Energy Sector
Stock Recommendation
March 2, 2010
Eric DeWees
Honglei Gong
Charles Hathaway
Danqing Zhou
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S & P 500 Sector Weights (as of 2/28/2010)
Sector Weights
20.00%
18.00%
16.00%
14.00%
12.00%
Weight 10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Sector
S&P 500 Weight
SIM Weight
Sector Performance YTD (2/28/2010)
Sector Performance
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
YTD
-10.00%
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-12.00%
Ene
rgy
Price Return
Sector
Sector Performance YTD
Sector Performance (1 month)
Sector Recommendation
• Reduce the Energy Sector to 50 Basis
Points Underweight
• Current holdings are BP, ConocoPhillips,
Transocean, National Oilwell Varco
• We would like to:
– Sell 100% of BP Plc. (BP)
– Sell 100% of ConocoPhillips (COP)
– Buy Noble Energy (NE)
Noble Corporation
•
Noble Corporation (NE) is a oil drilling company that was spun-off the
parent company Noble Energy in 1985.
•
The company, with operations in waters off the coasts of five continents,
has a fleet of 63 offshore drilling units: three submersibles, four
dynamically positioned drillships, 13 semisubmersibles, and 43 jack-up
rigs. Many of its rigs are capable of operating in depths greater than
5,000 feet.
•
The group, which derives most of its revenues from offshore contracts,
has positioned itself to ride the global trend toward deepwater
exploration. Through acquisitions and equipment upgrading, Noble has
been expanding its geographical reach and increasing its ability to drill
in deeper off-shore areas.
Noble Corporation
Advantages
•
Low Taxes
– Moved from Cayman Islands to Switzerland. Avg Tax Rate (16%)
•
Geographically Dispersed
– World-wide, primarily in Mexico, Brazil, and Nigeria
•
Long-Term Historical Growth
– Has experienced over 6% Earnings and Revenue Growth since
2000
– Baseline has a long-term growth rate of 5%
•
First energy industry to recover
– Oil & Gas Drilling Services is one of the first industry to recover when oil
prices increase.
– Exploration and Production must first acquire leases on drilling rigs, years
and months in advance
Noble Corporation
Advantages
•
•
•
Maintained high margins despite downturn
– 44% in 2009, 44% in 2008
– Utilization went down from 88% to 83%
Financially Stable
– 735 Million Cash on Hand, $2.80 Per Share
– Low Debt (750 Million), $2.82 Per Share
– Growth Financed Heavily through Retained Earnings (70% of Total
Liabilities and Equity)
Noble increased its capital expenditures
–
–
–
–
Building more rigs to sustain growth, don’t build until contracts are made
1.4 Billion in 2009, 1 Billion in 2008. Guidance in 2010 is 1 Billion
Oil Majors are increasingly turning to offshore drilling
Expecting a slew of contract announcement for 2011 in 1Q and 2Q
Noble Corporation
Baseline Filter
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Energy Sector
P/Latest Earnings less than 1.0
Market Capitalization: 1 Billion or greater
Earnings: 3 Year Historical Growth Rate 6% or Greater
Earnings: 5 Year Growth Rate 6% or better
Long-Term Future Growth Rate: 4% or greater
ROE: 26% or greater
Reinvestment Yield: 10.0%
Price-Relative Strength to all stocks 70% or better
Earnings Momentum Value: 90% or greater
Noble Corporation (NE) the only energy stock to meet this
criteria
Noble Corporation
Risks
•
Tax Increase
– Currently taxes average 16%, there’s some risk that Switzerland,
and other countries that Noble does business in will increase taxes
•
Currency Risk
– Earnings are in Swiss Francs, not dollars. If dollar strengthens
significantly, earnings will suffer in dollar terms
•
Huge Capital Investments
– 79% of assets are in drilling equipment and facilities
– Utilization dropped from 83% from 88%
•
Oil Prices Decrease Significantly
– Sustained Oil Prices sinking to the $30-$40 level would reduce the
desirability of offshore oil production
– In the short term, we believe oil prices will be fluctuating between
$65 and $85 per barrel
Noble Corporation
Stock Repurchases and Dividends
• Stock Repurchase
– Yearly stock repurchase
– 2009: $204 Million
– 2008: $314 Million
• Dividend
– Current Dividend is 16 cents per share.
– Current dividend yield is .38%.
– Talk of Possible Increase at Annual Shareholders Meeting April
30, 2010. Mentioned in 4Q Earnings Call
• Debt to Total Capital is 10.5%.
Energy Industries
Relative Strength
Noble Corporation
EPS Surprise History
Noble Corporation
Earnings Growth Rates
Noble is trading at one of the lowest Price to Books in years
Noble Corporation
Margins
Margins have been increasing since ’05 but are expected to
fall back slightly as contracts are renewed in ‘10 and ‘11
Noble Corporation Valuation Analysis
Relative to Industry High
Low
Median
Current
P/Trailing E
1.3
.63
.95
.65
P/Forward E
1.1
.52
.90
.60
P/B
1.5
.8
1.1
1.1
P/S
1.7
1.1
1.3
1.6
P/CF
1.5
.8
1.1
1.0
Relative to S&P 500 High
P/Trailing E
2.9
Low
.32
Median
.84
Current
.39
P/Forward E
1.5
.25
.59
.53
P/B
1.5
.6
1.1
.8
P/S
5.5
2.1
3.6
2.6
P/CF
2.4
.4
1.0
.5
Noble Corporation Valuation Analysis
Absolute
Valuation
P/Forward E
High
50.5
4.0
13.9
P/S
25.7
3.3
9.0
7.8
9
5.538
50.00
P/B
4.1
1.1
3.2
1.7
2.5
25.29
63.24
23.85
2.58
9.51
4.57
7
9.45
66.17
26.8
3.1
10.4
5.3
7.5
8.15
61.13
P/EBITDA
P/CF
Low Median
Current Target
Target E,S,B Target Price
Multiple /Share
6.6
9
6.43
57.87
Current Share Price : $43.24
Implied equity value/share : $62
Upside/(Downside) to Valuation : 43%
Noble Corporation
Discounted Free Cash Flow
Terminal Growth Rate: 5%
Implied Value: $60.34
Discount Rate: 12%
Upside: 39.5%
Noble Corporation
Target Price
Sensitivity Matrix
Target Price for Noble Corporation: $60
Current Price: $43.24
DCF: $60.38
Valuation: $61
Upside Potential: 39%
Noble Corporation
Performance Year to Date
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Noble Corporation has consistently outperformed the S&P since it was
spun off.
It has significantly outperformed since 2000. This can be attributed to
the increase in oil prices and world demand
Noble Corporation
Performance 1 Year
Noble Corporation
Performance 2 Year
Noble Corporation
Performance 5 Year
Noble Corporation
Performance 10 Year
Noble Corporation
Performance 20 Year
BP Plc. Report
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Current Price: $53.05
Target Price: $60
Upside: 14.7%
Dividend Yield: 3.36 / 6.28%
% of SIM: .97%
Recommendation: Sell 100%
BP Plc.
Valuation
BP Plc. Discounted Free Cash Flow
Implied Value: $60.63
Terminal Growth Rate: 3%
Discount Factor: 12%
Upside: 15.9%
BP Plc. DCF Sensitivity
ConocoPhillips Report
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Current Price: $48.91
Target Price: $57.00
Upside: 16.5%
Dividend Yield: 4.17%
% of SIM: 3.18%
Recommendation: Sell 100%
ConocoPhillips DCF
Implied Value: $ 57.36
Terminal Growth Rate: 3%
Discount Factor: 12%
Upside: 17.3%
COP Valuation
Absolute
Valuation
High
Low Median Current
P/Forward E
18.6
5.3
8.8
8.0
8.8
7.8
68.64
P/S
1.2
.2
.60
.50
.60
131.53
78.92
P/B
3.5
.80
1.5
1.2
1.5
41.46
62.19
P/EBITDA
12.44
2.53
3.97
4.86
3.97
12.73
50.54
P/CF
11.0
2.3
5.5
4.9
5.5
13.00
71.52
Target
Multiple
Target E,S,B Target Price
/Share
Proposed Energy Sector Holdings
As % of SIM
• Noble Corporation (NE):
• Transocean (RIG):
• National Oilwell Varco (NOV):
Proposed SIM Weight:
S&P Energy Sector Weight:
Current SIM Weight:
11.14%
11.48%
1.68%
4.18%
4.78%
10.64%
Energy Team
Questions?
Transocean Report
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Current Price: $80.33
Target Price: $110
Upside: 36.9%
Dividend Yield: No Dividend
% SIM: 4.18%
Recommendation: No Action
Transocean
DCF and Valuation
Terminal Discount Rate = 11%
Terminal FCF Growth Rate = 3%
National Oilwell Varco Report
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Current Price: $43.66
Target Price: $40.34
Downside: 7.6%
Dividend Yield: 40 Cents / .92%
% SIM: 4.78%
Recommendation: No Action
National Oilwell Varco
DCF and Valuation
Terminal Discount Rate = 11%
Terminal FCF Growth Rate = 3%