NOVEMBER 30TH 2 0 10
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
S T U D E N T I N V E ST M E N T M A N A G E M E N T P R O G R A M
T HE OHIO STATE UNIVERSITY
ENERGY COMPANY PRESENTATION
David Clark-Joseph
Felice Green
Jiri Woschitz
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
SECTOR OVERVIEW
NATIONAL OILWELL VARCO
CHEVRON
MURPHY OIL
NEW ADDITION
SUMMARY OF RECOMMENDATIONS
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
SECTOR OVERVIEW
SIM: Energy overweight 60 bps
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
S&P Sector Breakdown
3.1% 3.4%
SIM Sector Breakdown
3.7%
4.0%
10.6%
19.1%
2.1% 4.2%
13.0%
11.7%
19.8%
12.3%
10.7%
15.6%
11.2%
11.0%
12.2%
10.7%
11.6% 10.2%
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Energy Sector
• 1.27 Trillion in Market Capitalization
• 3rd Largest Sector in S&P
• SIM holds 3 S&P Companies
SIM Energy Holdings
Symbol
SIM Weight
Chevron
CVX
463 bps
Murphy Oil
NOV
369 bps
National-Oilwell Varco
NOV
383 bps
Industry
Oil & Gas
Integrated
Oil & Gas
Integrated
Oil & Gas Equipment
Services
S&P Energy Sector
Year to Date Performance:
Energy Sector
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Industry Makeup of Energy Sector
1% 2% 2%
3%
16%
Oil & Gas Refining &
Marketing
25.00%
Oil & Gas Drilling
20.00%
Coal & Consumable Fuels
15.00%
Oil & Gas Storage &
Transportation
59%
16%
10.00%
Oil & Gas Equipment &
Services
Oil & Gas Exploration &
Production
Integrated Oil & Gas
5.00%
0.00%
-5.00%
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Recommendation From Sector
Presentation
• Reduce SIM weight of the energy sector by
110bps (1.1%).
Stock
SIM Weight
Upside
Recommendation
Final SIM Weight
NOV
463 bps
13.78%
Hold
463 bps
CVX
369 bps
14.80%
Reduce 110 bps
259 bps
MUR
383 bps
(1.60%)
Reduce 383 bps
0
RIG
0
40.00%
Increase 383 bps
383 bps
Sector
1215 bps
1105 bps
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
NATIONAL OILWELL VARCO
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
National Oilwell Varco
• National Oilwell Varco specializes in providing equipment for on-shore
and offshore oilrigs and drilling. It also provides maintenance services,
customer solutions, and supplies as it relates to drilling for oil. NOV
operates in 825 countries across 6 continents.
• Business Segments:
– Rig Technology
– Petroleum Services & Supplies
– Distribution Services
• NOV Information:
– Market Cap: $25.8 Billion
– 52-Week Range: $32.18 - $63.88
– Current Stock Price: $61.52
• Competitors:
–
–
–
–
–
–
Baker Hughes
Cameron International
FMC Technologies
Halliburton
National Oilwell Varco
Schlumberger
• Current SIM weight: 463 bps
NOV 52-Week Stock Price Range
65
60
55
50
45
40
35
30
NOV vs. Competitors
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
• 11 Acquisitions from 2005-2009 and stake in one firm.
– 2010 Acquisitions:
• Ambar Lone Star Fluid Svcs LLC
• Advanced Production and Loading PLC (to be completed EOY)
Q3
Gross Margin
35.6%
Operating Margin 19.8%
Net Profit Margin 13.4%
ROA
7.3%
ROE
10.9%
2009
31.7%
17.5%
11.6%
6.8%
11.0%
2008
32.0%
20.4%
14.5%
11.6%
20.2%
2007
30.5%
20.3%
13.7%
12.7%
22.9%
2006
26.8%
15.3%
9.7%
8.7%
14.8%
2005
23.0%
10.3%
6.2%
6.2%
10.5%
Q3
BHI CAM
FTI HAL NOV
Gross Margin
29.0% 31.3% 27.3% 25.0% 35.6%
Operating Margin 10.2% 13.4% 11.6% 17.5% 19.8%
Net Profit Margin 6.3% 9.7% 8.4% 10.4% 13.4%
ROA
2.5% 6.4% 10.2% 8.1% 7.3%
ROE
5.4% 14.0% 32.8% 12.6% 10.9%
SLB
31.5%
15.5%
25.3%
8.1%
16.1%
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
NOV vs. S&P 500
1 Year:
Lagging
S&P 500 by
-19.8%
3 Month:
Ahead of
S&P 500 by
46.7%
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
DCF Model
Terminal Growth
Rate
Terminal Growth
Rate
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
DCF Sensitivity Analysis
10.0%
$73.21
$76.95
$81.32
$86.48
$92.94
Terminal Discount Rate
10.5%
11.0%
11.5%
$68.37
$64.13
$60.38
$71.53
$66.82
$62.69
$75.17
$69.89
$65.31
$79.42
$73.43
$68.30
$84.67
$77.78
$71.94
12.0%
$57.05
$59.05
$61.30
$63.85
$66.93
10.0%
Terminal Discount Rate
10.5%
11.0%
11.5%
12.0%
3.0%
19.0%
11.1%
4.2%
-1.8%
-7.3%
3.5%
25.1%
16.3%
8.6%
1.9%
-4.0%
4.0%
32.2%
22.2%
13.6%
6.2%
-0.4%
4.5%
40.6%
29.1%
19.4%
11.0%
3.8%
5.0%
51.1%
37.6%
26.4%
16.9%
8.8%
3.0%
3.5%
4.0%
4.5%
5.0%
NOV Valuation Analysis
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
NOV Relative to the Industry
Trailing P/E
Forward P/E
P/B
P/S
P/CF
High
1.8
1.2
1.1
1.1
6.4
Low
0.43
0.43
0.4
0.5
0.6
Median
0.85
0.8
0.5
0.8
1.4
Current
0.61
0.88
0.6
0.9
0.8
Status
Undervalued
In line
In line
In line
Undervalued
NOV Relative to the Sector
Trailing
Forward
P/B
P/S
P/CF
high
7.5
2.5
1.5
2.6
11.4
low
0.6
0.5
0.5
0.8
0.6
median
1.5
1.3
0.9
1.4
2.5
current
1.1
1.3
0.9
2.1
1.5
Status
Undervalued
In line
In line
Overvalued
Undervalued
NOV Absolute Valuation and Target Prices
Forward P/E
P/S
P/B
P/EBITDA
P/CF
High
35.5
3.1
5.1
42.07
107.3
Low Median Current
5.1
16.6
16.6
0.8
1.4
2.1
0.8
2.3
1.7
2.77 11.44
8.63
3.9
17.6
11.8
Target Multiple
16.6
1.4
2.3
11.44
17.6
Target/Share
4.00
29.01
36.19
7.13
5.21
Avaerage:
Target Price
$66.40
$40.61
$83.24
$81.57
$91.70
$72.70
NOV Advantages & Risks
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
• Advantages
–
–
–
–
Rising oil prices
Contract Agreements
GDP growth in developing countries
Increased activity in the oil and gas industries
• Risks
–
–
–
–
Lower oil Prices
Slow US growth
US government regulations
Foreign currency exposure
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
NOV Recommendation
• Current Price: $61.52
• Target Price: $70.00
– Target Price =
• Total Upside: 13.78%
• Recommendation: HOLD at 463 bps
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
CHEVRON
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Chevron
• Chevron is a major integrated oil and gas producer,
currently the 3rd largest energy company in the
world, and 8th largest company in the S&P
• Business Segments:
– Upstream (86%of Net Income)
– Downstream (13% of Net Income)
– Chemicals (1% of Net Income)
• CVX Information:
– Market Cap: $165.12 Billion
– 52-Week Range: $66.83 - $86.19
– Current Stock Price: $82.05
• Competitors:
–
–
–
–
Exxon Mobil
Conoco Philips
Royal Dutch Shell
BP
• Current SIM Weight: 369 bps
12 Month Stock Performance
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Chevron
- Strong Performance relative to peers
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Chevron vs. S&P 500 and Peers
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Chevron vs. S&P 500 and Peers
Price Target: $94.17 (+14.8%)
Valuation Ranges
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
52-week Trading Range
$66.83
$86.19
Multiples Analysis
$76.76
$117.97
Sum of Parts Assets and
Segment Comparables
Discounted Cash Flow
Analysis
$92.53
$72.95
11/26/10 Trading Range
$60.00
$93.45
$81.70
$70.00
$80.00
$82.60
$90.00
$100.00
Illustrative WMT Price per Share
$110.00
$120.00
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
CVX Recommendation
•
•
•
•
Current Price: $82.05
Target Price: $94.17
Total Upside: 14.8%
Recommendation:
– Reduce by 110bps: from 369 bps to 259 bps
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
MURPHY OIL
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Murphy Oil Corporation
• Murphy Oil Corporation conducts the business from
the exploration of the raw material over the
production and refining to the distribution and sales of
the final products in the market
• Business Segments:
– Exploration and Production
– Refining and Marketing
• MUR Information:
– Market Cap: $12.6 Billion
– Diluted Shares Outstanding:
192.468M
– 52-Week Range: $48.44- $68.91
– Dividend Yield: 1.7%
• Current SIM Weight: 383 bps
Stock Price MUR
80
70
60
50
40
30
20
10
0
11/24/2009
11/24/2010
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Statistical Analysis Economic Factors
Implied Price: $61.50
-5.8%
Price Range: [$48, $80]
[-26.5%, 22.5%]
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
DCF Model
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
DCF Sensitivity Analysis
Implied Price: $61.49
-5.8%
Price Range: [$52.70, $75.30]
[-19.3%, 15.2%]
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Multiples: Median vs. Current
Murphy Oil too cheap in 13 out of 15 cases.
BUT: Oil prices will not go beyond $90/barrel until end of March (assumption)
 Murphy Oil will not reach is median stock price in the near future
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Multiple Valuation
Implied Price: $69.69
+6.7%
Price Range: [$27.84, $103.05]
[-57.4%, 57.8%]
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
MUR Recommendation
•
•
•
•
Current Price: $65.74
Target Price: $64.23
Downside:
-1.6%
Recommendation: SELL 383 BPS
Risk to Recommendation
Main assumptions: 1) Oil prices remain on today’s level
2) Economy will not strengthen in
the near future
If this is not true the recommendation fails. If the
economy strengthens and oil prices increase, Murphy
Oil’s stock price can perform very well.
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
TRANSOCEAN (RIG)
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Transocean (RIG)
• Transocean Ltd is an international provider of offshore contract
drilling services for oil and gas, with 138 mobile offshore units.
Transocean is the largest operator of these services, twice the size
of the next largest competitor. It also has a backlog of $28B.
•
Primary Business
– Contract Drilling
•
RIG Information:
– Market Cap: $21.6 Billion
– 52-Week Range:
•
$41.88- $94.88
– Current Stock Price: $67.77
•
Competitors:
– Noble
– Nabors
– Rowan
•
Not a current SIM holding
1 Year Stock Performance
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Transocean: Thesis
We think that the impact on market capitalization to date
resulting from the Gulf Oil spill is overblown, and impact to
Transocean’s balance sheet and future profitability are
minimal.
- Transocean received a $560M Insurance payout
- The contract between Transocean and BP indemnifies
Transocean for any liabilities related to discharges from the
well or costs to control any cleanup.
- Transocean is also best positioned to take advantage of
integrated oil companies such as Chevron pushing
upstream deepwater exploration.
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Transocean vs. S&P 500 and Peers
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
Transocean vs. S&P 500 and Peers
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
RIG DCF Target: $94.90
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
RIG Recommendation
•
•
•
•
Current Price: $67.77
Target Price: $94.17
Total Upside: 40.0%
Recommendation:
– Initiate position of 383 bps.
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
SUMMARY OF RECOMMENDATIONS
THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS
RECOMMENDATIONS
Stock
SIM Weight
Upside
Recommendation
Final SIM Weight
NOV
463 bps
13.78%
Hold
463 bps
CVX
369 bps
14.80%
Reduce 110 bps
259 bps
MUR
383 bps
(1.60%)
Reduce 383 bps
0
RIG
0
40.00%
Increase 383 bps
383 bps
Sector
1215 bps
1105 bps