John Goik John Glankler Christian Töpfner von Schütz Agenda • • • • S&P 500 Energy Sector Business & Economic Analysis Financial Analysis / Valuation Recommendation S&P 500: # of Companies in Sectors 100 81 80 80 75 58 60 53 41 40 35 40 20 0 28 9 S&P 500 Energy Sector Global Industry Classification Standard (GICS) Sector Industry Group Industry Sub-Industry Oil & Gas Drilling (4) Energy Equipment & Services (12) Oil & Gas Equipment & Services (8) Integrated Oil & Gas (7) Energy (40) Energy (40) Oil, Gas & Consumable Fuels (28) Oil & Gas Exploration & Production (12) Oil & Gas Refining & Marketing (3) Oil & Gas Storage & Transportation (3) Coal & Consumable Fuels (3) S&P 500 Energy Sector % of S&P 500 Integrated Oil & Gas (7) 7.61% Oil & Gas Exploration & Production (12) 1.99% Oil & Gas Equipment & Services (8) 1.61% Oil & Gas Storage & Transportation (3) 0.32% Oil & Gas Drilling (4) 0.22% Coal & Consumable Fuels (3) 0.20% Oil & Gas Refining & Marketing (3) 0.17% 12.12% S&P 500: QTD Sector Performance 5.70% 6.00% 5.00% 4.00% 3.00% 4.07% 3.41% 2.73% 1.86% 1.64% 2.00% 1.00% 0.43% 0.33% 0.19% 0.00% -1.00% -2.00% -3.00% -4.00% -3.34% S&P 500: YTD Sector Performance 40.00% 31.15% 30.00% 20.00% 16.11% 10.45% 10.00% 0.49% 0.00% -10.00% -0.53% -2.92% -3.20% -3.89% -5.96% -9.85% Energy Sector: Historical Performance Energy Sector: Historical Performance Energy Sector: Top 5 Market Cap Exxon Mobil Corp. (XOM) $ 334,357,700,000 Chevron Corp. (CVX) $ 130,544,200,000 Schlumberger Limited (SLB) $ 67,010,740,000 ConocoPhillips (COP) $ 62,788,270,000 Occidental Petroleum Corporation (OXY) $ 54,916,530,000 YTD Performance FMC Technologies, Inc. (FTI) 64.88% Pioneer Natural Resources Co. (PXD) 58.83% Diamond Offshore Drilling Inc. (DO) 52.38% Massey Energy Co. (MEE) 51.92% Peabody Energy Corp. (BTU) 45.78% Agenda • • • • S&P 500 Energy Sector Business & Economic Analysis Financial Analysis / Valuation Recommendation Oil Price - Outlook Short Term: High Inventories Four month rally in prices stalled in early July Demand down by 3.2 mb/d 2Q 2009 Demand down by 2.2 mb/d 3Q 2009 Demand expected to rise again by 1.4 mb/d 1Q 2010 to 85.9 mb/d Oil price expected to be $55 on average in 3Q 2009 (Morgan Stanley) Long Term: Structural capacity issues Production capacity likely to decline (weak price environment) Utilization at 100% by 2013 Demand limited by flat supply capacity Correlation Between Crude & Stock Prices per Industry 180 160 140 CRUDE 120 COAL + 100 DRILLING SERVICES 80 EXPLOR. 60 INTEGR. R&M 40 STORAGE 20 0 COAL + DRILLING SERVICES EXPLOR. INTEGR. R&M STORAGE 0.650897 0.846183 0.368496 0.90326 0.6885324 0.525075166 -0.46567 Oil Supply Oil Inventory Oil Demand Global Oil Demand Oil Futures Crude Oil Feb 13 Crude Oil Apr 13 Crude Oil Jun 13 Crude Oil Aug 13 Crude Oil Oct 13 Crude Oil Dec 13 Crude Oil Feb 14 Crude Oil Apr 14 Crude Oil Jun 14 Crude Oil Aug 14 Crude Oil Oct 14 Crude Oil Dec 14 Crude Oil Dec 15 Crude Oil Dec 16 Crude Oil Dec 17 Crude Oil Aug 09 Crude Oil Oct 09 Crude Oil Dec 09 Crude Oil Feb 10 Crude Oil Apr 10 Crude Oil Jun 10 Crude Oil Aug 10 Crude Oil Oct 10 Crude Oil Dec 10 Crude Oil Feb 11 Crude Oil Apr 11 Crude Oil Jun 11 Crude Oil Aug 11 Crude Oil Oct 11 Crude Oil Dec 11 Crude Oil Feb 12 Crude Oil Apr 12 Crude Oil Jun 12 Crude Oil Aug 12 Crude Oil Oct 12 Crude Oil Dec 12 In US Dollars Future Projections Oil Prices Drop-off relative to past few years Going to Hold Steady/Possibly Increase Projections are cautiously optimistic Crude Oil Futures 95 90 85 80 75 70 65 60 Analysts Projections Most analysts are skeptical about the near term Global demand slashed by as much as 2.8% in 2009 Earnings for 2009 are expected to be poor But virtually all agree on long term growth in prices Most predict an oil rebound late this year/early next year, projections as high as $85/barrel next year Oil stocks themselves tend to lead the way out of a recession Agenda • • • • S&P 500 Energy Sector Business & Economic Analysis Financial Analysis / Valuation Recommendation Energy Sector: Top 5 Sales Growth (5 year average) National Oilwell Varco, Inc. (NOV) 49.32% XTO Energy Inc. (XTO) 44.16% Chesapeake Energy Corporation (CHK) 38.88% Diamond Offshore Drilling Inc. (DO) 38.25% Southwestern Energy Co. (SWN) 37.62% Net Income Growth (5 year average) Peabody Energy Corp. (BTU) 260.76% Southwestern Energy Co. (SWN) 156.79% Murphy Oil Corporation (MUR) 127.00% EOG Resources, Inc. (EOG) 123.59% CONSOL Energy Inc. (CNX) 65.24% Energy Sector: Top 5 Operating Margin Ensco International Inc. (ESV) 57.40% Diamond Offshore Drilling Inc. (DO) 54.74% Apache Corp. (APA) 52.50% Denbury Resources Inc. (DNR) 51.67% EOG Resources, Inc. (EOG) 50.41% Operating Margin Growth (5 year average) Rowan Companies Inc. (RDC) 78.46% Halliburton Company (HAL) 40.19% Peabody Energy Corp. (BTU) 33.72% Schlumberger Limited (SLB) 25.52% Williams Companies, Inc. (WMB) 25.46% Energy Sector Valuations Sector Valuations vs. S&P 500 % Change of Current Valuation From 15 Year Median 19% 14% 20% 10% 0% 0% 0% -10% -14% -20% -30% -32% -40% Trailing P/E Forward P/E P/S P/B P/CF P/EBITDA Industry Valuations – Trailing P/E Trailing P/E vs. S&P 500 0% % Change of Current Valuation From 15 Year Median -10% -14% -20% -30% -31% -40% -42% -50% -60% -56% -57% -60% -70% -80% COCOF -79% OGDRL OGEQP OGEXP OGINT OGREF OGSTO Industry Valuations – Forward P/E Industry Forward P/E vs. S&P 500 % Change of Current Valuation From 15 Year Median 200% 159% 150% 84% 100% 50% 11% 0% 0% -8% -19% -43% -50% COCOF OGDRL OGEQP OGEXP OGINT OGREF OGSTO Industry Valuations – P/S Industry P/S vs. S&P 500 20% % Change of Current Valuation From 15 Year Median 18% 16% 20% 10% 0% 0% 0% -10% -20% -30% -40% -45% -50% COCOF OGDRL OGEQP OGEXP OGINT -50% OGREF OGSTO Industry Valuations – P/CF Industry P/CF vs. S&P 500 0% % Change of Current Valuation From 15 Year Median 0% -10% -13% -14% -20% -29% -30% -33% -40% -40% -50% -55% -60% COCOF OGDRL OGEQP OGEXP OGINT OGREF OGSTO Industry Valuations – P/B P/B vs. S&P 500 50% % Change of Current Valuation From 15 Year Median 50% 40% 30% 20% 11% 10% 0% 0% 0% -10% -8% -20% -30% -30% -40% COCOF OGDRL OGEQP OGEXP OGINT -40% OGREF OGSTO Industry Valuations – P/EBITDA P/EBITDA vs. S&P 500 133% % Change of Current Valuation From 15 Year Median 140% 120% 100% 80% 60% 40% 5% 20% 0% -9% -20% -40% -34% -39% -60% -36% -63% -80% COCOF OGDRL OGEQP OGEXP OGINT OGREF OGSTO Agenda • • • • S&P 500 Energy Sector Business & Economic Analysis Financial Analysis / Valuation Recommendation S&P 500 vs. SIM: Sector Weight Energy Energy sector currently underweight by 137 basis points 14.00% 12.00% 10.00% S&P 500 25.00% SIM 8.00% 6.00% 4.00% 20.00% 2.00% 0.00% 15.00% 10.00% 5.00% 0.00% 12.05% 10.68% Recommendation Increase weight of Energy sector by 137 basis points to par with S&P 500 : Sector is undervalued and has mid to long-term growth potential Current weakness should be used to add stock in this sector Waiting until the next SIM trading window in Nov/Dec 09 could be too long since stocks will most likely move quickly on positive news Positives: Economic recovery (especially in China and India) Expected rise in oil prices (mid to long-term) Structural problems on the supply side (mid to long-term) Risks: High inventory/low demand in short term Overall uncertainty in oil price predictions Recommendation Industry to overweight Oil & Gas Drilling Integrated Oil & Gas Industry to underweight Oil & Gas Storage & Transportation Refining & Manufacturing Energy Sector What Questions Do You Have?