Energy Sector
Lee Grossman
Adam Harkey
Luran He
Current Weights --> Underweighted
Last time we voted: Increase by 100bps
The exact figures are 11.08% and 9.83% or 125 bips underweight.
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%
SIM Portfolio holdings
SLB
Schlumberger
$241,335
2.02%
Outline
 Chevron: BUY 100 bps
 Schlumberger: BUY 100 bps
 Apache: SELL 100 bps
Chevron Corporation
Summary & Strategy
 Headquarters in San Ramon,
California
 Employs approximately 62,000
 In more than 180 countries
worldwide
 #6 in S&P index
Upstream Activities (80% of
earnings and 88% of new CapEx):
• Development
• Production
• Liquefaction
• Regasification
• Exploration
Downstream Activities (20% of
earnings)
• Refining
• Marketing
• Manufacturing
• Transporting
Stock Data






Current Weight
Current Price
52 Week Price Range
Market Capitalization
Diluted Shares Outstanding
Dividend
$3.60
 Dividend Yield
3.00%
 Historic Beta
1.18
 Industry
373 BPS
$117.78
$95.73-119.25
228.81B
1.97B
Oil Integrated
Chevron 12-MO Performance
Competition
Industry Comparison
0.45
0.4
0.35
0.3
Chevron
Exxon
BP
RDS
TOTAL SA
0.25
0.2
0.15
0.1
0.05
0
Gross Profit
Margin
Operating
Margin
ROE
ROA
Return on
Invested
Cap
DCF Analysis
Chevron Corporation (CVX)
Year
Revenue
Lee
Analyst:Grossman
Terminal
Discount
Rate =
11.50%
Date:2/11/13
Terminal
FCF
Growth =
3.00%
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
TERMINAL
2022E
272,376
296,177
325,815
335,590
345,993
357,065
368,848
381,758
395,883
411,322
427,775
8.7%
10.0%
3.0%
3.1%
3.2%
3.3%
3.5%
3.7%
3.9%
4.00%
45,006
47,384
51,861
50,338
51,899
53,560
55,327
57,264
58,195
59,642
61,471
16.5%
16.0%
15.9%
15.0%
15.0%
15.0%
15.0%
15.0%
14.7%
14.5%
14.4%
19,353
20,375
22,300
22,149
22,836
23,566
24,344
25,196
25,606
26,242
27,047
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%
105
108
110
110
112
112
114
114
115
116
116
25,548
26,901
29,451
28,080
28,951
29,881
30,869
31,954
32,474
33,283
34,308
5.3%
9.5%
-4.7%
3.1%
3.2%
3.3%
3.5%
1.6%
2.5%
3.1%
25,331
27,841
30,952
34,901
35,291
35,706
36,885
37,794
38,797
39,898
41,494
9.3%
9.4%
9.5%
10.4%
10.2%
10.0%
10.0%
9.9%
9.8%
9.7%
9.7%
(3,064)
(916)
(1,141)
(275)
(293)
(312)
(332)
(365)
(400)
(438)
(467)
% Growth
Income before Income tax expense
Operating Margin
Taxes
Tax Rate
Noncontrolling Interests
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
-1.13%
-0.31%
-0.35%
-0.08%
-0.08%
-0.09%
-0.09%
-0.10%
-0.10%
-0.11%
-0.11%
24,514
27,248
30,301
39,264
39,789
39,991
39,467
40,085
39,588
40,310
41,922
Capex % of sales
9.0%
9.2%
9.3%
11.7%
11.5%
11.2%
10.7%
10.5%
10.0%
9.8%
9.8%
Free Cash Flow
23,415
26,594
28,986
23,677
24,403
25,518
28,103
29,433
31,343
32,477
33,458
13.58%
9.00%
-18.32%
3.07%
4.57%
10.13%
4.73%
6.49%
3.62%
3.02%
Subtract Cap Ex
% Growth
DCF Analysis Cont.
NPV of Cash Flows
159,784
54%
NPV of terminal value
136,514
46%
Projected Equity Value
296,297
100%
Free Cash Flow Yield
10.27%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
8.9
8.5
7.7
11.6
11.0
10.1
3.2
3.0
2.7
4.2
3.9
3.5
1,972
$115.64
Implied equity value/share
150.25
Upside/(Downside) to DCF
29.9%
Terminal
Value
405,438
Free Cash
Yield
8.25%
Terminal
P/E
11.8
Terminal
EV/EBITDA
3.9
Valuation Analysis
Absolute
Valuation
A.
P/Forward E
High
#Your
*Your Target Your Target
Median Current Target E, S, B,
Price
Multiple etc/Share
(F x G)
D.
E.
F.
G.
H.
Low
B.
C.
15.4
5.6
9.4
9.4
9.4
12.96
P/S
1.1
0.8
0.8
0.9
0.8
138.12
P/B
3.2
2.2
2.2
1.7
2.2
70.13
154.29
8.06
2.37
4.58
3.92
4.58
35.67
163.36
9
3.8
6.7
5.9
6.7
11.87
79.55
P/EBITDA
P/CF
Income Statement Forecast
4Q2012 P/B Ratio Chevron
DCF Analysis
121.82 Projected Price
110.50 Current Price
Current Multiples Chevron Industry S&P 500
Price/Earnings
9.5
10.6
14.4
Price/Book
1.7
2.0
2.3
Price/Sales
0.94
1.02
1.38
Price/Cash Flow
5.9
6.6
9.8
Dividend Yield %
3.2%
2.7%
2.1%
150.25
128.31
115.64
Summary
Recommendation:
12 Month Price Target:
Current Price (Apr 3):
Upside Potential:
BUY 100 BPS
To 4.73%
$150.25
$117.78
29.9%
Catalysts
 Consumption growth rates
 Scale in production
 Strong future volume growth and
operating cash flow
 Increased capital spending
($36.7B in 2013)
Risks
 Volatile oil prices
 Alternative energy sources
 Regulatory risks
 Europe’s sovereign-debt crisis
 Disruption of operations
Schlumberger Limited
Business Analysis
 World’s largest oilfield service
company
 More than 118,000 employees
in 85 countries
 Business segments:
 Reservoir Characterization
Group
 Drilling Group
 Production Group
Market Data
Current weight
2.02%
Market cap
100.50B
52 week range
59.12-82.00
Dividend Yield
1.70%
Beta
1.82
Industry
Oil & Gas
Equipment &
Services
Business Analysis
 On March 31, 2013,
Schlumberger’s CEO
announced that the
collections from
Venezuela PDVSA had
improved.
 China will account for
almost half of the net
global increase in
petroleum products
demand this year.
2012 Renevues by Geographic
Areas
($ in Millions)
North America
$473
1%
$9,194
22%
$11,443
27%
Latin America
$13,485
32%
$7,554
18%
Europe/CIS/Africa
Middle East &
Asia
Others
Peer Comparison
20.00%
16.00%
Schlumberger (SLB)
12.00%
Halliburton (HAL)
National Oilwell Varco
(NOV)
Baker Hughes (BHI)
8.00%
4.00%
0.00%
Profit Margin
ROE
ROA
12-month Stock Performance
Multiple Valuation
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Absolute
Valuation
Median
1.6
1.4
2.0
2.6
1.4
Current
1.2
1.1
1.3
1.7
1.1
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median Current
A.
B.
P/Forward E 31.8
C.
10.2
D.
20.7
E.
15.8
P/S
P/B
P/EBITDA
P/CF
1.6
2.5
4.87
5.9
3.1
5.0
12.91
14.4
2.3
2.9
8.84
10.9
6.4
11.9
19.58
24.5
Median
1.2
1.1
1.3
1.5
1.1
Current
1.1
1.1
1.3
1.4
1.1
Target
Target E, Target Weight
Multiple S, B,
Price
etc./Share
F.
G.
H.
I.
18.46
4.81
88.79 20%
2.76
34.69
3.5
26.16
10.50
9.47
16.00
5.09
Implied Price per Share
95.74 20%
91.56 20%
99.44 20%
81.44 20%
$ 91.39
Schlumberger Limited (SLB)
Analyst: Luran He
Date: 4/8/2013
Year
Terminal Discount Rate =
Terminal FCF Growth =
2012
Revenue
42,149
% Grow th
7,520
Operating Margin
Interest and Other
Interest % of Sales
Taxes
% of Sales
13,794
78,927
7.0%
14,838
83,663
6.0%
15,729
87,010
4.0%
16,358
90,490
4.0%
17,012
(329)
(348)
(390)
(429)
(470)
(512)
(553)
(592)
(627)
(653)
(679)
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
-0.8%
2,033
24.0%
6,439
3,855
2,402
24.0%
7,607
18.1%
4,318
2,438
24.0%
7,720
1.5%
4,807
2,669
24.0%
8,453
9.5%
5,263
2,910
24.0%
9,214
9.0%
5,737
3,178
24.0%
10,063
9.2%
6,196
3,419
24.0%
10,827
7.6%
6,630
3,624
24.0%
11,477
6.0%
7,028
3,769
24.0%
11,936
4.0%
7,309
3,920
24.0%
12,413
4.0%
7,601
8.3%
8.3%
8.3%
8.4%
8.4%
8.4%
8.4%
8.4%
8.4%
8.4%
8.4%
(1,062)
(771)
(1,014)
(973)
(1,012)
(1,045)
(1,003)
(939)
(853)
(592)
(615)
-1.7%
5,174
11.1%
4,744
28.7%
48,193
70,237
118,430
3.70%
18.1
21.5
9.5
11.2
1,339
$
$
8.0%
18.8%
3,686
Shares Outstanding
12,635
73,764
18.8%
% Grow th
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
9.0%
2022E
18.8%
11.1%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
11,592
68,300
2021E
18.8%
-2.5%
Free Cash Flow
9.5%
2020E
18.7%
4,695
Capex % of sales
10,586
62,660
2019E
18.5%
3,500
Subtract Cap Ex
10.0%
2018E
18.5%
16.7%
Plus/(minus) Changes WC
10,399
57,224
2017E
18.5%
5,516
% of Sales
12.0%
2016E
20.0%
% Grow th
Add Depreciation/Amort
52,022
2015E
19.0%
24.0%
Net Income
8,821
2014E
17.8%
1,726
Tax Rate
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
46,448
10.2%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2013E
10.5%
4.0%
74.47
88.45
18.8%
11,630
6,274
4.69
61,547
18.9%
17%
-2.0%
5,795
11.1%
5,586
17.7%
41%
59%
100%
-1.7%
4,807
8.4%
6,931
24.1%
-1.6%
5,263
8.4%
7,632
10.1%
-1.5%
5,737
8.4%
8,366
9.6%
-1.4%
6,196
8.4%
9,249
10.6%
-1.2%
6,630
8.4%
10,066
8.8%
-1.0%
7,028
8.4%
10,785
7.1%
-0.7%
7,309
8.4%
11,456
6.2%
8.4%
11,914
4.0%
Terminal Value 190,630
Free Cash Yield
15.5
18.4
8.3
9.8
-0.7%
7,601
13.1
15.6
7.1
8.4
6.25%
Terminal P/E
15.4
Terminal EV/EBITDA
8.0
Sensitivity Analysis
Growth Rate
Discount Rate
10.00%
10.25%
10.50%
10.75%
11.00%
3.50%
91.53
87.86
84.47
81.30
78.36
3.75%
93.85
89.97
86.38
83.05
79.96
4.00%
96.37
92.25
88.45
84.93
81.67
4.25%
99.10
94.71
90.68
86.95
83.51
4.50%
102.08
97.39
93.09
89.14
85.49
Price Target
Target Price
Discounted Cash Flow
P/Forward E
P/S
P/B
P/EBITDA
P/CF
$
$
$
$
$
$
88.45
88.79
95.74
91.56
99.44
81.44
Projected Target Price
Current Price (as of April 15, 2013)
Upside
$
$
90.00
72.00
25%
Weight
50%
10%
10%
10%
10%
10%
Recommendation
Recommendation: Buy 100 bps
Price Target:
$90.00
Current Price:
$72.00
Upside Potential:
25%
Catalysts
 Technology and Innovation
 Global Growth
 Acquisition and joint venture
Risks
 Volatile oil price
 Geopolitical issues
 Environmental regulations
National Oilwell Varco (NOV)
Absolute
Valuation
High
Low
Median Current
Target
Target E, Target Weight
Multiple S, B,
Price
etc./Share
P/Forward E 26.9
5.1
14.8
11.7
13.00
5.91
76.83
25%
P/S
3.7
0.8
1.7
1.5
1.55
53.53
82.97
25%
P/B
5.1
0.8
2.0
1.5
1.6
47.41
75.86
25%
P/EBITDA
25.68
2.77
10.22
7.07
8.0
9.80
78.40
25%
Implied Price per Share
$78.52
Current Price (As of Apr. 15, 2013)
$66.08
Upside
18.83%
Apache Corporation
Stock Data









Current Weight
393 bps
Current Price
$75.09
52 Week Price Range
$72.20-$98.20
Market Capitalization
29.24B
Diluted Shares Outstanding
402m
Dividend
0.80
Dividend Yield
1.1%
Historic Beta
1.79
Industry
Oil and Gas Exploration and Production
Overview
 Headquartered in Houston, Texas
 Founded in 1954
 Produces oil, natural gas, and natural gas
liquids
 Pursuing goal of being an global oil
company
 Underwent large acquisitions in the past three
years
Egypt
 Made strategic
acquisitions to become a
global energy company
 Unfortunately, they
“diversified” into Egypt
 Apache blames media
coverage for stock most
recent stock decline
 Note in the table below
that 20% of production
comes from Egypt
 Political risks
 Worst-case scenario, they
lose everything in Egypt
 stock price should fall to
about $67, according to my
model
Financials
 Growing revenues
 2.3% Q4 revenue growth outpaced 1.7%
industry average
 Growing production
 Growing sales
 Have not sustained higher margins to
reflect revenue growth in earnings
 Poorer earnings due to oil prices
 Lower operating income
 Debt-to-Equity lower than competitors (.39)
 ROE has fallen in 2012 compared to 2011
 Asset turnover is at ten year lows at .3
Apache vs. Sector, Industry, S&P
5 year comparison
Multiples
 Price to sales is below the
average for the industry
 Poor operating margins
 P/E is near ten year lows
and well below the industry
average
 Outpaced S&P and sector
closer to 2011, but currently
struggles
 The stock is still cheap
Insider trading
 The stock is cheap, and insiders are buying
 Even with struggling margins, APA has seen a recent growth
in insider trading
November 5, 2012 - Vice President Brady F. Parish bought 4,750 shares at $80.96 per share.
November 5, 2012 - Director Charles J. Pitman bought 300 shares at $80.95 per share.
November 9, 2012 - Director George D. Lawrence bought 500 shares at $78.93 per share.
November 16, 2012 - Director Charles J. Pitman bought 1,000 shares at $75.40 per share.
February 26, 2013 - Director Charles J. Pitman bought 350 shares at $73.60 per share.
March 5, 2013 - Director Bill C. Montgomery bought 2,000 shares at $73.11 per share.
March 26, 2013 - Director Randolph M. Ferlic bought 10,000 shares at $74.48 per share.
April 1, 2013 - Director George D. Lawrence bought 3,000 shares at $76 per share.
The total amount of insider purchases in the last 4 months is valued at over $1.6 million.
DCF
 Projecting moderate growth in
revenue
 Struggling operating margins
 Consistent with low oil
prices but increased
volume
 Consistent with historical
averages under these
conditions
 Historically
consistently
inconsistent
 Conservative
estimate
 High discount, considering
risks in Egypt and threat of
high regulations on formerly
profitable production in the
Gulf of Mexico
Apache Corp. (APA)
Analyst: Adam Harkey
Date: 6/20/2012
Year
2012E
Revenue
17,078
% Grow th
5,042
Operating Margin
Interest and Other
Interest % of Sales
Taxes
17,154
% of Sales
Net Income
Subtract Cap Ex
5,599
18,912
1.0%
5,674
19,101
1.0%
5,730
19,292
1.0%
5,788
19,485
1.0%
5,845
19,875
2.0%
5,962
30.0%
30.0%
165
206
210
232
255
281
378
382
386
390
397
1.0%
1.2%
1.2%
1.3%
1.4%
1.5%
2.0%
2.0%
2.0%
2.0%
2.0%
2,141
40.0%
2,095
40.0%
2,403
40.0%
2,443
40.0%
2,127
40.0%
2,118
40.0%
2,139
40.0%
2,161
40.0%
2,182
40.0%
2,226
40.0%
76
76
76
76
76
76
76
76
76
76
76
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
2,929
6,861
2,857
-2.5%
6,989
3,528
23.5%
5,881
3,589
1.7%
4,363
3,115
-13.2%
3,558
3,101
-0.4%
2,837
3,133
1.0%
2,197
3,165
1.0%
1,852
3,197
1.0%
1,432
3,263
2.0%
994
41.6%
40.0%
40.0%
33.0%
24.0%
19.0%
15.0%
11.5%
9.6%
7.4%
595
(577)
(133)
(21)
(22)
(34)
(11)
(11)
(12)
(12)
(24)
3.5%
-3.4%
-0.8%
-0.1%
-0.1%
-0.2%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
7,085
1,029
6.0%
7,202
1.7%
29,483
6,291
35,774
23.75%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
15.5
18.6
3.4
3.9
Shares Outstanding
402
$
$
3.0%
TERMINAL
2022E
30.0%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
6,363
18,725
2021E
30.0%
7.9%
Free Cash Flow
2.0%
2020E
30.0%
1,358
Capex % of sales
6,238
18,179
2019E
29.9%
7,109
% of Sales
2.0%
2018E
35.0%
52.2%
Plus/(minus) Changes WC
5,238
17,823
2017E
35.0%
1,925
% of Sales
1.9%
2016E
30.0%
% Grow th
Add Depreciation/Amort
17,473
2015E
31.2%
59.0%
Preferred Stock Dividends
5,352
2014E
15.00%
2.0%
29.5%
2,876
Tax Rate
Debt
Cash
Cash/share
Total Assets
Debt/Assets
2013E
0.4%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Discount Rate =
Terminal FCF Growth =
74.20
88.99
19.9%
11,355
160
0.40
60,737
18.7%
1,048
6.0%
7,579
5.2%
82%
18%
100%
10.2
12.2
3.4
3.8
10.4
12.5
3.4
3.8
1,069
6.0%
7,423
-2.1%
1,091
6.0%
1,105
5.9%
1,087
5.8%
1,051
5.5%
6,232
5,082
4,514
4,055
-16.0%
-18.5%
-11.2%
-10.2%
1,042
5.4%
3,814
-5.9%
1,052
5.4%
3,497
-8.3%
5.0%
994
5.0%
3,244
-7.2%
Terminal Value
25,449
Free Cash Yield
12.75%
Terminal P/E
7.8
Terminal EV/EBITDA
5.3
Growth Rate
Sensitivity Analysis
-1%
0%
1%
2%
3%
10%
113.69
116.95
120.93
125.9
132.29
11%
106.26
108.78
11.8
115.49
120.11
12%
99.87
101.85
104.19
106.99
110.42
Discount Rate
13%
14%
94.31
89.4
95.88
90.67
97.72
92.14
99.89
93.85
102.5
95.86
15%
85.04
86.08
87.26
88.99
90.21
16%
81.14
81.99
82.95
84.05
85.32
17%
77.61
78.32
79.11
80
81.03
18%
74.21
75
75.65
76.39
77.22
 The market is currently projecting unreasonably small growth
and very high risk
Recommendation
 Price target of $90
 19% upside
 Timing of larger payoff may be correlated with oil prices
Absolute Valuation High
Low
Median Current Target
Price
Weight
Forward P/E
20.7
6.5
9.8
8.9
9.6
73.92
5%
P/S
4.7
1.5
3.3
1.8
3.0 127.806
5%
P/B
3.0
1.0
2.0
1.0
1.5 116.9067
5%
P/EBITDA
6.36
2.2
4.44
2.24
4.0 53.25373
5%
P/CF
9.0
1.7
5.8
2.8
5.2 93.1602
5%
DCF
74.21
132.29
88.99
88.99
75%
Summary
Recommendation:
12 Month Price Target:
Current Price (Apr 3):
Upside Potential:
Hold
$90
$75
19%
Catalysts
 Growth in production
 Development of newly acquired
projects
 Strong future sales
 Advancements in technology and
avoidance of heavily regulated
environments
 Diversified
Risks
 Volatile oil prices
 When oil prices drop, larger firms tend
to cut exploration and production
 Weak operating margin
 Regulatory risks
 Europe’s sovereign-debt crisis
 Disruption of operations
Recommendation
Stock
Apache
Schlumberger
Chevron
Action
Current Weight Desired Weight Upside Potential Current Price Target Price
Sell 100 bps
393
293
19%
75
90
Buy 100 bps
202
302
25%
72
90
Buy 100 bps
373
473
30%
115
150
 Apache Corp. should not be our largest Energy holding
 Biases towards risks in Egypt, and production and exploration
industry
 Chevron may better track the performance of the sector
 Schlumberger has a higher and less risky upside than
Apache