ENERGY SECTOR
ENERGY SECTOR
Nick Eyer
Julie Heigel
Renae Schlosser
Outline
•
•
•
•
•
•
Overview
O
i
Business Analysis
y
Economic Analysis
Financial Analysis
l
l
Valuation Analysis
y
Recommendation
Overview
Business
Economic
Financial
Valuation
Proposal
S&P 500/SIM Weights
as
of 4/30/2012
as of 4/30/2012
SIM Weight by Sector S&P 500 Weight by Sector
Consumer Discretionary
Consumer Discretionary Consumer Staples
3.45 2.91 0
0
3.5
Energy
3.93
11.22
3.83
1.02 3.47
0.08
10.04
Financials
10.85
10 85
20.29
10 95
10.95
Health Care
11.22
21.91
Industrials
10.42
Information Technology
10.51
11.39
14 68
14.68
Materials
13.36
3.36
7.37
Telecommunication Services
13.61
Utilities
Cash
Dividend Receivables Overview
Business
Economic
Financial
Energy currently 80 bps underweight underweight
Valuation
Proposal
Energy: Industry Breakdown
Overview
Business
Economic
Financial
Valuation
Proposal
Largest Energy Sector Companies
According to Petroleum Intelligence Weekly (PIW)
According to Petroleum Intelligence Weekly (PIW)
Note: PIW publication composite based on reserves, oil and gas production, refinery capacity, and product sales.
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Performance
10 Yr S&P 500 Sectors
10‐Yr. S&P 500 Sectors
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Performance
10 Yr Energy vs S&P 500
10‐Yr. Energy vs. S&P 500
145%
30%
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Performance
YTD Energy vs S&P 500
YTD Energy vs. S&P 500
3%
‐11%
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Performance
QTD Energy vs S&P 500
QTD Energy vs. S&P 500
11%
2%
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Life Cycle Phase
Phase of Life Cycle Mature
Phase of Life Cycle ‐
• Demand is strong International Energy Agency predicts demand to increase by one‐third
one
third between between
2010 and 2035 • Acquisition activity
New opportunities to N
ii
generate cash flow
Energy Transfer Partners acquisition of q
Sunoco Overview
Business
Economic
Financial
Valuation
Proposal
Sector Performance
Classification by Business Cycle Mid to Late Cycle
Classification by Business Cycle –
Mid to Late Cycle
Overview
Business
Economic
Financial
Valuation
Proposal
Oil Supply and Demand
• Inelastic supply & demand pp y
(steep curves) in short‐term
Pi
Price
Supply
• Small changes in supply or demand causes drastic changes
demand causes drastic changes in price
• Result: High Volatility of oil prices
Demand
Quantity
Overview
Business
Economic
Financial
Valuation
Proposal
Analysis of Long‐term Demand
Total Final World Energy Demand
Total Final World Energy Demand
• LLong‐term energy consumption t
ti
& demand is estimated to grow at a steady rate
• Driven by developing nations (emerging markets) significant increases
Non OECD account for 90%
Non‐OECD account for 90% of energy demand growth moving forward Non‐OECD countries include BRIC’s, etc
Overview
Business
Economic
Financial
Valuation
Proposal
Analysis of Demand
Total Final World Energy Consumption by Region
Total Final World Energy Consumption by Region
• Short‐term demand decreasing for g
OECD countries facing economic troubles
• Non‐OECD developing nations drive increasing global demand
increasing global demand •
Still expected 2012 increase in global demand by .9% (to 90 mb/d)
Overview
Business
Economic
Financial
Valuation
Proposal
Analysis of Short Term Demand
Q
Q3 Expectations and Short Term Risks
p
•
Q3 in 2012 is expected to be relatively low demand compared to historical Q3’s
• Oil prices usually spike in Q2 before expected high summer demand
• Historically prices have small change Q2 to Q3
Hi t i ll
i
h
ll h
Q2 t Q3
• Due to economic instability in western nations demand less this summer relatively
Quarterly Oil Prices (USD)
140
120
100
80
60
40
20
0
Overview
Business
Economic
Financial
Valuation
Proposal
Analysis of Supply
Total World Energy Capacity Growth
Total World Energy Capacity Growth
• Shrinking of supply capacity in 2011 factor capacity in 2011
factor
causing sharp increases in oil prices
• Expanding of supply capacity in 2012 & 2013 causes downward pressure on prices
pressure on prices
• Supply inflexible (inelastic) in short‐term b i l l dj i
but is slowly adjusting over time
Overview
Business
Economic
Financial
Valuation
Proposal
Supply and Demand Balance
• Previously Global Oil Supplies were not meeting world oil demand  higher prices
• Supply capacities starting to increase throughout May
• By end of Q2 and Q3 (summer), supply capacities will be greatly increased  lower prices
Overview
Business
Economic
Financial
Valuation
Proposal
Analysis of Supply & Demand
Oil Prices and Effect on Energy Sector Predictions
Oil Prices and Effect on Energy Sector Predictions
•
•
•
•
Short‐Term Supply: increasing due to expanding capacity
Short‐Term Demand: decreasing relative to historical values
Long‐Term Supply: expanding slowly depending on economy
l
l l
Long‐Term Demand: increasing steadily
• We think: oil prices will gradually rise in the long‐run but will either be stable et
: o p ces
g adua y se t e o g u but
e t e be stab e
or decrease in the short‐term • in order to correct from the recent spikes and as a reaction to increased supplies
• European economic crisis can have very significant effect on oil demand E
i ii
h
i ifi t ff t
il d
d
and hence oil prices
gy
• What does this mean for the energy sector? • Decreased revenues in short‐run but potential for long‐term growth
Overview
Business
Economic
Financial
Valuation
Proposal
Porter’s Five Competitive Forces
• Threat of Entry – Low
• High capital intensive
• Specialized/proprietary knowledge & technology necessary
• Difficulty for firms to differentiate (oil is commodity)
Diffi lt f fi
t diff
ti t ( il i
dit )
• Limited access to reserves
• Economies of scale necessary
• Intensity of Rivalry – High
• Major contracts are awarded on bid basis between highly competitive firms
• Few major integrated oil companies have access to a greater portion of the market
• Very numerous smaller firms competing on a regular basis with major firms
Very numerous smaller firms competing on a regular basis with major firms
Overview
Business
Economic
Financial
Valuation
Proposal
Porter’s Five Competitive Forces
• Bargaining Power of Buyers – Low
• Market Demand major factor setting price of oil  End consumers are individuals in large population with no individual bargaining power • Slightly higher in situations where large consumers such as countries or contract‐
Sli htl hi h i it ti
h
l
h
ti
t t
bulk purchasers can influence price based on demand
• Bargaining Power of Suppliers–
g
g
pp
High
g
• Vertically Integrated firms are their own suppliers and therefore have high bargaining power
• Midstream/Downstream firms suffer loss of bargaining power with upstream Exploration & Production firms  increasing purchase costs Exploration & Production firms 
increasing purchase costs
• Foreign nations in which firms operate control regulation of and abilities of companies to extract oil
•
Overview
Ability to nationalize companies and “boot out” foreign owned companies and acquire their assets (Argentina, Venezuela, Ecuador, etc.)
Business
Economic
Financial
Valuation
Proposal
Porter’s Five Competitive Forces
• Threat of Substitutes – Low in Short‐Term, High in Long‐Term
• New energy sources that are being developed (renewables, biofuels, nuclear, etc.) cannot replace petroleum fuel in machinery over night
• In Long‐term engineers developing new and more efficient ways to replace I L
t
i
d l i
d
ffi i t
t
l
dependency on oil and consumer fuels. • Renewables & Biofuels growing rapidly in abundance
Overview
Business
Economic
Financial
Valuation
Proposal
Economics
Crude Oil vs Energy
Crude Oil vs. Energy
Overview
Business
Economic
Financial
Valuation
Proposal
Economics
Baker Hughs Rig Count vs. Energy
Baker Hughs
Rig Count vs Energy
Overview
Business
Economic
Financial
Valuation
Proposal
Economics
PPI: Gasoline vs Energy
PPI: Gasoline vs. Energy
Overview
Business
Economic
Financial
Valuation
Proposal
Economics
Confidence vs Energy
Confidence vs. Energy
Overview
Business
Economic
Financial
Valuation
Proposal
Economics
Alcohol Consumption vs Energy
Alcohol Consumption vs. Energy
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Revenues and EPS
SSector Absolute: t Ab l t
Revenues/Share
S t Ab l t EPS
Sector Absolute: EPS
60
50
800
700
600
500
400
300
200
100
0
40
30
20
10
0
Revenues/Share Growth
EPS Growth
50%
80%
40%
60%
30%
40%
20%
20%
10%
0%
0%
‐20%
‐10%
‐20%
‐40%
‐30%
‐60%
‐40%
‐80%
Overview
Business
Economic
Financial
Valuation
Proposal
Sector EPS
Sector EPS Growth Relative to S&P 500
Sector EPS Growth Relative to S&P 500
Overview
Business
Economic
Financial
Valuation
Proposal
Sector Margins and ROE
Margins
ROE
25%
30%
20%
25%
20%
15%
Net Profit Margin
10%
EBITDA Margin
15%
10%
5%
5%
%
0%
0%
Sector Financial Ratios
Relative to S&P 500
Net Profit Margin
Net
Profit Margin
EBITDA Margin
ROE
Overview
2003
07
0.7
0.8
1.0
Business
2004
09
0.9
0.8
1.2
2005
09
0.9
0.8
1.2
2006
1
0.8
1.6
Economic
2007
11
1.1
0.8
1.4
2008
11
1.1
0.8
1.3
Financial
2009
14
1.4
1.0
1.8
2010
08
0.8
1.1
1.1
2011
09
0.9
1.0
1.0
Valuation
2012
09
0.9
1.0
1.1
2013
N/A
1.0
1.1
Proposal
Industry Net Profit Margins
Absolute
Energy Industries 5‐Year Net Profit Margins
35%
30%
25%
COCOF
20%
OGDRL
OGEQP
OGEXP
15%
OGINT
OGREF
10%
OGSTO
5%
0%
Overview
Business
Economic
Financial
Valuation
Proposal
Industry Net Profit Margins
Relative to S&P 500
Relative to S&P 500
2007
12
1.2
2.6
1.4
28
2.8
1.0
0.5
07
0.7
COCOF
OGDRL
OGEQP
OGEXP
OGINT
OGREF
OGSTO
Overview
Business
Net Profit Margin
N
t P fit M i
Industry Relative to S&P 500
2008
2009
2010
10
1.0
19
1.9
12
1.2
3.9
5.1
2.7
1.8
2.3
1.4
27
2.7
36
3.6
23
2.3
1.1
1.3
0.8
0.4
0.3
‐0.1
16
1.6
22
2.2
18
1.8
Economic
Financial
Valuation
2011
10
1.0
1.2
1.2
21
2.1
0.9
0.1
15
1.5
Proposal
Industry EBITDA Margins
Absolute
Energy Industries 5‐Year EBITDA Margins
70%
60%
50%
COCOF
40%
OGDRL
OGEQP
OGEXP
30%
OGINT
OGREF
20%
OGSTO
10%
0%
Overview
Business
Economic
Financial
Valuation
Proposal
Industry EBITDA Margins
Relative to S&P 500
Relative to S&P 500
Industry
COCOF
OGDRL
OGEQP
OGEXP
OGINT
OGREF
OGSTO
Overview
2008
09
0.9
1.9
1.0
24
2.4
0.8
0.3
18
1.8
Business
EBITDA Margin
EBITDA
M i
Industry Relative to S&P 500
2009
2010
2011
12
1.2
14
1.4
12
1.2
2.5
2.3
1.4
1.4
1.3
1.2
33
3.3
38
3.8
34
3.4
1.0
0.9
0.9
0.2
0.3
0.2
24
2.4
28
2.8
23
2.3
Economic
Financial
Valuation
2012
12
1.2
1.7
1.1
21
2.1
0.9
0.2
15
1.5
Proposal
Industry ROE
Absolute
Energy Industries 5‐Year ROE
35%
30%
25%
COCOF
20%
OGDRL
OGEQP
OGEXP
15%
OGINT
OGREF
10%
OGSTO
5%
0%
Overview
Business
Economic
Financial
Valuation
Proposal
Industry ROE
Relative to S&P 500
Relative to S&P 500
2008
00
0.0
1.5
1.6
09
0.9
1.4
1.5
00
0.0
COCOF
OGDRL
OGEQP
OGEXP
OGINT
OGREF
OGSTO
Overview
Business
ROE
Industry Relative to S&P 500
2009
2010
2011
18
1.8
21
2.1
11
1.1
1.7
1.6
0.6
1.8
1.6
0.9
14
1.4
07
0.7
08
0.8
2.0
1.2
1.2
0.8
0.4
0.2
13
1.3
11
1.1
09
0.9
Economic
Financial
Valuation
2012
10
1.0
0.5
0.9
08
0.8
1.4
1.0
09
0.9
Proposal
Sector Valuation
Sector ‐ 10 Year Absolute
Sector
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
21.3
6.1
13.2
11.1
Forward P/E
21.8
7.8
11.9
11.0
P/S
/
1.4
0.5
1.0
0.9
P/B
3.8
1.4
2.4
2.0
P/CF
9.6
5.0
7.2
6.6
Sector 10 Year Relative to S&P 500
1.2
Sector ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
1.1
0.5
0.8
0.8
Forward P/E
1.2
0.6
0.8
0.8
P/S
1.0
0.6
0.8
0.7
P/B
1.4
0.7
1.0
0.9
P/CF
0.9
0.6
0.7
0.7
1.0
0.8
Median
0.6
Current
0.4
S&P 500
0.2
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
COCOF Valuation
COCOF ‐ 10 Year Absolute
COCOF
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
427.0
7.2
24.1
9.7
Forward P/E
28.8
5.3
13.7
19.2
P/S
/
4.9
0.5
1.6
0.9
P/B
4.3
0.8
2.9
1.2
P/CF
22.1
4.8
8.4
5.3
COCOF 10 Year Relative to S&P 500
1.6
COCOF ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
23.3
0.6
1.5
0.7
Forward P/E
2.1
0.4
0.9
1.4
P/S
4.0
0.4
1.2
0.7
P/B
2.1
0.4
1.5
0.5
P/CF
2.1
0.5
0.8
0.6
1.4
1.2
1.0
0.8
Median
0.6
Current
0.4
S&P 500
02
0.2
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGDRL Valuation
OGDRL ‐ 10 Year Absolute
OGDRL
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
65.0
3.3
19.7
15.8
Forward P/E
38.3
3.7
13.5
11.7
P/S
/
6.6
1.1
3.4
1.8
P/B
4.1
0.8
1.7
1.3
P/CF
20.1
3.0
10.4
6.8
OGDRL 10 Year Relative to S&P 500
3.0
OGDRL ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
3.7
0.3
1.2
1.2
Forward P/E
2.1
0.3
0.9
0.9
P/S
4.3
1.3
2.4
1.4
P/B
1.7
0.4
0.7
0.6
P/CF
1.8
0.4
1.0
0.7
2.5
2.0
Median
1.5
Current
1.0
S&P 500
0.5
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGEQP Valuation
OGEQP ‐ 10 Year Absolute
OGEQP
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
39.5
6.5
24.0
16.0
Forward P/E
32.9
7.8
20.3
14.4
P/S
/
3.5
1.0
2.0
1.9
P/B
8.6
1.6
3.8
2.4
P/CF
17.5
5.6
12.5
10.1
OGEQP 10 Year Relative to S&P 500
OGEQP ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
2.0
0.6
1.5
1.2
Forward P/E
1.7
0.6
1.3
1.1
P/S
2.8
1.0
1.6
1.5
P/B
2.8
0.9
1.5
1.1
P/CF
1.7
0.8
1.3
1.1
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Median
Current
S&P 500
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGEXP Valuation
OGEXP ‐ 10 Year Absolute
OGEXP
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
27.1
6.3
12.9
14.5
Forward P/E
27.1
8.2
12.6
11.3
P/S
/
4.3
1.5
2.9
2.6
P/B
3.4
1.0
2.0
1.7
P/CF
8.7
3.8
5.9
6.3
OGEXP 10 Year Relative to S&P 500
2.5
OGEXP ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
1.5
0.5
0.8
1.1
Forward P/E
1.9
0.5
0.8
0.8
P/S
3.5
1.3
2.1
2.1
P/B
1.3
0.5
0.8
0.8
P/CF
0.9
0.4
0.6
0.7
2.0
1.5
Median
1.0
Current
0.5
S&P 500
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGINT Valuation
OGINT ‐ 10 Year Absolute
OGINT
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
20.4
6.2
11.3
9.4
Forward P/E
20.5
6.5
10.9
9.6
P/S
/
1.2
0.5
0.9
0.8
P/B
3.6
1.6
2.5
2.0
P/CF
10.1
5.1
6.8
6.2
OGINT 10 Year Relative to S&P 500
1.2
OGINT ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
1.1
0.5
0.7
0.7
Forward P/E
1.2
0.5
0.7
0.7
P/S
0.8
0.5
0.7
0.6
P/B
1.4
0.7
1.0
0.9
P/CF
0.9
0.6
0.7
0.7
1.0
0.8
Median
0.6
Current
0.4
S&P 500
0.2
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGREF Valuation
OGREF ‐ 10 Year Absolute
OGREF
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
144.5
3.4
10.7
7.6
Forward P/E
78.9
4.3
9.1
11.7
P/S
/
0.7
0.1
0.2
0.1
P/B
3.9
0.5
1.5
1.2
P/CF
8.2
2.9
5.3
4.3
OGREF 10 Year Relative to S&P 500
1.2
OGREF ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
7.6
0.2
0.6
0.6
Forward P/E
4.8
0.4
0.6
0.9
P/S
0.5
0.1
0.2
0.1
P/B
1.3
0.2
0.5
0.5
P/CF
0.8
0.3
0.5
0.5
1.0
0.8
Median
0.6
Current
0.4
S&P 500
0.2
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
OGSTO Valuation
OGSTO ‐ 10 Year Absolute
OGSTO
‐ 10 Year Absolute
Monthly High Monthly Low Median Current
Trailing P/E
396.0
3.9
19.7
23.8
Forward P/E
21.6
8.5
17.2
21.6
P/S
/S
3.2
3
0.5
0
5
1.5
5
3.2
3
P/B
4.2
0.9
2.6
4.2
P/CF
14.5
3.7
7.3
10.1
OGSTO 10 Year Relative to S&P 500
3.0
OGSTO ‐ 10 Year Relative S&P500
Monthly High Monthly Low
Monthly High
Monthly Low Median Current
Trailing P/E
22.0
0.2
1.3
1.7
Forward P/E
1.6
0.7
1.1
1.6
P/S
2.5
0.4
1.2
2.5
P/B
1.9
0.6
1.0
1.9
P/CF
1.3
0.5
0.8
1.1
2.5
2.0
Median
1.5
Current
1.0
S&P 500
0.5
0.0
Trailing Forward P/E
P/E
Overview
Business
Economic
Financial
P/S
P/B
Valuation
P/CF
Proposal
Sector Technical Analysis
80‐day SMA currently above 20‐day SMA, but this is historically expected during Q2.
Overview
Business
Economic
Financial
Valuation
Proposal
Investment Recommendation
• Rational:
i
l
• Market risk due to European crisis uncertainty • Weak forecasted demand for Q3 & Q4 relative to historicals
• Increasing supply capacity puts downward pressure on oil prices
on oil prices
• Valuation indicates sector currently at or below median
currently at or below median
• Technical analysis indicates bearish sector at the moment (as expected)
(as expected)
Recommendation: Hold at 10.42%
Overview
Business
Economic
Financial
Valuation
Proposal