Energy Sector
SUMMER 2015
ANALYSTS: DANIEL J. ERIN & JONATHAN CREMEANS
Agenda

Overview

Chevron

Conoco Phillips

Recommendation
2
Overview
3
Business Cycle
Energy
4
Industries
Energy Equipment & Services
($349.38B)
Oil, Gas, and Consumable Fuels
($3.07T)
Down 35.91% over the past year
Down 23.30% over the past year
5
Sector Performance
Brent Crude
PPB Increase
from prior
week: $4.57
Brent Crude
PPB decrease
from prior
week: $5
Brent Crude
PPB Increase
from prior
month: $10.86
Brent Crude
PPB decrease
from prior
week: $5
Brent Crude
PPB decrease
from prior
month: $5.50
6
Energy Sector
Operating Margin
7
US EIA Projections: Price Per
Barrel of Brent Crude
7/24: $54.62
2015: $55.62
2016: $67.04
2017: $76.35
8
Recommendation
 Add at least 40 bps of exposure to match S&P
 Industry is highly dependent on the price per barrel of oil equivalent
 The price of Brent Crude is expected to increase; however this is
based on the relationship between global GDP (demand proxy) and
global supply. A divergence between the 2 in either direction will
significantly impact the price per barrel of oil and the valuation of the
companies in the sector.
9
Chevron
10
Business Analysis: Competitive
Advantage
Value creation and capture: by the efficient deployment of cash in the
world’s key hydrocarbon basins, the transportation of crude products,
and the effective differentiation of hydrocarbon products.
 Upstream: drilling success rate in 2014 was 66% beating the industry
average of 59%. When the price per barrel of oil is high, Chevron is
able to leverage their production capacity and industry leading
earnings per barrel of oil
 Downstream: Chevron has a strong position in gasoline, diesel and
other fuels, as well as in additives, petrochemicals and lubricants.
Chevron has effectively differentiated many of its premium base fuel
and petrochemical products to capture an industry leading earnings
BOE
Industry leader in earnings per BOE in 2014
11
Business Analysis: Future
Positioning
The current Oil and Gas market is terrible; however, Chevron has taken the
following steps to position itself for success if the price per BOE increases:
 Reducing capital spend; with a
renewed focus on less-risky
fields
 Lowering costs - leveraging
purchasing power, negotiating
supplier reductions, and
rebidding contracts
 Improving efficiency
 Divesting low performing assets
12
Business Analysis: Key Economic
Drivers and Recent Performance
• The price of per barrel of Brent Crude
• The S&P 500
• Global GDP Growth
140
120
100
CVX regressed against the S&P 500 and the
price per barrel of Brent Crude (10YR)
80
60
Regression Statistics
Multiple R
R Square
40
20
Adjusted R Square
Standard Error
Observations
0
Brent Crude
CVX
90%
81%
80%
9.17
113.00
Predicted Y (CVX Stock Price) = -2.4567 +
(0.4917 * Brent Crude Spot Price) + (0.037 *
S&P500 Price)
13
Financial Analysis: 3 yr.
Projections
Table1: Forecasted Segment Revenues
 Decrease in revenue is
consistent with other
companies projections
(000$)
 Gradual increase in revenue is
expected from a rebound in
the price per BOE
 Income and EPS are expected
to increase as a result of the
Cash Flow improvement
initiatives discussed above
Net Income
Basic
Diluted
Consensus - GAAP
FY 2017E
$13,303
7.06
7.05
7.90
FY 2016E
$10,468
5.56
5.54
5.72
FY 2015E
$7,781
4.13
4.12
4.10
Net Revenue:
Upstream
Downstream
Other
Total Segments
Elimination of
intersegment
sales
Total Core Business
Revenue
Income from equity
affiliates
Other income
Total net revenue
Consensus
FY 2017E
FY
2016E
FY
2015E
56,483
143,863
1,500
201,846
52,788
134,452
1,500
188,739
43,990
112,043
1,500
157,533
-39,505
-37,269
-31,318
162,341
151,470
126,214
6,000
6,000
2,000
2,000
170,341 159,470
174,916 159,000
6,000
2,000
134,214
130,146
Expected improvement due to better
margins and price per BOE rebound
14
Financial Analysis: History and
Comps
Sector Valuation:
Absolute Basis
P/E
P/B
P/S
P/EBITDA
High
19.51080
3.2370
1.5546
8.1340
Low
5.8400
1.4863
.5128
2.8922
Median
12.7610
2.2172
1.0109
5.7870
Current
16.8320
1.8514
1.5288
7.8828
Stock Valuation:
Ticker
Average
CVX
XOM US
RDSA LN
BP/ LN
HES US
FP FP
IMO CN
P/E TTM
P/S TTM
31.02
11.41
13.11
13.08
46.06
94.54
33.46
15.52
P/B
0.92
1.13
1.12
0.51
0.41
2.12
0.61
1.34
P/CF TTM
1.21
1.27
2.11
1.14
1.17
0.92
1.31
1.86
5.80
7.77
9.69
5.23
4.92
5.60
4.83
11.74
EV/ EBITDA
TTM
6.74
6.90
8.64
4.79
4.45
4.89
5.15
10.67
Chevron’s P/E is below the industry average and the low when compared to peers
15
Financial Analysis: DCF
 High discount rate to
appropriately account for the
risk in the global oil market
 Strong projected upside
 Revenue and EPS estimates
are in-line with analyst
consensus opinion
16
Financial Analysis: Predictive
Regression
 10 year 2 variable regression
model:
 S&P 500
 Brent Crude Monthly Spot Price
Bret Crude Spot Price 7/24
S&P 500 7/24
Predicted Price of CVX (as of
7/24):
Actual Price
Potential Upside
 Predicted Y (CVX Stock Price) =
-2.4567 + (0.4917 * Brent Crude
Spot Price) + (0.037 * S&P500
Price).
Multiple R
R Square
 Strong potential upside; consistent
with the DCF model
Adjusted R Square
Standard Error
Observations
54.62
2,079.65
101.62
90.60
12%
Regression Statistics
90%
81%
80%
9.17
113.00
17
Recommendation:

Target Price $105.0, representing 13.7% upside over 7/28 close

CVX currently accounts for 3.58% of the SIM portfolio

Increase 40BPS to the 3.98% bringing the energy sector to market neutral
Why CVX:
Risks:

Positioned well for future growth

Global geo-political peace

Industry leader in profitability per BOE
in both the upstream and downstream
segments

80% of CVX earnings are directly related
to the price of a commodity

CVX is unable to implement their Cash
Flow improvement initiatives and
margins are worse than expected

Improvements to the attractiveness of
oil& gas alternatives

Environmental disaster


Appears to be cheaper than comparable
based on P/E ratio (in spite of poor
earnings)
Strong DCF and predictive historical
regression upsides
18
ConocoPhillips
19
Overview
•
Formed in 2002 from merger between Conoco, Inc. and Phillips
Petroleum
•
Largest independent oil & gas exploration and production company
•
Conventional and unconventional assets in North America, Europe,
Asia, Australia and Africa
•
Currently 3.79% of SIM Portfolio
1,610 MBOED Production - 1Q'15
8.9 BBOE Reserves - YE 2014
Liquids
18%
24%
16%
58%
OECD
North American
Gas
LNG +
International Gas
Non-OECD
84%
Source: COP Q1 Investor Update
20
Key Investment Considerations
•
Commitment to steady, compelling dividend
•
•
Annualized 4.7% dividend in 2Q’15
Diversification/Portfolio management capabilities
•
•
•
Robust geographic and product diversification
Hand in nearly every significant production play throughout the world
Capital Flexibility
•
•
Recently freed $5bn+ in capital
Strong position to capitalize on upcoming opportunities in industry
changes
21
Business Analysis - Diversification
•
•
Unique cost structures, regulatory
environments and risk profiles across
locations
No more than 33% production from
one geographic segment
Production (MMBOED)
2.0
1.5
1.0
Europe
Alaska
Europe
Alaska
AP&ME
AP&ME
Canada
Canada
Lower 48
Lower 48
2014
2017
0.5
-
Income/(loss) by Business Segment ($mm)
4,000
3,000
2,000
1,000
(1,000)
(2,000)
Alaska
Lower 48
Canada
Europe
2014
Asia Pacific and
Middle East
Other
International
Corporate and
Other
2013
22
Business Analysis – Capital Flexibility
2015-2017 Avg. Capital ~11.5bn
•
Recently freed ~ $5bn in capital
•
Excess creates enhanced ability to
quickly shuffle invested capital to
highest-returning geographic
segment, products, etc.
•
Ability to quickly close acquisitions
•
$12.0bn
$10.0bn
Europe
$8.0bn
Alaska
$6.0bn
AP&ME
$4.0bn
$2.0bn
Canada
Lower 48
$-
Key for distressed assets
23
Financial Projections
Forecast Methodology
Summary
•
Management production targets
•
Sharp decline in revenue in ’15
•
WTI/Brent Crude & HH futures
through 2017
•
•
Expenses projected as Cost/BOE
where applicable, otherwise %
sales
Strong top-line growth after ‘15
from increased production &
appreciation in oil & gas prices
•
Significant EPS growth from cost
savings
FY
2017E
Total Revenue
FY
2016E
FY
2015E
MRQ
1Q15
FY
2014A
FY
2013A
FY
2012A
FY
2011A
FY
2010A
$44,294,312
$41,797,656
$36,364,169
$8,002,000
$55,517,000
$58,248,000
$62,004,000
$66,069,000
$63,335,000
37,605,871
36,949,128
33,964,133
8,358,000
46,127,000
43,802,000
46,581,000
50,673,000
45,460,000
Income Taxes
2,541,608
1,842,441
912,013
(642,000)
3,583,000
6,409,000
7,942,000
8,208,000
7,570,000
Net Income
4,146,833
3,006,087
1,488,022
286,000
5,807,000
8,037,000
7,481,000
7,188,000
10,305,000
Diluted EPS
$3.27
$2.36
$1.14
$0.22
$5.51
$7.39
$6.73
$8.97
$7.62
Costs and Expenses
24
Trading Comps
Price
Market
Enterprise
EBITDAX
ROIC%
ROE%
Dividend
6/30/15
Cap
Value
Margin
2014
2014
Yield
Exxon Mobil Corp (XOM)
$83.20
$347,868.2
$378,215.8
14.6%
9.4%
16.3%
3.3%
Chevron Corp (CVX)
$96.47
$181,409.7
$206,248.5
20.0%
5.4%
11.3%
4.4%
ConocoPhillips (COP)
$61.41
$75,715.3
$96,511.3
33.2%
3.8%
9.9%
4.7%
Imperial Oil Ltd (IMO)
$38.66
$32,761.9
$40,038.7
15.7%
8.7%
15.1%
1.1%
Hess Corp (HES)
$66.88
$19,220.1
$23,872.4
64.7%
4.0%
6.7%
1.5%
Husky Energy Inc (HSE)
$19.14
$18,828.8
$28,784.2
25.6%
2.8%
3.8%
5.0%
Murphy Oil Corp (MUR)
$41.57
$7,398.2
$8,768.0
($ in millions except per share data)
69.8%
8.5%
8.9%
4.1%
Median
25.6%
5.4%
9.9%
4.1%
Average
34.8%
6.1%
10.3%
3.5%
EV/EBITDAX
EV/Reserves
P/E
Exxon Mobil Corp (XOM)
Chevron Corp (CVX)
ConocoPhillips (COP)
Imperial Oil Ltd (IMO)
P/CF
EV/EBITDA
TTM
2015E
2016E
2015E
2016E
2014A
1Q'15
19.4 x
9.9 x
8.3 x
8.1 x
6.9 x
45.0 x
15.1 x
23.4 x
7.9 x
5.9 x
6.5 x
5.4 x
35.9 x
18.3 x
140.8 x
7.7 x
5.8 x
8.5 x
5.9 x
43.4 x
10.8 x
22.2 x
11.9 x
9.6 x
11.6 x
9.3 x
55.9 x
10.1 x
N/A
6.7 x
5.0 x
7.9 x
6.1 x
41.5 x
16.6 x
Husky Energy Inc (HSE)
63.7 x
6.7 x
5.6 x
7.8 x
5.9 x
33.6 x
21.6 x
Murphy Oil Corp (MUR)
N/A
5.1 x
4.0 x
5.8 x
4.7 x
16.2 x
11.4 x
Median
23.4 x
7.7 x
5.8 x
7.9 x
5.9 x
41.5 x
15.1 x
Average
53.9 x
8.0 x
6.3 x
8.0 x
6.3 x
38.8 x
14.8 x
Hess Corp (HES)
25
DCF Analysis
61
9.0%
10.0%
11.0%
Terminal Growth Rate
2.0%
2.5%
3.0%
$57.7
$60.7
$64.2
$49.2
$51.3
$53.7
$42.6
$44.1
$45.8
44
9.0%
10.0%
11.0%
Avg. Crude Price
$70.0
$75.0
$80.0
$62.6
$64.2
$65.9
$52.8
$54.2
$55.7
$45.5
$46.7
$47.9
Weight
40%
60%
Cost of
Equity
$60.2
15.7%
Cost of
Equity
DCF-Implied Share Price
Implied Return
Cost of
Equity
$51.3
$66.2
EBITDA Exit Multiple
82 7.0x
8.0x
9.0x
9.0%
$64.9
$73.4
$81.8
10.0% $58.5
$66.2
$74.0
11.0% $52.7
$59.8
$66.8
Cost of
Equity
Price
GG-Implied Share Price
EMM-Implied Share Price
44
9.0%
10.0%
11.0%
Avg. Nat. Gas Price
$4.0
$5.0
$6.0
$62.1
$64.2
$66.2
$52.5
$54.2
$55.9
$45.2
$46.7
$48.1
26
COP Recommendation
•
Target price: $61.0, representing 16% upside over 7/28 close
•
No change to current position
•
Uncertainty over the next 3-6 months for the industry outweighs
positive valuation & growth potential
27
Conclusion
•
Increase position in CVX 40BPS to 3.98% to bring the energy sector
to market neutral
•
No change to current COP position
28
Appendix
29
COP Production Profile
$000s
Production Profile
FY
2017E
FY
2016E
FY
2015E
MRQ
1Q15
FY
2014A
FY
2013A
FY
2012A
FY
2011A
FY
2010A
Crude Oil
Average net production (MBD)
% Growth
Average price per barrel
Average Daily Revenue
Annual Revenue
667
5.0%
64.41
42,945
15,674,830
635
5.0%
62.42
39,638
14,507,655
605
5.0%
54.51
32,965
12,032,088
622
8.0%
48.05
29,887
2,727,198
576
2.5%
89.72
51,679
18,862,733
562
-0.9%
100.11
56,262
20,535,564
567
N/A
102.69
58,225
21,310,434
747
-12.9%
97.12
72,549
26,480,254
858
N/A
72.63
62,317
22,745,537
Natural Gas Liquids
Average net production (MBD)
% Growth
Average price per barrel
Average Daily Revenue
Annual Revenue
160
1.5%
20.0
3,192
1,165,143
157
1.5%
20.0
3,145
1,151,069
155
2.6%
19.0
2,944
1,074,412
155
2.6%
19.60
3,038
277,218
151
1.3%
37.45
5,655
2,064,057
149
0.7%
39.60
5,900
2,153,646
148
N/A
44.62
6,604
2,416,976
N/A
-
N/A
-
Bitumen
Average net production (MBD)
% Growth
Average price per barrel
Average Daily Revenue
Annual Revenue
156
0.0%
20.0
3,120
1,138,800
156
0.0%
20.0
3,120
1,141,920
156
1200.0%
20.0
3,120
1,138,800
156
1200.0%
17.22
2,686
245,127
12
-7.7%
60.03
720
262,931
13
8.3%
55.25
718
262,161
12
N/A
57.58
691
252,891
10
N/A
55.16
552
201,334
10
N/A
51.10
511
186,515
4,060
0.0%
4,060
0.0%
4,060
18.1%
4,059
18.1%
3,438
-0.6%
3,458
-4.2%
3,611
-10.3%
4,024
-9.3%
4,437
N/A
3.30
13,404
4,892,510
3.08
12,505
4,576,699
3.25
13,205
4,819,654
4.72
19,158
1,748,211
6.01
20,652
7,538,004
5.68
19,641
7,169,126
5.05
18,236
6,674,211
5.64
22,695
8,283,806
5.07
22,496
8,210,890
Total COP Production Revenue
% Growth
22,871,283
7.0%
21,377,343
12.1%
19,064,954
-33.6%
4,997,753
N/A
28,727,725
-4.6%
30,120,497
-1.7%
30,654,513
-12.3%
34,965,394
12.3%
31,142,942
Revenue from Operating Subsidiaries
% Growth
17,989,984
5.0%
17,133,318
20.0%
14,277,765
-40.0%
2,718,247
N/A
23,796,275
-2.0%
24,292,503
-11.1%
27,312,487
-6.6%
29,230,606
16.6%
25,072,058
3,067,045
366,000
3,433,045
2,920,995
366,000
3,286,995
2,655,450
366,000
3,021,450
205,000
52,000
29,000
286,000
2,529,000
98,000
366,000
2,993,000
2,219,000
1,242,000
374,000
3,835,000
1,911,000
1,657,000
469,000
4,037,000
1,239,000
370,000
264,000
1,873,000
1,376,000
5,563,000
181,000
7,120,000
44,294,312
45,689,000
41,797,656
41,990,000
36,364,169
33,756,000
8,002,000
55,517,000
58,248,000
62,004,000
66,069,000
63,335,000
Natural Gas
Average net production (MMCFD)
% Growth
Average price per thousand cubic ft.
Average Daily Revenue
Annual Revenue
Income Statement
Equity in earnings of affiliates
Gain on dispositions
Other income
Total Other Revenue
Total Revenue
Consensus
30
COP Free Cash Flow
ConocoPhillips (NYSE:COP)
Discounted Cash Flow Analysis
Analyst: Jon Cremeans
6/10/15
$000s
Terminal Discount Rate =
9.0%
Terminal FCF Growth =
2.5%
EBITDA Exit Multiple=
9.0 x
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
36,364,169
-33.6%
41,797,656
14.9%
44,294,312
6.0%
46,951,970
6.0%
49,299,569
5.0%
51,764,547
5.0%
54,352,775
5.0%
57,070,413
5.0%
59,923,934
5.0%
62,920,131
5.0%
1,309,110
3.6%
4,848,528
11.6%
7,574,327
17.1%
7,981,835
17.0%
9,120,420
18.5%
9,835,264
19.0%
10,870,555
20.0%
11,414,083
20.0%
11,984,787
20.0%
12,584,026
20.0%
Interest (Income)/Expense
% Sales
363,642
1.0%
417,977
1.0%
442,943
1.0%
469,520
1.0%
492,996
1.0%
517,645
1.0%
543,528
1.0%
570,704
1.0%
599,239
1.0%
629,201
1.0%
Taxes
Rate
359,278
38.0%
1,683,610
38.0%
2,709,926
38.0%
2,854,680
38.0%
3,278,421
38.0%
3,540,695
38.0%
3,924,270
38.0%
4,120,484
38.0%
4,326,508
38.0%
4,542,833
38.0%
Net Income
% Sales
586,190
1.6%
2,746,942
6.6%
4,421,458
10.0%
4,657,635
9.9%
5,349,003
10.9%
5,776,923
11.2%
6,402,757
11.8%
6,722,895
11.8%
7,059,039
11.8%
7,411,991
11.8%
7,272,834
20.0%
(24,000)
-0.1%
9,091,042
25.0%
8,359,531
20.0%
167,191
0.4%
9,404,473
22.5%
8,858,862
20.0%
9,987
0.0%
8,858,862
20.0%
9,390,394
20.0%
10,586
0.0%
9,390,394
20.0%
9,859,914
20.0%
11,115
0.0%
9,859,914
20.0%
10,352,909
20.0%
11,671
0.0%
10,352,909
20.0%
10,870,555
20.0%
12,254
0.0%
10,870,555
20.0%
11,414,083
20.0%
12,867
0.0%
11,414,083
20.0%
11,984,787
20.0%
13,510
0.0%
11,984,787
20.0%
12,584,026
20.0%
14,186
0.0%
12,584,026
20.0%
Free Cash Flow
Discount Factor
(1,208,018)
0.92
1,534,810
0.84
4,411,472
0.77
4,647,050
0.71
5,337,888
0.65
5,765,253
0.60
6,390,502
0.55
6,710,028
0.50
7,045,529
0.46
7,397,805
0.42
PV of FCF
(1,108,273)
1,291,819
3,406,465
3,292,087
3,469,261
3,437,632
3,495,824
3,367,537
3,243,957
3,124,913
Revenue
% Growth
Operating Income
Margin
Plus: Depreciation, Depletion and
Amortization
% Sales
Less: Δ NWC
% Sales
Less: Capital Expenditures
% Sales
31
COP DCF Calc
Implied Equity Value (Gordon Growth)
Terminal Value (EMM)
Terminal Value (Gordon Growth)
Cumulative PV of Cash Flows
27,021,221
35.4%
2024E EBITDA
25,168,052
PV of Terminal Value
Implied Equity Value
49,277,473
76,298,695
64.6%
100.0%
EBITDA Exit Multiple
9.0x
Terminal Value
226,512,471
FCF Yield
3.3%
PV of Terminal Value
95,681,315
Terminal FCF
Terminal
Growth Rate
Discount Rate
Implied Multiples (GG)
Market P/E
136.1x
29.0x
18.0x
Projected P/E
Market EV/EBITDA
Projected EV/EBITDA
130.2x
11.9x
11.5x
27.8x
7.7x
7.5x
17.3x
6.2x
6.0x
Implied Share Price (GG)
Shares Outstanding
1,245,531
Terminal P/E
30.6x
Implied Share Price
82.73
DCF-Implied Return
29.2%
7,397,805
2.5%
9.0%
Terminal
Value
FCF Yield
116,657,700
6.3%
PV of Terminal
Value
49,277,473
Terminal P/E
15.7x
Terminal
EV/EBITDA
4.6x
Implied Equity Value/Share
Debt
Cash
Cash/Share
$64.06
$61.26
-4.4%
22,318,000
2,664,000
2.14
Calculated Share Price
Price
GG Implied Share Price
$61.3
EMM Implied Share Price
82.7
DCF-Implied Share Price
Implied Return
Cost of
Equity
Current Price
Implied Equity Value/Share
GG-Implied Return
61
8.0%
9.0%
10.0%
11.0%
12.0%
2.00%
$69.8
$58.3
$49.7
$43.0
$37.7
2.25%
$72.0
$59.7
$50.7
$43.7
$38.3
Terminal Growth Rate
2.50%
$74.3
$61.3
$51.8
$44.5
$38.9
2.75%
$76.9
$62.9
$52.9
$45.4
$39.5
3.00%
$79.7
$64.8
$54.1
$46.2
$40.1
Weight
60.0%
40.0%
$69.8
9%
32