S&P 500 Energy Sector Luke DiTomas Alex Foisel Ian McLeod February 10, 2009.

S&P 500 Energy Sector

Luke DiTomas

Alex Foisel

Ian McLeod

February 10, 2009

Size and Composition Industry Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

Agenda

The energy sector in the SIM portfolio is currently underweight when compared to the S&P 500 by 6.04%

Portfolio Weights

Consumer Discretionary, 8.19%

Consumer Staples, 12.85%

Energy, 14.09%

Financials, 10.72%Health Care,

15.94%

Industrials, 10.62%

Information Technology, 16.22%

Materials, 3.04%

Telecommunication Services, 3.72%

Utilities, 4.61% Consumer Discretionary, 9.67%

Consumer Staples, 14.22%

Energy, 8.05%

Financials, 9.59%Health Care, 21.50%

Industrials, 8.27%

Information Technology, 18.97%

Materials, 1.79%

Telecommunication Services, 2.19%

Utilities, 2.89%

S&P 500 Weight SIM Weight

Size and Composition

S&P 500 and Sector Performance

*As of January 30, 2009

The energy sector: Contains 39 stocks 3rd largest market cap* 4th best YTD return: (3.16%)* 6th best YTD return in 2008: (36.74%)

Sector Market Cap Level Daily MTD QTD YTDS&P 500 7,192,455 $825.88 -2.28% -8.57% -8.57% -8.57%

Energy 1,014,055 $374.13 -1.24% -3.16% -3.16% -3.16%Materials 218,994 $127.62 -3.67% -7.24% -7.24% -7.24%Industrials 763,552 $180.98 -2.48% -12.66% -12.66% -12.66%Consumer Discretionary 589,017 $151.37 -2.94% -10.64% -10.64% -10.64%Consumer Staples 924,124 $227.75 -3.22% -7.67% -7.67% -7.67%Health Care 1,146,392 $305.40 -1.19% -1.30% -1.30% -1.30%Financials 770,678 $123.98 -2.47% -26.55% -26.55% -26.55%Information Technology 1,166,403 $224.67 -2.89% -3.08% -3.08% -3.08%Telecommunications Services 267,760 $99.34 -0.96% -11.06% -11.06% -11.06%Utilities 331,480 $146.71 -2.39% -0.83% -0.83% -0.83%


Top Stocks Top 10 energy stocks based on S&P 500 Index Weight†

ConocoPhillips is currently held in the SIM portfolio* BP is currently the only other energy stock in the SIM portfolio

† As of February 6, 2009


Company Quote Market Cap P/E EPS Dividend YieldS&P 500 Index

Weight (%)Exxon Mobil Corp. 80.34 399.77B 9.24 8.69 2.00% 5.40%Chevron Corp. 74.90 152.18B 6.42 11.67 3.50% 2.01%ConocoPhillips* 47.94 71.47B N/A -11.16 3.90% 0.94%Occidental Petroleum Corporation 56.77 45.98B 6.80 8.35 2.30% 0.61%Apache Corp. 78.74 26.35B 5.62 14.02 0.80% 0.35%Devon Energy Corporation 58.20 25.84B N/A -4.85 1.10% 0.34%XTO Energy Inc. 39.34 22.69B 10.01 3.93 1.20% 0.30%Anadarko Petroleum Corp. 41.78 19.18B 5.93 7.05 0.90% 0.25%Marathon Oil Corporation 27.15 19.25B 5.49 4.95 3.50% 0.25%Halliburton Company 19.71 17.50B 11.59 1.70 1.80% 0.23%

Natural gas transmission & distribution This industry classification includes establishments engaged in both the

transmission and distribution of natural gas, but not in distribution to end users

Pipe lines, except natural gas This industry classification includes establishments engaged in the gathering

system and transportation via pipeline of refined and semi-refined products

Oil & gas field machinery & equipment This category covers establishments primarily engaged in the manufacturing of

machinery and equipment for use in oil and gas fields

Petroleum (Integrated) This category covers establishments primarily engaged in the exploration,

production, refinement, transportation and sale of crude oil and natural gas

Petroleum (Producing) This industry classification includes establishments engaged in the exploration,

developing and producing natural gas, crude oil and natural gas liquids

Coal This industry includes establishments primarily engaged in mining operations

producing bituminous coal, anthracite, and lignites

Sector Composition


Energy Stocks BP- Petroleum (Integrated)

Engages in the exploration, production, transportation, and sale of crude oil and natural gas

ConocoPhillips- Petroleum (Integrated) Operates as an integrated energy

company which explores, produces and markets crude oil, natural gas and natural gas liquids

Pengrowth Energy Trust- Petroleum (Producing) Engages in the acquisition, ownership

and management of working interests and royalty interests in oil and natural gas properties

Stock price quotes and market caps as of February 9, 2009

Quote Market Cap Beta P/EDividend

YieldDiluted

EPS 2008 Revenue$45.46 143.79B 0.65 6.79 7.40% 6.70 367.05B


YieldDiluted

EPS 2008 Revenue$45.83 72.35B 1.18 N/A 3.90% -11.16 225.42B


YieldDiluted

EPS 2007 Revenue$8.49 2.16B 0.84 10.61 20.10% 0.80 1.26B


Industry Analysis

Source: EIA

Mature phase of life cycle Global economy influence

Foreign & domestic economies Global recession Credit crisis

OPEC Controls 40% of world’s crude oil

Government factors Volume controls Price regulation Imposition of taxes and subsidies

External factors Threat to entry Intensity of rivalry Supplier bargaining power Buyer bargaining power Substitutes

Inputs: crude oil, labor, equipment / outputs: fuels, plastics

Industry

Industry Analysis Cont. Threat to entry (Low)

High start-up costs Economies of scale Multiple permits and licenses needed for exploration of oil Oil exploration requires large amounts of cash reinvested in the business each year

Intensity of rivalry (High) Heightened government control has restricted access to new upstream resources Oil and gas are facing growing competition from other fuel sources Increasing difficulties in extracting the remainder of the world’s oil will lead

companies to strive for greater efficiencies - hence increasing rivalry Increasing security of supply and transport costs has pushed companies to build

plants closer to major demand centers

Industry

Industry Analysis Cont. Supplier bargaining power (Moderate)

Foreign governments require permits and licenses in order to conduct drilling/extraction

Facilities need specialized parts and equipment to ensure proper functioning Vertical integration has reduced the reliance of input suppliers

Buyer bargaining power (Low) Commodity traders effect oil prices, shifting price power away from buyers Demand by foreign countries is expected to increase

Substitutes (Moderate) Although there is movement towards alternative energies, there hasn’t been a

sustainable energy source which could be a true substitute for oil Oil is one of the main commodities that drives the US/global economy

Industry

Exploration & Development Hydrocarbon Production Shipping Refining & Blending Storage Distribution Market

Business Segmentation

Exploration & Development Hydrocarbon

Production

Shipping

Refining & Blending

Storage

Distribution

Market

Exploration & Development

Hydrocarbon Production

Shipping

Refining & Blending

Storage

Distribution

Market

Value Chain

Source: UTC Energy Investment

Industry

Rise in Future Crude Oil Prices Subsiding global recession

Rise in crude oil prices and demand Turnaround in company earnings and job

numbers The dollar’s rally ends

Demand in China and India Growing rapidly from continued

industrialization Factories expected to pump up crude oil

demand

OPEC crude oil pricing goals OPEC countries need $60 to $80 per barrel

To balance budgets and invest in social programs

Further supply cuts

Industry

Crude oil producers Crude oil is becoming scarcer Price of crude oil too low to support the income needs of producing countries

Alternative energy Start-up phase High costs Hard to access more capital Expensive to implement Lack of demand given lower crude oil prices Traditional energy has more benefits

Cheaper source Fossil fuels readily available Easy to use Easily transportable

Rise in Crude Oil Prices Cont.

Industry

Alternative Energy Solar

Advantages: Always there with no pollution being created

Disadvantages: Low efficiency (15%) which can only be compensated for by large collecting areas Very high initial costs Lack of adequate storage materials (batteries) High cost to the consumer

Wind Advantages:

None on large scale; supplemental power in windy areas

Disadvantages: Relatively low efficiency (30%) Disruption of migratory birds (note this is what killed the recently proposed Columbia

River Gorge wind turbine project) Unreliable and its strength depends on local weather patterns, temperature, time of year

and location Equipment is very expensive compared to other energy sources and initial expense is

high

Industry

Biomass Advantages:

Theoretically inexhaustible fuel source Alcohols and other fuels produced by biomass are efficient, viable, and relatively clean-

burning

Disadvantages: Could contribute a great deal to global warming and create pollution if directly burned Still an expensive source, both in terms of producing the biomass and converting it to alcohols On a small scale there is most likely a net loss of energy

Alternative Energy Cont.

Industry

Crude Oil Prices vs. Energy Sector

Economic

Crude Oil Prices

Regression: Crude Oil Prices and Energy Sector

Economic

Yen/Euro Cross vs. Crude Oil Prices

Economic

Crude Oil Prices

Yen/Euro Cross

Regression: Yen/Euro Cross and Crude Oil Prices

•Correlation: 0.7919•R-square: 0.6272

Economic

Financial

All growth rates represent a 3, 5, or 10-year trailing average

EPS Growth Rates

-0.3%

11.5%16.1%

9.2%

1.7%

-2.3%

-25.4%

7.1%

27.1% 27.2%

41.3%

25.4%

15.4%

-4.7%

6.9%

24.0% 23.1%

54.3%

40.4%

19.9%

2.5%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

SP5A SP-10 XOM XTO COP BP PGH

3-year

5-year

10-year

6.9%

24.0%

6.3%8.7%

-0.5%

9.3%10.6%

-10.7%

9.9%

-1.8%

2.6%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Financial

10-Year EPS Growth Rate

Revenue Growth Rates

Financial

All growth rates represent a 3, 5, or 10-year trailing average

7.1% 7.4%

13.8%

26.1%

9.3%

13.8%

34.7%

8.7%

12.8%

17.9%

46.1%

18.6% 18.0%

36.4%

7.2%

9.8%12.2%

41.6%

35.8%

19.9%

32.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%


3-year

5-year

10-year

All margins represent a 5-year trailing average

Pre-Tax Margins

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%


Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Financial

Financial

All cash flows represent 12-month calendar years

Energy Sector Free Cash Flow

-223.2

602.9

3,600.0

2,312.5

1,225.9

3,858.6

5,773.1

6,781.5

5,012.8

5,694.4

-300.0

700.0

1,700.0

2,700.0

3,700.0

4,700.0

5,700.0

6,700.0

7,700.0

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008

millions

17.9%

5.1%

30.8%

25.6%

12.8%

7.7% Natural Gas Transmission & Distribution

Pipe Lines, Except Natural Gas

Oil & Gas Field Machinery & Equipment

Petroleum (Integrated)

Petroleum (Producing)

Coal

Sector Weight by SIC Code

Sector Segmentation Segmented the sector based on SIC

code Established in 1937 , The Standard

Industrial Classification (abbreviated SIC) is a United States Government system for classifying industries by a four-digit code

Segmented sector by SIC code: Natural gas Transmission &Distribution-

7 stocks Pipe Lines, Except Natural Gas- 2

stocks Oil & Gas Field Machinery & Equipment-

12 stocks Petroleum (Integrated)- 12 stocks Petroleum (Producing)- 10 stocks

*Petroleum stocks make up over 56% of sector

Coal- 3 stocks

Valuation

1.3

2.1

1.1

1.4 1.3 1.31.3 1.2

0.9

1.6

2.9

0.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Natural Gas Transmission &

Distribution

Pipe Lines, Except Natural

Gas




Coal

MeanCurrentEnergy Sector (mean)S&P 500 (mean)

13.6

17.5 17.8

8.8

15.0

24.3

15.112.3

9.0

16.6

40.4

6.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


Distribution


Gas




Coal


Valuation Analysis Price/Earnings Ratio

Energy sector mean: 12.3 S&P 500 mean: 18.2 Earnings are very correlated to oil prices

Gasoline sold for 37% less in Q408 than Q407

OPEC production cuts Met apx. 67% of the total 4.2 million barrel-

per-day-cut

Additional exploration costs Real GDP explains about 93% of the

demand for petroleum products

Price/Earnings/Growth Ratio Energy sector mean: 1.4 S&P 500 mean: 1.3 Additional OPEC production cuts Analyst/U.S. Government oil price

predictions Consensus 2009 price per barrel- apx. $60 Optimistic analysts- $100 per barrel

Price/Earnings Ratio

Price/Earnings/Growth Ratio

Valuation

18.2%

12.3% 12.2%

21.6%

14.5% 15.5%13.8%

15.9%

24.3% 23.3%

14.5%

31.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


Distribution


Gas




Coal


6.5x5.6x

11.5x

5.1x 5.5x

8.8x

4.3x

2.6x3.3x

4.2x3.3x

4.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x


Distribution


Gas




Coal


Valuation Analysis Cont.Price/EBITDA

Return on Equity

Valuation

Price/EBITDA Energy sector mean: 5.8x S&P 500 mean: 8.5x Decrease in EBITDA margins

Return on Equity Energy sector mean: 22.1% S&P 500 mean: 17.0% Increased revenue arising from higher

petroleum product prices flowed through to profit 10-year revenue growth rate for 6 largest

oil refiners- 17.99%

Period of consolidation Lower volumes

Wedge formation Upside breakout imminent

Constant highs, higher lows 20 & 50-day moving averages

Broken to the upside Creation of new support levels

Relative strength index (RSI) Upward trend developing

Moving average convergence divergence (MACD) Narrow gap

ADX directional movement index Crossover signals a buy

Technical Analysis

Source: Stockcharts.com

Valuation

Recommendation Current SIM Weight: 8.05% Current S&P 500 Weight: 14.09% Currently underweight 604 basis points Underweight the sector by 209 basis points relative to the S&P 500

An increase in current SIM Weight of 3.95%

Why not underweight more? Energy prices near bottom Valuation looks very cheap Increase in global energy demand

Why not overweight? Short-term demand for oil could further contract Recession could extend longer than expected

Recommendation

S&P 500 Energy Sector Luke DiTomas Alex Foisel Ian McLeod February 10, 2009.

Documents

natural gas petroleum

distribution of natural

composition slide

sale of crude oil

markets crude oil

gas fields petroleum

plastics industry slide

industry classification