Energy Sector - Max M. Fisher College of Business - Energy Sector...India – 3.62 V. Russia– 3.20 VI. ... Porter’s Five Forces Rivalry Amongst Firms ... Energy Sector, 15.1% S&P,

Energy Sector Maggie & Tyler

SIM SECTOR PRESENTATION Fall 2013

i. Overview

ii. Business Analysis

iii. Economic Analysis

iv. Financial Analysis

v. Valuation Analysis

vi. Recommendation

Agenda

Agenda

SECTOR OVERVIEW


S&P 500, SIM Portfolio Comparison

Overview

S&P 500 - 10.49% SIM - 14.39%

390 basis points

Overweight

Energy Sector vs S&P 500 YTD

*Thomas Baseline Overview

Energy Sector vs. S&P 500 QTD

Overview *Thomas Baseline

Chevron Corp (CVX) Schlumberger Ltd. (SLB) Apache Corp (APA)

SIM Weight

Overview

Stocks in SIM Portfolio YTD

Overview

Schlumberger – Up 27% Chevron – Up 7% Apache –Up 6%

Largest Firms within Energy Sector

Overview

Largest Energy Firms in S&P500 by MarketCap

Overview

• Integrated Oil & Gas

• Oil & Gas Drilling

• Oil & Gas Exploration and Production

• Oil & Gas Equipment and Services

• Oil & Gas Storage

• Coal & Consumed Fuels

• Oil & Gas Refining and Marketing

Industries

Overview

Industries YTD

Overview

Top Performers: Oil &Gas Refining, Exploration/Production, Equipment/Services Bottom Performers: Coal & Consumed Fuels, Oil & Gas Integrated

BUSINESS ANALYSIS


Phases of the Business Cycle

Business Analysis

Capital Goods & Basic

Materials

Energy& Consumer

Staples

Utilities

Financials & Consumer Cyclicals

Technology

Middle Expansion*

Late Expansion**

Early Contraction

Late Contraction

Early Expansion

Oil Producers in 2012 (By millions of barrels per day)

I. Saudi Arabia – 11.73

II. United States – 11.12

III. Russia – 10.40

IV. China – 4.42

V. Canada – 3.87

VI. Iran – 3.59

VII. United Arab Emirates – 3.21

World Production

Business Analysis *According to U.S. Energy Information Administration 2012 (eia)

U.S. Projected to be world’s top oil producer by the end of 2013

according to PIRA (12.1 million barrels a day)

Business Analysis

Oil Consumption 2012 (By millions of barrels per day)

I. United States – 18.56

II. China – 10.28

III. Japan – 4.72

IV. India – 3.62

V. Russia– 3.20

VI. Saudi Arabia – 2.86

VII. Brazil – 2.81

World Consumption


Business Analysis

Proven Oil Reserves in 2012-2013 (By millions of barrels )

I. Venezuela– 297,700

II. Saudi Arabia – 265,900

III. Canada – 175,00

IV. Iran – 157,300

V. Iraq – 140,300

VI. Kuwait– 101,500

VII. United Arab Emirates – 97,800

World Proven Reserves


Industrialization in Emerging Countries

Business Analysis

I. Significant increase in Operating Usage

II. Tendency to see rapid demand growth for Energy during this stage

III. Driving Global Use steadily higher

Demand

Transport Sector already accounts for over half of global oil consumption*

Although trending “Fuel-economic” for passenger vehicles, not being widely adopted for the trucking and road freight business 40% increase in global oil demand for trucking*

Air- Travel

Transport Sector

Business Analysis *According to World Energy Outlook

Demand

U.S. Shale Drilling • Natural Gas

• Predicted by the year 2035, 46% of the U.S. natural gas supply will come from Shale Drilling*

New Capacity additions in Supply

Business Analysis *According to the EIA

Supply

12 Current Members Algeria

Angola

Ecuador

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

United Arab Emirates

Venezuela

OPEC

Business Analysis

Dedicated to ensure the stabilization of oil markets to: 1. Secure an efficient, economic and regular supply of

petroleum to consumers 2. Steady income to producers 3. A fair Return on capital for those investing in the

petroleum industry

OPEC

Porter’s Five Forces

Rivalry Amongst

Firms

Barriers to Entry/Exit

Power of Suppliers

Substitutes

Power of Buyers

Business Analysis

Five Forces - Barriers

Business Analysis

Barriers to Entry Extraordinary Start-Up Costs

Economies of Scale take time to be realized

Potential Entrants - Low

Five Forces - Suppliers

Business Analysis

Bargaining Power of Suppliers Many firms are vertically

integrated, not a factor

Exploration and production industry, high costs for purchasing

Five Forces - Substitutes

Business Analysis

Threat of a Substitute Alternative Energy is not

efficient enough, costly

• Solar, Wind, Nuclear

Long-term possible when efficiencies are realized

Five Forces - Buyers

Bargaining Power of Buyers

Market Demand is a primary factor in setting prices.

Consumers are individual buyers in large populations giving no individual bargaining power

Business Analysis

ECONOMIC ANALYSIS


Real GDP vs. Energy

Economics

Crude Oil Price (WTI) vs. Energy Sector

Economics

Crude Oil Price (BRENT) vs. Energy Sector

Economics

Rig Count vs. Energy

Economics

Consumer Confidence

Economics

Worldwide Production vs. Energy

Economics

FINANCIAL ANALYSIS


28%

9% 9% 25%

-33%

21% 24%

-4% 4% 2%

47%

21%

7% 19%

-57%

55%

37%

-2% -6%

11%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sector Growth

Revenue/Share Growth Earnings/Share Growth

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth 28% 9% 9% 25% -33% 21% 24% -4% 4% 2%

Earnings/Share Growth 47% 21% 7% 19% -57% 55% 37% -2% -6% 11%

Financial

Sector

Energy Sector, 7.7%

S&P, 9.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Net Profit Margin

Energy Sector, 19.7%

S&P, 19.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

EBITDA Margin

Energy Sector, 15.1%

S&P, 16.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ROE

Financial

Industries

Oil & Gas – Integrated

Major Companies

Chevron, Exxon Mobil, Hess Corp

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

OGINT

Revenue/Share Growth

Earnings/Share Growth

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth 29% 4% 11% 29% -32% 23% 23% -21% 3% 1%

Earnings/Share Growth 39% 20% 6% 23% -58% 70% 38% -3% -10% 5%

Financial

Industries

Oil & Gas – Expl/Prod

Major Companies

Apache, Conoco Phillips, Marathon Oil

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

OGEXP



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth 22% 27% 10% 22% -35% 17% 32% 28% 18% 1%

Earnings/Share Growth 67% 10% -4% 27% -56% 34% 34% -12% 22% 13%

Financial

Industries

Oil & Gas – Equip/Svc

Major Companies

Schlumberger, Baker Hughes, Cameron Int’l

-60%

-40%

-20%

0%

20%

40%

60%

80%

OGEQP



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Earnings/Share Growth 71% 55% 35% 15% -47% 17% 42% 4% 5% 26%

Financial

Industries

Coal & Consumable Fuels

Major Companies

Consol Energy, Peabody Energy

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

COCOF



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth 37% -6% -7% 32% -4% 2% 22% -12% -30% 11%

Earnings/Share Growth 147% 50% -29% 84% -33% 4% 36% -62% -82% 271%

Financial

Industries

Oil & Gas – Drilling

Major Companies

Diamond Offshore Drl, Ensco Plc

-100%

-50%

0%

50%

100%

150%

200%

OGDRL



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth 25% 43% 33% 35% -3% 9% -5% 4% -3% 14%

Earnings/Share Growth 181% 89% 83% 34% -44% -39% 6% 25% 8% 27%

Financial

Industries

Oil & Gas – Refining/Marketing

Major Companies

Marathon Petroleum, Phillips 66, Tesoro

-200%

-100%

0%

100%

200%

300%

400%

OGREF

Revenue/ShareGrowth

Earnings/ShareGrowth

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Earnings/Share Growth 194% 24% -9% -35% -112% 351% 174% 71% -30% 19%

Financial

Industries

Oil & Gas – Storage

Major Companies

Kinder Morgan Holdco, Spectra Energy

-500%

0%

500%

1000%

1500%

2000%

2500%

OGSTO

Revenue/ShareGrowth

Earnings/ShareGrowth

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue/Share Growth -5% 42% -38% 15% -24% 9% 6% 15% 11% 16%

Earnings/Share Growth 2046% 18% 26% 24% -35% 13% 13% -22% 2% 33%

Financial

VALUATION ANALYSIS


Sector

0

5

10

15

20

P/Trailing E P/Forward E P/B P/S P/CF

Absolute Basis

High Low Median Current

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Relative to S&P 500


Absolute Basis High Low Median Current

P/Trailing E 18.7 6.1 12.3 13.1

P/Forward E 16.9 7.8 11.8 12.5

P/B 3.8 1.4 2.4 1.9

P/S 1.4 0.5 1.0 1.0

P/CF 9.4 5.0 7.1 7.3

Relative to SP500 High Low Median Current

P/Trailing E 1.1 0.53 0.78 0.84

P/Forward E 1.2 0.57 0.82 0.86

P/B 1.4 0.7 1.0 0.8

P/S 1.0 0.6 0.7 0.7

P/CF 0.9 0.6 0.7 0.7

Valuation

OGINT

0.0

5.0

10.0

15.0

20.0


Absolute Basis


0

0.2

0.4

0.6

0.8

1

1.2

1.4


Relative to S&P 500



P/Trailing E 16.8 6.2 10.8 10.9

P/Forward E 16.2 6.5 10.7 10.8

P/B 3.6 1.6 2.3 1.9

P/S 1.2 0.5 0.9 1.0

P/CF 8.9 5.1 6.8 6.9

Relative to SP500


P/Trailing E 0.97 0.51 0.69 0.7

P/Forward E 1.1 0.4 0.65 0.68

P/B 1.2 0.46 0.72 0.75

P/S 0.8 0.5 0.7 0.7

P/CF 0.9 0.6 0.7 0.7

Valuation

OGEXP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

P/Trailing E P/ForwardE

P/B P/S P/CF

Absolute Basis


0

0.51

1.5

2

2.5

33.5

4


P/B P/S P/CF

Relative to S&P 500



P/Trailing E 27.1 6.3 13.1 18.2

P/Forward E 27.1 8.2 13.1 15.2

P/B 3.4 1.0 2.0 1.9

P/S 4.3 1.5 2.9 2.3

P/CF 8.7 3.8 5.9 6.7

Relative to SP500


P/Trailing E 1.6 0.47 0.83 1.2

P/Forward E

1.9 0.51 0.93 1.1

P/B 1.3 0.5 0.8 0.8

P/S 3.5 1.4 2.1 1.6

P/CF 0.9 0.4 0.6 0.7

Valuation

OGEQP

0.0

10.0

20.0

30.0

40.0

50.0


Absolute Basis


0

0.5

1

1.5

2

2.5

3


Relative to S&P 500



P/Trailing E 39.5 6.5 20.6 20.2

P/Forward E 28.9 7.8 18.1 16.4

P/B 8.6 1.6 3.6 2.6

P/S 3.0 1.0 2.0 2.0

P/CF 17.5 5.6 12.3 12.3

Relative to SP500


P/Trailing E 1.9 0.58 1.3 1.2

P/Forward E 1.7 0.61 1.2 1.1

P/B 2.8 0.9 1.5 1.1

P/S 2.8 1.0 1.6 1.3

P/CF 1.7 0.8 1.3 1.1

Valuation

COCOF

0

1

2

3

4

5


P/B P/S P/CF

Relative to S&P 500


0.0

20.0

40.0

60.0

80.0


Absolute Basis



P/Trailing E 37.5 7.2 17.4 37.5

P/Forward E 70.5 5.3 15.6 65.6

P/B 4.3 0.6 2.5 1.4

P/S 4.9 0.6 1.6 1.0

P/CF 22.1 4.8 7.9 7.7

Relative to SP500


P/Trailing E 1.9 0.58 1.3 1.2

P/Forward E 1.7 0.61 1.2 1.1

P/B 2.1 0.3 1.1 0.6

P/S 4.0 0.5 1.2 0.7

P/CF 2.1 0.5 0.8 0.7

OGDRL


P/Trailing E 65.0 3.3 15.1 12.6

P/Forward E 38.3 3.7 11.3 11.1

P/B 4.1 0.8 1.7 1.2

P/S 6.6 1.1 2.6 2.0

P/CF 20.1 3.0 8.0 6.5

Relative to SP500


P/Trailing E 3.7 0.28 0.99 0.77

P/Forward E 2.1 0.28 0.83 0.73

P/B 1.7 0.5 0.7 0.5

P/S 4.3 1.2 2.0 1.3

P/CF 1.8 0.4 0.8 0.6

0.0

20.0

40.0

60.0

80.0


Absolute Basis


0

1

2

3

4

5


Relative to S&P 500


Valuation

OGREF

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0


Absolute Basis


0

1

2

3

4

5

6


Relative to S&P 500



P/Trailing E 36.8 3.4 8.7 7.4

P/Forward E 78.9 4.3 8.6 12.3

P/B 3.9 0.5 1.6 1.6

P/S 3.5 0.1 0.2 0.2

P/CF 8.2 2.9 5.4 5.4

Relative to SP500


P/Trailing E 2.4 0.23 0.57 0.46

P/Forward E 4.8 0.38 0.58 0.81

P/B 1.3 0.2 0.7 0.7

P/S 0.5 0.1 0.2 0.1

P/CF 0.8 0.4 0.5 0.5

Valuation

OGSTO

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0


Absolute Basis


0

5

10

15

20

25


Relative to S&P 500



P/Trailing E 396.0 5.9 20.9 38.5

P/Forward E 32.5 8.5 17.6 26.8

P/B 3.6 0.9 2.8 3.5

P/S 3.2 0.6 1.7 2.8

P/CF 16.1 3.7 8.3 15.8

Relative to SP500 High Low Median Current

P/Trailing E 22 0.52 1.4 2.3

P/Forward E 2.1 0.69 1.2 1.8

P/B 1.5 0.6 1.1 1.4

P/S 2.6 0.4 1.4 1.9

P/CF 1.6 0.5 0.9 1.5

Valuation

Technical Analysis

Simple Moving Average

Relative Strength

Valuation

RECOMMENDATION


Attractive Sector, but already significantly overweight. Remain Overweight relative to the benchmark Sell a 100 basis points in each stock and purchase another stock to lower

the single stock weights in the portfolio Ultimately Hold at 14.38%

Positives Valuation, sector is at or below median U.S. and Chinese economies drive the sector Developing countries demand

Risks Heavily Reliant on Oil Prices - volatility

Industries to overweight – oil & gas integrated, exploration and production, coal and consumed fuels

Recommendation

Questions?


www.opec.org

us.spindices.com

www.eia.gov

www.worldenergyoutlook.org

www.oecd.org

Bloomberg Terminal

Thomas Reuters Baseline

References

Energy Sector - Max M. Fisher College of Business - Energy Sector...India – 3.62 V. Russia– 3.20 VI. ... Porter’s Five Forces Rivalry Amongst Firms ... Energy Sector, 15.1% S&P,

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