John Goik
John Glankler
Christian Töpfner von Schütz
Energy Sector
Stock Recommendation
John Goik
John Glankler
Christian Töpfner von Schütz
Agenda
•
•
•
•
Energy Sector – Review and Proposal
BP & ConocoPhillips
Transocean Ltd. (RIG)
Summary
Energy Sector - Review
Industry to overweight
Oil & Gas Drilling
Integrated Oil & Gas
Industry to underweight
Oil & Gas Storage & Transportation
Refining & Manufacturing
Energy Sector - Review
Sector
Consumer Discretionary
Consumer Staples
Energy
S&P 500 Weight
SIM Weight
+/-
9.11%
7.19%
-1.92%
11.81%
11.65%
-0.16%
12.04%
10.74% -1.31%
Financials
13.86%
8.93%
-4.93%
Health Care
13.73%
13.30%
-0.43%
Industrials
9.98%
12.37%
2.39%
18.72%
20.41%
1.69%
Materials
3.40%
4.98%
1.58%
Telecommunication Services
3.41%
3.39%
-0.02%
Utilities
3.94%
3.61%
-0.34%
Cash
0.00%
3.38%
3.38%
Information Technology
Energy Sector - Review
 Short Term:
High Inventories
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
 Strong oil price reaction to signs of economic recovery
 Long Term:
 Structural capacity issues
 Production capacity likely to decline (weak price environment)
 Utilization at 100% by 2013
 Demand limited by flat supply capacity
 Morgan Stanley oil price predictions: $85 for 2010, $95 for 2011
Energy Sector - Review
Increase weight of Energy sector by 131 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
Energy Sector - Proposal
Security
Current Weight
Buy
Sell
New Weight
BP plc
4.09%
0.31%
0.00%
4.40%
ConocoPhillips
3.11%
0.00%
0.00%
3.11%
Transocean Ltd
3.54%
1.00%
0.00%
4.54%
Hess
0.00%
0.00%
0.00%
0.00%
Total
10.74%
1.31%
0.00%
12.05%
Agenda
•
•
•
•
Energy Sector – Review and Proposal
BP & ConocoPhillips
Transocean Ltd. (RIG)
Summary
BP – DCF Valuation
DCF Valuation
4/24/2009
BP
Terminal Discount Rate =
John Glankler
Terminal FCF Growth =
12.0%
3.0%
Forecast
Year
Revenue
2009E
385,405
2010E
404,675
% Growth
Operating Income
Operating Margin
Taxes
Net Income
5.00%
75,291
19.54%
14,966
% of Sales
87,996
437,656
5.00%
-
102,846
21.74%
2014E
464,309
3.00%
58,602
13.00%
Upside to DCF
17,753
21,058
19.9%
-
60,325
450,786
3.00%
56,895
24.20%
2013E
60,360
13.00%
11,478
20.2%
-
70,244
11,823
20.2%
-
81,788
12,177
-
45,417
-
46,779
3.00%
13.00%
84.40%
12,919
49,628
3.00%
13,307
51,117
3.00%
13,706
13.00%
14,117
20.2%
-
52,651
3.00%
69,974
13.00%
20.2%
-
2019E
538,261
67,936
13.00%
20.2%
-
2018E
522,584
65,957
13.00%
20.2%
-
48,183
507,363
64,036
$94.40
2017E
3.00%
$51.20
12,543
20.2%
2016E
492,585
62,171
13.00%
20.2%
2015E
478,238
3.00%
Implied equity value/share
19.6%
% Growth
Add Depreciation/Amort
424,909
2012E
Current Price
Tax Rate
Minority Interest
2011E
20.2%
-
54,230
55,857
16%
16%
-44%
3%
3%
3%
3%
3%
3%
3%
10,985
11,534
12,111
12,474
12,849
13,234
13,631
14,040
14,461
14,895
15,342
2.85%
2.9%
2.9%
2.9%
2.9%
2.9%
2.9%
2.9%
2.9%
2.9%
2.9%
CapEx
30832
32374
33993
35012
36063
37145
38259
39407
40589
41807
43061
Free Cash Flow
40,477
49,404
59,906
22,879
23,565
24,272
25,000
25,750
26,523
27,318
28,138
22%
21%
-62%
3%
3%
3%
3%
3%
3%
3%
YOY growth
BP – Multiples Valuation
 Average Target Price for Multiples Valuation:
 $74.94
*Your
Target E,
S, B,
etc/Share
Your Target
Price
(F x G)
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward E
14.4
4.7
10.3
10.3
8.0
9.19
73.52
P/S
1.1
0.0
0.8
0.6
0.6
117.65
70.59
P/B
3.3
1.4
2.7
1.7
2.0
59.67
119.34
P/EBITDA
8.12
2.86
5.71
4.01
4.1
9.27
38.01
P/CF
9.7
3.3
7.6
5.7
6.0
12.21
73.26
 Final Average Target Price for BP:
 80% DCF weight and 20% Multiples = $91.51
 76.78% Upside
 Correlation to oil price: r = 0.70
ConocoPhillips – DCF Valuation
DCF Valuation
7/13/2009
Ticker: COP
Terminal Discount Rate =
John Glankler
Terminal FCF Growth =
11.5%
4.0%
In Millions($)
Forecast
Year
Revenue
2009E
180,632
2010E
180,632
% Growth
Operating Income
6,851
5,740
5,334
Net Income
-
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
10,020
5,470
8,151
2013E
231,757
8.00%
12,875
5.04%
250,298
8.00%
13,905
6.00%
4,292
2014E
2.75%
15,018
6.00%
4,635
4,170
2.00%
5,810
Upside to DCF
33.8%
33.8%
-
9,434
10,426
11,357
7,319
7,905
9.00%
-
13,247
-
14,306
7,355
9,220
2.00%
9,958
33.8%
-
16,687
6.00%
2.00%
33.8%
-
15,451
22,066
6,811
8,537
8.00%
6.00%
2.00%
33.8%
367,770
20,432
6,306
2019E
8.00%
6.00%
2.00%
33.8%
340,528
18,918
5,839
2018E
8.00%
6.00%
$48.20
-
315,303
17,517
2.00%
33.8%
2017E
8.00%
6.00%
5,406
6,777
12,265
291,948
16,219
2.00%
33.8%
-
2016E
8.00%
$44.22
5,006
6,275
-
270,322
6.00%
2.00%
33.8%
2015E
8.00%
Implied equity value/share
3.10%
-
% Growth
214,590
10.00%
4.79%
4,827
33.8%
2012E
Current Price
5,603
3.18%
Tax Rate
Minority Interest
8,658
3.79%
Interest % of Sales
Taxes
198,695
0.00%
Operating Margin
Interest and Other- net
2011E
33.8%
-
18,022
19,464
16%
11%
9%
8%
8%
8%
8%
8%
8%
8%
13,761
6,759
6,759
7,435
8,030
8,672
9,366
10,115
10,924
11,798
12,742
3.74%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
1,538
0
(2,954)
(2,682)
(2,897)
(3,129)
(3,379)
(3,649)
(3,941)
(4,257)
(4,597)
0.85%
0.00%
-1.49%
-1.25%
-1.25%
-1.25%
-1.25%
-1.25%
-1.25%
-1.25%
-1.25%
13,084
13,084
14,393
10,730
11,588
12,515
13,516
14,597
15,765
17,026
18,388
7.24%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
3,364
3,109
514
5,975
6,453
6,969
7,526
8,129
8,779
9,481
10,240
-8%
-83%
1063%
8%
8%
8%
8%
8%
8%
8%
ConocoPhillips – Multiples Valuation
 Average Target Price for Multiples Valuation:
 $52.21
*Your
Target E,
S, B,
etc/Share
Your Target
Price
(F x G)
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward E
11.3
5.3
8.0
9.7
9.0
3.75
33.75
P/S
0.9
0.2
0.6
0.3
0.7
106.25
74.38
P/B
2.3
.8
1.5
1.1
1.4
37.19
52.07
P/EBITDA
12.44
2.58
3.91
3.98
5
7.25
36.25
P/CF
8.2
2.3
5.4
2.9
5.4
11.96
64.58
 Final Average Target Price for COP:
 80% DCF weight and 20% Multiples = $49.00
 10.81% Upside
 Correlation to oil price: r = 0.94
COP - Recommendation
Hold:
Some upside potential, but not enough to add to
current position
Should profit from increasing oil price
Review position next quarter and potentially
replace if upside potential has been exhausted
Agenda
•
•
•
•
Energy Sector – Review and Proposal
BP & ConocoPhillips
Transocean Ltd. (RIG)
Summary
Transocean (RIG)
 Industry: Oil & Gas Drilling and Exploration
 Company: Provides offshore contract drilling
services for oil and gas wells worldwide
 Market Cap: $24.07 Billion (08/09/2009)
 Makes up 33% of SIM Energy Sector and 3.54% of
Total Assets in the SIM portfolio
7,670 shares
Cost Basis: $71.50
Current Price: $75.06 (08/09/2009)
RIG – Business Analysis
RIG – Business Analysis
Competition
High cost, small number of similar companies
Diversity of Location
China, India
Strong Ultra Deepwater Market
Deep water is where major new oil finds are most
likely
Contract with Petrobras (Brazil)
RIG – Financial Analysis
 S&P projects earnings of Oil and Gas Drillers to
grow at 22% annually over the next 5 years
 Strong contract backlog of $33.7B
Contract Backlog by Client Rating
4%
37%
59%
A Rated
Other Investment Grade
Other
RIG – Financial Analysis
$900M in cash
Buyback shares or pay down debt
2Q 2009 EPS $2.79 below analyst estimates of
$3.02
“Operational Incident” - $30M
Swap of Legend and Sedco 703 rigs - $22m
4% drop in stock price
Market overreaction?
RIG – DCF Valuation
DCF Valuation
8/10/2009
Ticker: RIG
John Goik
Year
Terminal Discount Rate =
Terminal FCF Growth =
2009E
2010E
2011E
2012E
2013E
12.0%
4.0%
Forecast
2014E
2015E
2016E
2017E
2018E
2019E
Revenue
% Growth
12,040
12,642
5.00%
13,274
5.00%
14,204
7.00%
15,198
7.00%
16,110
6.00%
17,076
6.00%
18,101
6.00%
19,187
6.00%
20,146
5.00%
21,053
4.50%
Operating Income
Operating Margin
5,575
46.30%
5,373
42.50%
5,509
41.50%
5,681
40.00%
6,079
40.00%
5,638
35.00%
5,977
35.00%
5,430
30.00%
5,756
30.00%
5,037
25.00%
5,263
25.00%
Interest Income
Interest % of Sales
25
0.21%
32
0.25%
28
0.21%
43
0.30%
53
0.35%
64
0.40%
77
0.45%
81
0.45%
96
0.50%
111
0.55%
137
0.65%
Interest Expense
Interest % of Sales
(470)
-3.90%
(329)
-2.60%
(355)
-2.50%
(380)
-2.50%
(483)
-3.00%
(543)
-3.00%
(576)
-3.00%
(604)
-3.00%
(632)
-3.00%
Losses on Retirement of Debt
% of Sales
(12)
-0.10%
0
0.00%
(54)
-0.30%
(58)
-0.30%
(60)
-0.30%
(63)
-0.30%
Other, net
% of Sales
120
1.00%
63
0.50%
66
0.50%
142
1.00%
152
1.00%
242
1.50%
256
1.50%
362
2.00%
384
2.00%
403
2.00%
421
2.00%
Taxes
Tax Rate
Minority Interest
1105
21.1%
(2)
1084
21.1%
(2)
1106
21.1%
(2)
1153
21.1%
(2)
1236
21.1%
(2)
1142
21.1%
(2)
1212
21.1%
(2)
1113
21.1%
(2)
1182
21.1%
(2)
1030
21.1%
(2)
1081
21.1%
(2)
Net Income
% Growth
4,136
4,057
-2%
4,140
2%
4,317
4%
4,625
7%
4,273
-8%
4,536
6%
4,166
-8%
4,423
6%
3,857
-13%
4,047
5%
709
5.89%
97
0.81%
3,973
33.00%
745
5.9%
(93)
-0.73%
3,161
25.00%
782
5.9%
(97)
-0.73%
2,920
22.00%
837
5.9%
(170)
-1.20%
2,131
15.00%
895
5.9%
(182)
-1.20%
1,824
12.00%
949
5.9%
(193)
-1.20%
1,289
8.00%
1,006
5.9%
(205)
-1.20%
1,025
6.00%
1,066
5.9%
(217)
-1.20%
1,086
6.00%
1,130
5.9%
(230)
-1.20%
1,151
6.00%
1,187
5.9%
(242)
-1.20%
1,209
6.00%
1,240
5.9%
(253)
-1.20%
1,263
6.00%
969
1,549
60%
1,905
23%
2,853
50%
3,514
23%
3,740
6%
4,313
15%
3,929
-9%
4,172
6%
3,593
-14%
3,771
5%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
Current(319)
Price
-2.40%
(40)
(43)
(46)
Implied
equity-0.30%
value/share
-0.30%
-0.30%
Upside to DCF
$75.06
(512)
-3.00%
(48)
-0.30%
(51)
$103.52
-0.30%
37.92%
RIG – DCF Valuation
Average Operating Margin is 41.30%
Too High?
Avg. Operating Margin 2009-2019
2019 Margin
Upside to DCF
31.85%
20.00%
12.40%
35.48%
25.00%
37.90%
41.30%
38.00%
92.04%
Average Target Price for DCF Valuation:
30% Weighting towards low end margin
60% Weighting towards middle margin
10% Weighting towards continuing trend on high
end
Result = Average Price $110.69
RIG – Multiples Valuation
RIG - Valuation Ratios vs. S&P 500
20%
20%
0%
-20%
-31%
-40%
-58%
-60%
-56%
-67%
-80%
-81%
-100%
Trailing P/E
Forward P/E
P/S
P/B
P/CF
P/EBITDA
RIG – Multiples Valuation
RIG - Valuation Ratios vs. Oil & Gas Drilling Industry
20%
20%
13%
10%
11%
0%
0%
-10%
-9%
-20%
-30%
-40%
-43%
-50%
Trailing P/E
Forward P/E
P/S
P/B
P/CF
P/EBITDA
RIG – Multiples Valuation
 Average Target Price for Multiples Valuation:
 $156.87
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
49.0
9.4
4.7
22.29
33.8
Low
3.1
1.3
0.9
2.44
2.8
Median
12.3
6.8
2.8
15.32
17.6
Current
6.3
1.9
1.3
3.73
4.7
Target
Multiple
9.3
4.5
2.0
10.0
11.1
 Final Average Target Price for RIG:
 80% DCF weight and 20% Multiples = $119.93
 59.78% Upside
 Correlation to oil price: r = 0.93
Target E,
S, B,
etc/Share
12.88
37.51
57.74
20.12
15.97
Target
Price
119.78
168.80
115.48
201.20
177.27
RIG - Recommendation
Buy 100 bps of RIG
Strong business position
Favorable valuations
Increase in price of oil
Weakening value of dollar
Risks
Decline in oil price
Stronger dollar
Agenda
•
•
•
•
Energy Sector – Review and Proposal
BP & ConocoPhillips
Transocean Ltd. (RIG)
Summary
Energy Sector - Summary
Security
Current Weight
Buy
Sell
New Weight
BP plc
4.09%
0.31%
0.00%
4.40%
ConocoPhillips
3.11%
0.00%
0.00%
3.11%
Transocean Ltd
3.54%
1.00%
0.00%
4.54%
Hess
0.00%
0.00%
0.00%
0.00%
Total
10.74%
1.31%
0.00%
12.05%
Energy Sector - Stock Recommendation
What Questions Do You Have?
What Questions Do You Have?