratio High Low Median Current
Trailing P/E 4.1 0.58 1.5 1.3Forward P/E 1.7 0.61 1.3 1.5
P/S 2.8 0.6 1.5 1.8P/B 2.8 0.5 1.2 1.3P/CF 1.6 0.5 1.2 1.4
Oil Refining Relative to S&P 500Ratio High Low Median Current
Trailing P/E 7.6 0.23 0.59 nmForward P/E 4.8 0.3 0.55 2.2
P/S 0.5 0.1 0.2 0.1P/B 1.3 0.2 0.5 0.4P/CF 1.3 0.2 0.5 1.3
Overvalued by >10%Inline with S&P
Undervalued by >10%
Coal Relative to S&P 500Ratio High Low Median Current
Trailing P/E 23.3 .32 1.3 1.1Forward P/E 2.1 .39 1 .98
P/S 4.0 .2 1 1.4P/B 2.1 .7 1.5 1.5P/CF 2.1 .5 .8 1.1
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Recommendation
• Currently underweight by 143 basis points
• Recommend increasing weight by ≈143 basis points to bring to market weight– Demand for energy will increase with economic
recovery, still relatively cheap
• Possibly look to oil refining industry or coal industry
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Questions