Energy Sector
Lee Grossman
Adam Harkey
Luran He
Outline
 Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
 Q&A
Major Players
Largest Companies by Market
Capitalization
Gazprom
PetroChina
Other
Chevron
ExxonMobil
Sinopec
BP
TOTAL
Royal Dutch Shell
Petrobras
SIM Portfolio holdings
SLB
Schlumberger
$241,335
2.17%
Current Weights -->
Underweighted
Energy’s Industries
 Oil & Gas Integrated
 Oil & Gas Drilling
 Oil & Gas Exploration and Production
 Oil & Gas Services & Equipment
 Oil & Gas Storage
 Oil & Gas Refining and Marketing
 Coal & Consumed Fuels
Market Capitalization by Industry
Coal & Consumer
Fuels
2%
Oil & Gas
Refining/Marketing
3%
Oil & Gas Storage
5%
Oil & Gas Equip/
Service
15%
Oil & Gas
Drilling
2%
Oil Integrated
67%
Oil & Gas
Exploration/Production
6%
10-YR Earnings Performance vs. S&P
10-YR Sector Performance (Price)
5-YR Performance Energy vs. S&P
YTD Performance Energy vs. S&P
 Overview
 Business Analysis
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Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Q&A
Analysis of Demand and Supply
 Phase of the life cycle: from growth to maturity
 stable growth
 High barriers to entry
 Significant competition
 US economy
 Oil price
 Inflation
 Government regulation
 Foreign economies
 OPEC
 External factors
 Weather
 Transportation oil use
Porter’s Five Forces
Threat of
New
Entrants
 Threat of new entrants: low
 Threat of substitutes: high
 Bargaining power of buyers: low
Suppliers
Power
Industry
Rivalry
 Bargaining power of suppliers: moderate
 Competitive rivalry: high
Threat of
Substitutes
Buyers
Power
Analysis of Demand
Analysis of Demand
Analysis of Supply
Analysis of Supply
 New capacity additions
Long-term U.S. Demand and Supply
Short-term World Demand and Supply
International Crude Oil and Liquid Fuels Supply, Consumption
Million barrels per day
94
Projections
92
90
88
86
84
82
80
2009
2010
2011
Total World Production
2012
Total World Consumption
2013
2014
 Overview
 Business Analysis
 Economic Analysis
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Financial Analysis
Valuation Analysis
Recommendation
Q&A
Economic Factors to Consider
 Oil Prices
 WTI, Brent
 Inflation
 Recent investment
 GDP
 Many of our positions are defensive
Crude vs. Energy
 Energy sector prices driven by oil prices
 Note the recent flattening of oil prices and dip in 2012
 Its effects will be apparent in later slides
Worldwide Crude Production
vs.
Energy
Gasoline vs. Energy
 Oil prices have flattened over the past year
 Should we be concerned?
 Consider oil price drivers
Crude vs. CPI
Dollar vs. Energy
 Dollar value falls – Energy climbs
U.S. Oil & Gas Rig Count
 U.S. rig count has climber for over two years, but recently
fallen
 Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
 Q&A
Financial Analysis
 Sales Revenue
 Earnings Growth
 Industry Profit Margin
 Industry ROE
 Summary
Sales Revenue
Earnings Growth
Energy’s Industries
 Oil Integrated
 Oil & Gas Exploration/Production
 Oil & Gas Drilling
 Oil & Gas Refining/Marketing
 Oil & Gas Equip/ Service
 Coal & Consumer Fuels
 Oil & Gas Storage
Net Profit Margins
Net Profit Margin
Industry
Oil Integrated
Oil & Gas Exploration/Production
Oil & Gas Drilling
Oil & Gas Refining/Marketing
Oil & Gas Equip/ Service
Coal & Consumer Fuels
Oil & Gas Storage
2009
2010
2011
2012
2013
5.3%
15.8%
18.8%
0.0%
9.7%
8.4%
12.3%
7.4%
18.0%
10.5%
0.8%
10.7%
8.5%
12.7%
8.3%
18.2%
11.6%
1.7%
11.8%
9.5%
13.6%
10.1%
12.5%
14.0%
2.7%
10.6%
4.1%
9.3%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Industry Net Profit Margins
Net Profit Margin
20.0%
18.0%
16.0%
Margin %
14.0%
Oil Integrated
Oil & Gas Exploration/Production
12.0%
Oil & Gas Drilling
10.0%
Oil & Gas Refining/Marketing
Oil & Gas Equip/ Service
8.0%
Coal & Consumer Fuels
6.0%
Oil & Gas Storage
4.0%
2.0%
0.0%
2009
2010
2011
2012
Industry Return on Equity
Return on Equity
Industry
Oil Integrated
Oil & Gas Exploration/Production
Oil & Gas Drilling
Oil & Gas Refining/Marketing
Oil & Gas Equip/ Service
Coal & Consumer Fuels
Oil & Gas Storage
2009
12.2%
7.1%
17.3%
3.8%
16.8%
22.4%
11.4%
2010
17.6%
11.6%
9.1%
2.6%
13.3%
16.2%
13.5%
2011
22.3%
12.5%
8.1%
15.5%
15.4%
15.5%
15.0%
2012
20.1%
11.6%
9.7%
15.9%
16.0%
12.5%
12.3%
2013
20.8%
10.7%
9.8%
24.0%
15.0%
10.3%
10.7%
Industry Return on Equity
Industry Return on Equity
30.0%
25.0%
Oil Integrated
20.0%
ROE %
Oil & Gas Exploration/Production
Oil & Gas Drilling
15.0%
Oil & Gas Refining/Marketing
Oil & Gas Equip/ Service
Coal & Consumer Fuels
10.0%
Oil & Gas Storage
5.0%
0.0%
2009
2010
2011
2012
2013
Financial Summary
 Sales stable to moderate in near term (up 2% in recent
quarter)
 Earnings growth down 2% in recent 12 months but up 10% in
4Q 2012
 Heavily invested into long-term operations
 Long-term growth (5-10 year) optimistic especially for large
cap stocks
 Most successful industries and firms reap large rewards
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Overview
Business Analysis
Economic Analysis
Financial Analysis
 Valuation Analysis
 Recommendation
 Q&A
Technical Analysis
Technical Analysis
 Energy has outperformed the S&P since
mid-2004
 Most multiples are equal to or just below
medians
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Energy - 10 Year, Absolute
Monthly High Monthly Low Median
18.9
6.1
12.4
16.9
7.8
11.8
1.4
0.5
1.0
3.4
1.4
2.0
9.4
5.0
7.0
Energy - 10 Year, relative S&P
Monthly High Monthly Low Median
1.10
0.53
0.84
1.20
0.57
0.85
1.00
0.70
0.80
1.40
0.80
0.90
0.90
0.70
0.70
Current
12.2
12.4
1.0
2.0
7.0
Current
0.81
0.85
0.70
0.80
0.70
Trailing P/E
Forward P/E
Price/Sales
Price/Book
Price / Cash Flows
Valuation - Sectors
 Sectors:
 Oil & Gas Equipment/Service
 Schlumberger
 Oil & Gas Drilling
 Coal & Consume Fuels
 Oil & Gas Exploration and Production
 Apache
 Oil & Gas Integrated
 Chevron
 Oil & Gas Refining
 Oil & Gas Storage
 Valuation varies by sector
 Integrated industry seems strongest, and represents a majority of the
sector
 Many sectors affected by lowered demand, increased supply, lower
oil prices in 2012, and stagnating economies in financial crises
•
Over a ten year period, all sectors
have beat the S&P
Oil & Gas Integrated
Oil & Gas Integrated - Relative to S&P
Monthly High Monthly Low Median
Trailing P/E
1.0
0.5
0.7
Forward P/E
1.2
0.5
0.7
P/S
0.8
0.6
0.7
P/B
1.4
0.9
1.0
P/CF
0.9
0.6
0.7
Current
0.7
0.7
0.7
0.9
0.7
Oil & Gas Integrated - 10 Year, Absolute
Monthly High Monthly Low Median
Trailing P/E
17.9
6.2
11.1
Forward P/E
16.2
6.5
10.7
P/S
1.2
0.5
0.9
P/B
3.6
1.6
2.4
P/CF
8.9
5.1
6.6
Current
10.0
10.7
1.0
2.0
6.6
Oil & Gas Refining
Oil & Gas Refining/Marketing - Relative to S&P
Monthly High Monthly Low Median Current
Trailing P/E
2.4
0.2
0.6
0.6
Forward P/E
4.8
0.4
0.6
0.6
P/S
0.2
0.1
0.1
0.2
P/B
0.9
0.2
0.5
0.9
P/CF
0.8
0.4
0.5
0.7
Oil & Gas Refining/Marketing - 10 Year, Absolute
Monthly High Monthly Low Median Current
Trailing P/E
92.6
3.4
9.5
8.8
Forward P/E
78.9
4.3
8.7
8.4
P/S
0.7
0.1
0.2
0.2
P/B
3.9
0.5
1.5
2
P/CF
8.2
2.9
5.3
6.4
Oil & Gas Storage
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Oil & Gas Storage - Relative to S&P
Monthly High Monthly Low Median
2.2
0.5
1.1
1.9
0.7
1.1
2.6
1.2
1.8
1.5
0.6
1.1
1.6
0.5
0.8
Current
2.2
1.9
2.1
1.5
1.6
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Oil & Gas Storage - 10 Year, Absolute
Monthly High Monthly Low Median
396
5.9
20.5
27.6
8.5
17.5
3.2
0.6
1.6
3.4
0.9
2.8
15.3
3.7
8
Current
31.8
27.6
2.9
3.4
15.3
Oil & Gas Exploration
Oil & Gas Exploration/Production - Relative S&P
Monthly High
Monthly Low Median Current
Trailing P/E
1.5
0.5
0.8
1.2
Forward P/E
1.9
0.5
0.9
1.1
P/S
3.5
1.4
2.1
1.6
P/B
1.3
0.5
0.8
0.7
P/CF
0.9
0.4
0.6
0.6
Oil & Gas Exploration/Production - 10 Year, Absolute
Monthly High Monthly Low Median Current
Trailing P/E
27.1
6.3
12.9
17.3
Forward P/E
27.1
8.2
12.5
15.5
P/S
4.3
1.5
2.9
2.2
P/B
3.4
1.0
2.0
1.7
P/CF
8.7
3.8
5.8
6.0
Oil & Gas Equipment and Service
Oil & Gas Equipment & Service - Relative S&P
Monthly High
Monthly Low Median
Trailing P/E
2
0.6
1.4
Forward P/E
1.7
0.6
1.3
P/S
2.8
1
1.6
P/B
2.8
1
1.5
P/CF
1.7
0.8
1.3
Current
1.1
1
1.2
1
1
Oil & Gas Equipment/Service - 10 Year, Absolute
Monthly High
Monthly Low Median
Trailing P/E
39.5
6.5
21.4
Forward P/E
28.9
7.8
18.7
P/S
3.5
1
2
P/B
8.6
1.6
3.8
P/CF
17.5
5.6
12.3
Current
15.7
14.7
1.7
2.3
10
Oil & Gas Drilling
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Oil & Gas Drilling - Relative S&P
Monthly High
Monthly Low Median
3.7
0.3
1.2
2.1
0.3
0.9
4.3
1.2
2.3
1.7
0.5
0.7
1.8
0.4
0.9
Current
0.9
0.8
1.3
0.5
0.7
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Oil & Gas Drilling - 10 Year, Absolute
Monthly High
Monthly Low Median
65
3.3
16.2
38.3
3.7
12.4
6.6
1.1
3.3
4.1
0.8
1.7
20.1
3
8.9
Current
12.5
11.2
1.8
1.2
6.4
Coal & Consumer Fuels
Coal & Consume Fuels - Relative to S&P
Monthly High Monthly Low Median
Trailing P/E
3.8
0.6
1.2
Forward P/E
3.1
0.4
1.0
P/S
4.0
0.5
1.4
P/B
2.1
0.3
1.5
P/CF
2.1
0.6
0.9
Current
1.3
2.7
0.6
0.6
0.6
Coal & Consume Fuels - 10 Year, Absolute
Monthly High Monthly Low Median
Trailing P/E
427
7.2
21.7
Forward P/E
43
5.3
15
P/S
4.9
0.6
1.6
P/B
4.3
0.6
2.7
P/CF
22.1
4.8
8.1
Current
18.8
38
0.8
1.4
6
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Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
 Q&A
Recommendation
 Add 100 basis points to current position
 Currently 125 basis points underweight
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Energy - 10 Year, Absolute
Monthly High Monthly Low Median
18.9
6.1
12.4
16.9
7.8
11.8
1.4
0.5
1.0
3.8
1.4
2.4
9.4
5.0
7.1
Current
12.2
12.4
1.0
2.0
7.0
Why are we so underweight?
 We have been
underweight the sector for
many quarters
 Our industry exposure is
not balanced with S&P
 Partly due to dramatic loss
in APA
 Weighted as 4.35% of SIM
portfolio in January 2013
 42% of energy sector
investment
 APA industry makes up
6% of Energy sector
+ 100 BPS, 25 bps below S&P
 Drivers
 Still has room for growth
 Modest growth in in shorter term
 Inflation hedge in long term
 Recovering global economies
 Increased recent investment
 We want an opportunity to realign our portfolio to reflect
the industry make up of the Energy sector
 Grow focus on Integrated Industry
 Driving the growth in the sector
Points of caution
 Supply disruptions
 Political unrest
 Note the large portion of world
production in unstable countries
 Middle East
 Straight of Hormuz transports up to
30% of worlds oil supply
 Arab Spring
 Our current positions have
significant exposure to Egypt
 Many industries are on
median trading levels
 Uncertainty in European Crisis
and mitigation of systemic
risk
 Increased supply
 Downward oil price pressures
 Changes in regulations
 Recent EPA regulation to lower
gasoline’s sulfur content
imposes large costs on refiners
Questions?
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Energy - 10 Year, relative S&P
Monthly High Monthly Low Median
1.10
0.53
0.84
1.20
0.57
0.85
1.00
0.70
0.80
1.40
0.80
0.90
0.90
0.70
0.70
Current
0.81
0.85
0.70
0.80
0.70
Trailing P/E
Forward P/E
P/S
P/B
P/CF
Energy - 10 Year, Absolute
Monthly High
Monthly Low Median
18.9
6.1
12.4
16.9
7.8
11.8
1.4
0.5
1.0
3.4
1.4
2.0
9.4
5.0
7.1
Current
12.2
12.4
1.0
2.0
7.0
THANK YOU