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Energy Sector. Martina Gutik Colleen Hurley Ben Jekeli Ben Smalley. Agenda. Size and Composition Business and Economic Analysis Financial Analysis Valuation Analysis Recommendation. SIZE AND COMPOSITION. Energy Sector Summary. - PowerPoint PPT Presentation
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Energy SectorMartina Gutik
Colleen HurleyBen Jekeli
Ben Smalley
Agenda
• Size and Composition• Business and Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation
SIZE AND COMPOSITION
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
S&P 500 BreakdownAs of 3/31/10
Compared to 9.76% SIM Weight
% SIM Over/Under S&P 500 As of 4/30/10
Recommend increasing sector weight to market level
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
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
Sector PerformanceAs of 4/30/10
Relative Strength
BUSINESS & ECONOMICANALYSIS
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
Key Drivers of Energy
• Demand• Oil Prices• Production Capacity• OPEC supply• Inventories• Political Influence
2008 Oil Consumption by Nation(thousand barrels per day)
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
2008 Oil Production by Nation(thousand barrels per day)
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
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
$/Euro versus Crude Oil Price
FINANCIALANALYSIS
Average Annual Revenue Growth
Average Annual EPS Growth
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)
S&P 500 Energy SectorExpected Growth - 2010
EPS Revenue
Mean 48.4%Median 12.2%
Mean 15.9%Median 12.7%
Sector ComparisonProjected EPS Growth - 2010
Net Profit Margin
Relative to S&P 500
VALUATIONANALYSIS
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%
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
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
Questions