Energy Sector Stock Recommendation March 2, 2010 Eric DeWees Honglei Gong Charles Hathaway Danqing Zhou.

Energy Sector Stock Recommendation

March 2, 2010

Eric DeWeesHonglei Gong

Charles HathawayDanqing Zhou

S & P 500 Sector Weights (as of 2/28/2010)

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Sector Performance YTD (2/28/2010)

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Sector Performance YTD

Sector Performance (1 month)

Sector Recommendation

• Reduce the Energy Sector to 50 Basis Points Underweight

• Current holdings are BP, ConocoPhillips, Transocean, National Oilwell Varco

• We would like to:– Sell 100% of BP Plc. (BP)– Sell 100% of ConocoPhillips (COP)– Buy Noble Energy (NE)

Noble Corporation

• Noble Corporation (NE) is a oil drilling company that was spun-off the parent company Noble Energy in 1985.

• The company, with operations in waters off the coasts of five continents, has a fleet of 63 offshore drilling units: three submersibles, four dynamically positioned drillships, 13 semisubmersibles, and 43 jack-up rigs. Many of its rigs are capable of operating in depths greater than 5,000 feet.

• The group, which derives most of its revenues from offshore contracts, has positioned itself to ride the global trend toward deepwater exploration. Through acquisitions and equipment upgrading, Noble has been expanding its geographical reach and increasing its ability to drill in deeper off-shore areas.

Noble CorporationAdvantages

• Low Taxes– Moved from Cayman Islands to Switzerland. Avg Tax Rate (16%)

• Geographically Dispersed– World-wide, primarily in Mexico, Brazil, and Nigeria

• Long-Term Historical Growth– Has experienced over 6% Earnings and Revenue Growth since

2000– Baseline has a long-term growth rate of 5%

• First energy industry to recover– Oil & Gas Drilling Services is one of the first industry to recover when oil

prices increase. – Exploration and Production must first acquire leases on drilling rigs, years

and months in advance

Noble CorporationAdvantages

• Maintained high margins despite downturn

– 44% in 2009, 44% in 2008

– Utilization went down from 88% to 83%

• Financially Stable

– 735 Million Cash on Hand, $2.80 Per Share

– Low Debt (750 Million), $2.82 Per Share

– Growth Financed Heavily through Retained Earnings (70% of Total Liabilities and Equity)

• Noble increased its capital expenditures – Building more rigs to sustain growth, don’t build until contracts are made– 1.4 Billion in 2009, 1 Billion in 2008. Guidance in 2010 is 1 Billion– Oil Majors are increasingly turning to offshore drilling– Expecting a slew of contract announcement for 2011 in 1Q and 2Q

Noble CorporationBaseline Filter• Energy Sector• P/Latest Earnings less than 1.0• Market Capitalization: 1 Billion or greater• Earnings: 3 Year Historical Growth Rate 6% or Greater• Earnings: 5 Year Growth Rate 6% or better• Long-Term Future Growth Rate: 4% or greater• ROE: 26% or greater• Reinvestment Yield: 10.0%• Price-Relative Strength to all stocks 70% or better• Earnings Momentum Value: 90% or greater

Noble Corporation (NE) the only energy stock to meet this criteria

Noble CorporationRisks

• Tax Increase– Currently taxes average 16%, there’s some risk that Switzerland,

and other countries that Noble does business in will increase taxes

• Currency Risk– Earnings are in Swiss Francs, not dollars. If dollar strengthens

significantly, earnings will suffer in dollar terms

• Huge Capital Investments– 79% of assets are in drilling equipment and facilities– Utilization dropped from 83% from 88%

• Oil Prices Decrease Significantly– Sustained Oil Prices sinking to the $30-$40 level would reduce the

desirability of offshore oil production– In the short term, we believe oil prices will be fluctuating between

$65 and $85 per barrel

Noble CorporationStock Repurchases and Dividends

• Stock Repurchase– Yearly stock repurchase– 2009: $204 Million– 2008: $314 Million

• Dividend– Current Dividend is 16 cents per share.– Current dividend yield is .38%.– Talk of Possible Increase at Annual Shareholders Meeting April

30, 2010. Mentioned in 4Q Earnings Call

• Debt to Total Capital is 10.5%.

Energy IndustriesRelative Strength

Noble CorporationEPS Surprise History

Noble CorporationEarnings Growth Rates

Noble is trading at one of the lowest Price to Books in years

Noble CorporationMargins

Margins have been increasing since ’05 but are expected to fall back slightly as contracts are renewed in ‘10 and ‘11

Noble Corporation Valuation Analysis Relative to Industry High Low Median Current

P/Trailing E 1.3 .63 .95 .65

P/Forward E 1.1 .52 .90 .60

P/B 1.5 .8 1.1 1.1

P/S 1.7 1.1 1.3 1.6

P/CF 1.5 .8 1.1 1.0

Relative to S&P 500 High Low Median CurrentP/Trailing E 2.9 .32 .84 .39

P/Forward E 1.5 .25 .59 .53

P/B 1.5 .6 1.1 .8

P/S 5.5 2.1 3.6 2.6

P/CF 2.4 .4 1.0 .5

Noble Corporation Valuation Analysis Absolute Valuation

High Low Median Current Target Multiple

Target E,S,B/Share

Target Price

P/Forward E 50.5 4.0 13.9 6.6 9 6.43 57.87

P/S 25.7 3.3 9.0 7.8 9 5.538 50.00

P/B 4.1 1.1 3.2 1.7 2.5 25.29 63.24

P/EBITDA 23.85 2.58 9.51 4.57 7 9.45 66.17

P/CF 26.8 3.1 10.4 5.3 7.5 8.15 61.13

Current Share Price : $43.24Implied equity value/share : $62Upside/(Downside) to Valuation : 43%

Noble CorporationDiscounted Free Cash Flow

Terminal Growth Rate: 5% Discount Rate: 12% Implied Value: $60.34 Upside: 39.5%

Noble CorporationTarget Price

Sensitivity Matrix

Target Price for Noble Corporation: $60

Current Price: $43.24 DCF: $60.38 Valuation: $61

Upside Potential: 39%

Noble Corporation Performance Year to Date

• Noble Corporation has consistently outperformed the S&P since it was spun off.

• It has significantly outperformed since 2000. This can be attributed to the increase in oil prices and world demand

Noble Corporation Performance 1 Year

Noble Corporation Performance 2 Year

Noble Corporation Performance 5 Year

Noble Corporation Performance 10 Year

Noble Corporation Performance 20 Year

BP Plc. Report

• Current Price: $53.05

• Target Price: $60

• Upside: 14.7%

• Dividend Yield: 3.36 / 6.28%

• % of SIM: .97%

• Recommendation: Sell 100%

BP Plc.Valuation

BP Plc. Discounted Free Cash Flow

Implied Value: $60.63 Discount Factor: 12% Terminal Growth Rate: 3% Upside: 15.9%

BP Plc. DCF Sensitivity

ConocoPhillips Report

• Current Price: $48.91

• Target Price: $57.00

• Upside: 16.5%

• Dividend Yield: 4.17%

• % of SIM: 3.18%

• Recommendation: Sell 100%

ConocoPhillips DCF

Implied Value: $ 57.36 Discount Factor: 12% Terminal Growth Rate: 3% Upside: 17.3%

COP Valuation

Absolute Valuation

High Low Median Current Target Multiple

Target E,S,B/Share

Target Price

P/Forward E 18.6 5.3 8.8 8.0 8.8 7.8 68.64

P/S 1.2 .2 .60 .50 .60 131.53 78.92

P/B 3.5 .80 1.5 1.2 1.5 41.46 62.19

P/EBITDA 12.44 2.53 3.97 4.86 3.97 12.73 50.54

P/CF 11.0 2.3 5.5 4.9 5.5 13.00 71.52

Proposed Energy Sector Holdings

As % of SIM

• Noble Corporation (NE): 1.68%

• Transocean (RIG): 4.18%

• National Oilwell Varco (NOV): 4.78%

Proposed SIM Weight: 10.64%

S&P Energy Sector Weight:11.14%

Current SIM Weight: 11.48%

Energy Team

Questions?

Transocean Report

• Current Price: $80.33

• Target Price: $110

• Upside: 36.9%

• Dividend Yield: No Dividend

• % SIM: 4.18%

• Recommendation: No Action

TransoceanDCF and Valuation

Terminal Discount Rate = 11%Terminal FCF Growth Rate = 3%

National Oilwell Varco Report

• Current Price: $43.66

• Target Price: $40.34

• Downside: 7.6%

• Dividend Yield: 40 Cents / .92%

• % SIM: 4.78%

• Recommendation: No Action

National Oilwell VarcoDCF and Valuation

Terminal Discount Rate = 11%Terminal FCF Growth Rate = 3%