Energy Sector
SIM STOCK PRESENTATION
Spring 2014
Adam Hulbert, Didier Hirwantwari,
Haochao Jiao and Yuxiang Hui
Agenda
I.
II.
III.
IV.
V.
VI.
Overview
Schlumberger
National Oilwell Varco
Marathon
Chevron
Recommendation
2
Sector Overview
S&P 500, SIM Portfolio Comparison
S&P 500: 10.23%
SIM: 8.78%
145 Basis Points Underweight
3
Sector Overview
Energy Stocks in SIM Portfolio
 Apache Corp. (APA)
4.40%
 Chevron Corp. (CVX)
4.37%
4
Schlumberger Limited
5
Business Overview
•
•
Schlumberger is the global leader in
the Integrated Oilfield Services industry
Three business segments:
• Reservoir Characterization
Principal Technologies involved in finding
and defining hydrocarbon resources
Company Data
Ticker: SLB
Beta: 1.75
EPS (2013): $5.09
Trailing P/E: 19.78
• Drilling
Principal Technologies involved in the
drilling and positioning of oil and gas wells
Market Cap: 130.51B
• Reservoir Production
Principal Technologies involved in the
lifetime production of oil and gas reservoirs
Diluted Shares Outstanding: 1.33B
Enterprise Value: 131.75B
Dividend Yield: 1.60%
52-Week Price Range: $69.08 - $100.15
6
LTM Stock Performance vs. S&P 500
Upward 36.99%
7
Drivers & Risks
Drivers
•
•
Expenditures of oil and gas companies
growing steadily
Especially Middle East & Asia
Reservoir Characterization segment
driving earnings growth
•
•
•
Fluctuation of oil and gas prices
•
International operation risk and
specific country risk
•
Competition and pricing pressure
•
Environmental and regulatory
compliance
•
Severe weather conditions
International market driving revenue
growth
•
•
Risks
Highest profit margin
Technology & Innovation
•
•
Highest R&D expense in the industry
Active M&A activities
8
Financial Analysis
• Firm Vitals
2009
2010
2011
2012
2013
Revenue
$ 22,702 $ 27,447 $ 36,959 $ 41,731 $ 45,266
Growth
20.90%
34.66%
12.91%
8.47%
Net Income
$ 3,134 $ 4,267 $ 4,997 $ 5,490 $ 6,732
Growth
36.15%
17.11%
9.87%
22.62%
ROA
9.56%
10.01%
9.34%
9.40%
10.47%
ROE
17.42%
16.95%
15.99%
16.63%
18.14%
Debt/Assets Ratio
16.38%
15.67%
17.99%
18.90%
19.64%
Current Ratio
1.88
1.67
1.95
1.95
1.94
Gross Margin
24.04%
20.42%
21.70%
21.20%
21.95%
Operating Margin
18.15%
15.94%
17.64%
17.46%
18.44%
Diluted EPS
$ 2.59 $ 3.38 $ 3.67 $ 4.10 $ 5.05
Growing fast, Increasing profitability, Good leverage, Great margin
9
Financial Analysis
• Peer Comparison
Schlumberger Halliburton Baker Hughes
Market Cap (mm)
ROA
ROE
Debt/Assets Ratio
Current Ratio
Gross Margin
Operating Margin
Weatherford
124.84
50.32
27.37
13.09
10.47%
18.14%
19.64%
1.94
21.95%
18.44%
7.50%
14.48%
26.75%
2.73
15.21%
14.07%
4.01%
6.30%
15.68%
2.47
17.04%
8.71%
-1.54%
-4.07%
39.71%
1.54
19.40%
4.27%
Largest Market Cap, Highest Profitability
Moderate Leverage & Liquidity, Greatest Margin
10
Valuation Analysis
• Multiples Valuation
WFT
P/E
P/B
P/S
P/CF
HAL
BHI
NOV
Current Stock
Price: $ 98.48
RIG
16.55 14.93 15.52 12.22 8.95
1.60 3.70 1.55 1.44 0.88
0.82 1.58 1.13 1.32 1.58
5.99 9.34 7.80 9.24 5.33
Target
Sector Multiple
14.52
1.96
1.16
7.35
15.50
3.00
1.40
9.00
Target Value
per Share
Target
Price
$5.09
$29.83
$34.21
$7.40
$78.90
$89.50
$47.90
$66.59
All surprisingly LOW compared with SLB current stock price!!
11
Valuation Analysis
• DCF Valuation
12
• Sensitivity Analysis
Terminal Growth
Rate
DCF Valuation Sensitivity Analysis
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
9.90%
10.20%
108.72
113.80
119.74
126.77
135.25
145.65
158.72
103.96
108.50
113.77
119.96
127.34
136.29
147.38
Discount Rate
10.50% 10.80% 11.10%
99.59
103.66
108.35
113.83
120.30
128.06
137.55
95.56
99.22
103.42
108.28
113.99
120.77
128.96
91.84
95.14
98.91
103.25
108.30
114.26
121.38
11.40%
11.70%
88.39
91.38
94.77
98.66
103.15
108.41
114.64
85.18
87.89
90.96
94.46
98.47
103.14
108.62
13
Final Price Target
Schlumberger Price Target
Metric
Price
Weight
P/E
$78.90
2%
P/B
$89.50
2%
P/S
$47.90
0%
P/CF
$66.59
1%
DCF
$108.28
95%
Final Price Target
Current Price (4/14/2014)
Upside Potential
Recommendation:
BUY
$106.90
$98.48
8.55%
14
National Oilwell Varco
Oil well Services & Equipment Industry
15
Business Overview
• Provides equipment,
components, and services
for the oil & gas drilling
industries
• Operations in over 1,100
locations across 6
continents
• Products on 90% of
offshore/onshore oil rigs
16
Stock vs S&P 500 vs Energy
17
Drivers vs Risks
Drivers
• Rapidly increasing shale
gas production
• International growth:
Russia, Brazil, Canada
• Segment spin-off &
revamp
• Strive for standardization
Risks
• Volatile oil prices
• Cost overruns
• End to Oil & Gas Boom?
• Dayrate Decreases (daily
rate operator pays rig
owner)
18
Financial Analysis
19
Financial Analysis
• P/E: 26%
undervalued
• P/CF: 59%
cheaper
• P/B: price per
share $0.94
20
Valuation Analysis
21
Valuation Analysis
Target Multiple Valuation
Target price is even higher than DCF through this valuation method,
shows the potential upside for NOV.
22
Recommendation
Target Price: $88.41
Current Price: $80.34
Upside: 10.04%
BUY
23
Marathon Oil Corporation
24
Business Overview
Introduction
•
•
•
International energy
company engaged in oil and
gas exploration &
production
Span off its downstream
business in 2011 and
focused on upstream
business since then
Operating Segments
• North America E&P
• International E&P
• Oil Sands Mining
Stock Data
Current Price
52 Week Price Range
Market Capitalization
Shares Outstanding
Dividend
Dividend Yield
Historic Beta
$35.52
$29.47-38.18
24.76B
710M
$0.76
2.20%
1.31
12 Month Stock Performance
25
Business Overview
Sustained Competitive Advantages
Prioritize in Liquid-Rich Plays
• 72% of the 2014 budget goes to North America E&P
Actively divestitures and acquisitions to optimize portfolio
• MRO divested approximately $3.5 billion assets from 2011 to 2013
• MRO announced to begin accepting bids for its North Sea
businesses in the second quarter
Align Interest with Shareholders
• MRO increased 12% of its dividend in 2013
• MRO expanded its share buyback program to a total of $1.5 billion
26
Drivers & Risks
Drivers and Risks
Drivers
• World economy shows
strong growth trend in 2014
• Increasing profitability and
strong efficiency
• Healthy financial condition
• Strong dividend payment and
intensive share repurchase
program
Risks
• High Volatility of Oil and
Gas Prices
• Uncertainty of the Possible
Sale of the UK and Norway
North Sea Businesses
• Uncertainty of future
exploration and drilling
results
27
Financial Analysis
Profitability Analysis – Peer Comparison
DVN
COP
MUR
APC
HES
MRO
Average
-20.00
-10.00
Average
Gross Margin 33.96
Profit Margin 10.30
ROA
5.38
ROE
11.03
0.00
MRO
43.35
11.80
4.94
9.32
10.00
HES
21.32
37.14
11.72
22.06
20.00
APC
48.71
-19.36
1.48
3.77
30.00
MUR
36.07
5.60
6.41
12.81
40.00
COP
23.98
18.76
7.79
18.30
50.00
DVN
30.34
7.89
-0.05
-0.10
28
Financial Analysis
Profitability Analysis – DuPont Analysis
0.8
0.6
0.4
0.2
Net Income Margin
0
Asset Turnover
-0.2
Leverage Ratio
-0.4
ROE
-0.6
Net Income Margin
Asset Turnover
Leverage Ratio
ROE
FY 2013
12.09
0.41
1.89
9.32
FY 2012
10.08
0.47
1.88
8.93
FY 2011
20.09
0.36
1.99
14.40
2005
2006
2007
2008
2009
2010
2011
2012
-1
2013
-0.8
FY 2010
21.97
0.24
2.12
11.24
FY 2009
3.03
1.08
2.07
6.75
29
Financial Analysis
Leverage and Liquidity Analysis
Curr
Ratio
Quick
Ratio
Debt/
Equity
Debt/
Asset
EBIT/
Interest Exp
Average
1.13
0.83
42.39
19.95
6.67
MRO
0.69
0.55
34.10
18.52
11.99
HES
1.31
0.75
23.45
13.56
1.66
APC
1.25
0.91
62.06
24.32
4.26
MUR
1.09
0.66
34.47
16.92
9.61
COP
1.26
0.98
41.59
18.35
7.74
DVN
1.20
1.14
58.65
28.04
4.74
30
Valuation Analysis
DCF Valuation
• Price Range: $35.78 – 52.80
MRO DCF Projections
2013E
Current P/E
13.80
Projected P/E
16.56
Current EV/EBITDA
4.75
Projected EV/EBITDA
5.41
Diluted Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2014E
12.46
14.95
4.88
5.55
2015E
12.80
15.37
5.00
5.70
710
$
$
35.54 2014/4/14
42.62
19.92%
31
Valuation Analysis
Sensitivity Analysis – Tornado Chart
32
Valuation Analysis
Relative Valuation
• Peers: MUR, COP, HES, APC, DVN
• Price Range: $35.94 – 41.46
Current
Multiple
Peers
Target Target % chg from
current
Multiple Price
MUR COP HES APC DVN
price
P/E
13.15 11.31 13.24 10.70 20.36 7.80
13.9
36.19
5.3%
P/S
1.64 0.65 1.53 1.92 2.81 2.49
1.92
39.97
16.3%
P/B
1.24 1.33 1.59 1.08 1.92 1.27
1.50
41.46
20.7%
P/CF
4.60 3.21 5.18 5.68 4.72 4.77
4.83
35.94
4.6%
average
38.39
11.7%
33
Recommendation
•
•
•
•
Target Price: $41.0
Current Price: $35.54
Upside Pontitial: 15.36%
Recommendation: BUY
Valuation Ranges
52-week Trading Range
Relative Valuation
DCF
20
25
30
35
40
45
50
55
60
34
Chevron Corporation
35
Business Overview
Chevron:
Chevron is a company
that is engaged in the
Oil and exploration
business and is part of
the Energy Sector and
falls under the
Integrated Oil and
Exploration SubIndustry.
Above is Chevron’s Deepest offshore production
Facility in the Gulf of Mexico off of the New Orleans
Coast – Part of Chevron’s push towards the
upstream segment.
36
Business Overview
Business Segments
•
•
•
Upstream:
Exploration and development of crude oil and
natural gas; Includes but is not limited to
processing, liquefaction, transporation and
regasification assiatied with liquefied natural
gas.
Downstream:
Refining crude oil into petroleum products that
include but are not limited to the marketing of
crude oil and redefined products and the
transportingcrude oil and refined products by
pipeline
Chemicals:
50% interest in its Chevron Phillips Chemical
Company LLC (CPChem) Affiliate.
Stock Data
Current Price
52 Week Price Range
Market Cap (billions)
Diluted Sahres Outstanding (billions)
Dividend (QTR)
Dividend Yield
Historic Beta
$119.20
109.27-127.83
$222.78
1.92
$1.00
3.5%
1.07
12 Month Stock Performance
37
Drivers & Risks
Economic Catalysts
Economic Risks
•
•
•
•
•
Oil prices in conjunction with
Energy demand are projected to
increase.
Favorable verdict in the Ecuador
litigation case adding to increased
investor trust
Expansion of profitable segments
(Upstream and Downstream)
•
•
Volatility of Oil prices
Geopolitical issues arising in
Russia where chevron has
production facilities
Less diversification through
concentration of only two
segments
Regulation risks in emerging
markets where CVX owns stake
38
Financial Analysis
Profitability Ratios
Outperformance of the
Energy Sector on avg.
for the past five years.
Ratios
ROE CVX
ROE S&P 500 Energy Sector
ROC cvx
ROC S&P 500 Energy Sector
Operating Margin CVX
Operating Margin S&P 500 Energy Sector
ROA CVX
ROA S&p 500 Energy Sector
CY 2008 CY 2009 CY 2010 CY 2011 CY 2012 CY 2013 avg
29.23
11.74
19.31
23.75
20.30
15.00
19.89
17.04
7.48
15.95
17.90
15.76
13.61
14.62
26.62
10.62
17.39
21.64
18.65
13.46
18.06
14.40
5.12
12.79
14.34
12.65
10.73
11.67
13.72
8.99
13.38
16.21
15.73
12.86
13.48
14.80
8.15
12.37
13.93
12.61
11.34
12.20
15.44
6.44
10.89
13.64
11.83
8.80
11.17
7.97
3.50
7.64
8.62
7.57
6.59
6.98
39
Financial Analysis
Peer comparison
Ticker
Integrated Oil & Gas (8 securities)
Average
CVX US Equity
XOM US Equity
HES US Equity
IMO CN Equity
BP/ LN Equity
RDSA LN Equity
OXY US Equity
FP FP Equity
Latest Filing
Mkt Cap (USD) P/E LF
141065.21
222785.73
416895.31
26336.74
43795.44
87756.37
143736.56
73740.82
113474.69
11.90
11.24
13.73
10.85
13.48
6.58
13.73
13.70
11.94
ROC LF
12.27
18.58
14.33
7.89
12.19
8.37
OPM:Y
13.13
12.86
10.33
13.55
11.90
4.16
5.95
35.74
10.60
Net Mrgn 5Yr Avg:Y
9.62
9.98
8.89
8.91
10.09
4.33
5.18
22.98
6.63
* Overall notion here is that Chevron is cheaper than the Market leaders in the sub
industry with a p/e of 11.24 as well as having a higher operating margin of 9.98 than both
sub industry leaders Royal Dutch and Mobil.
40
Valuation Analysis
DCF Valuation & Sensitivity Analysis
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
153,489
134,945
288,434
9.35%
2014E
10.7
13.7
6.8
8.7
53%
47%
100%
2015E
10.7
13.7
7.2
9.2
2016E
12.0 Disct rate
15.4
10.5
6.2 FCF rate
8.0
4.5
139.57
143.99
149.09
155.05
162.09
170.53
180.86
131.65
135.36
139.61
144.51
150.23
156.98
165.09
124.61
127.76
131.32
135.40
140.11
145.60
152.08
1,920
Current Price
$ 117.13
Implied equity value/share$ 150.23
Upside/(Downside) to DCF 28.3%
Range of Discnt Rate
• 10%-11%
Range of FCF Rate
• 2.50%-5.50%
Conclusion is that even
with extreme extreme
rates, firm is still
undervalued.
41
Valuation Analysis
Sum of parts Peer Comparison
P/E basis as well as previous DCF are the basis of
my implied
42
Recommendation
Target Price: $130.50
Current Price: $119.20
Upside potential: 9.48%
DCF %
• .50
Sum of parts %
• .50
Final Recommendation:
• Buy up to 4.5% of total weigh
43
Final Recommendations
Company
Price
Target
Current
Price
Current
Weight
Change
Recommended Upside
Weight
Pontential
Schlumberger
$ 106.90 $ 98.48
0 bps
BUY
250 bps
8.55%
National Oilwell Varco
$ 88.41 $ 80.34
0 bps
BUY
300 bps
10.04%
Marathon
$ 41.00 $ 35.54
0 bps
BUY
200 bps
15.36%
Chevron
$ 130.50 $ 119.20 437 bps
BUY
450 bps
9.48%
* 173 bps overweight to S&P 500
44
Thank you!
Any Questions?
45