Energy Sector
Stock Evaluations
Brian R. Boulter
Fisher College of Business
2/27/07
Comparative
SIM Sector Allocation
Utilities
Telecommunication Services
Materials
1.21%
3.35%
SIM Weight
7.44%
S&P 500 Weight
3.57%
1.53%
3.05%
16.38%
15.07%
Information Technology
11.34%
10.82%
Industrials
17.53%
Health Care
12.21%
20.71%
22.18%
Financials
7.73%
Energy
9.69%
6.69%
Consumer Staples
9.29%
7.82%
Consumer Discretionary
0.00%
10.76%
5.00%
10.00%
15.00%
20.00%
25.00%
$96
$57
$34
Sector Recommendation

Oil Prices are likely to remain relatively flat between $45
and $60 per barrel.


Recommend to decrease current SIM portfolio weighting
to 7.00%


Energy sector performance is still adjusting to the decline and
energy companies in general are likely see flatter earnings in the
future.
Sell 73 basis points to reach 269 basis points below S&P 500
weighting
Look to move towards equal weighting after 12-14
months
Industry Fundamentals




Integrated Oil & Gas - 63.76%
Oil & Gas Refining & Marketing – 3.30%
Oil & Gas Exploration & Production – 9.61%
Revenues and earnings in these industries are very
tightly correlated to oil prices



Crude oil is either a major input for production of goods for sale
or is itself the sole output of production.
Short-term oil price volatility results in more earnings volatility in
these industries.
Stagnant oil prices are likely to limit growth and performance in
the near future.
Industry Fundamentals




Oil & Gas Drilling – 4.21%
Oil & Gas Equipment & Services – 13.39%
Oil & Gas Storage & Transportation – 4.34%
Revenues and earnings in these industries are driven by
global supply and demand factors more than actual oil
prices (not as highly correlated to oil prices)



As long as oil is a primary source of energy, drilling, storage and
transportation services will be in high demand.
Revenues and earnings tend to be more stable than short-term
oil prices
May be an opportunity for stable growth when demand is
growing yet oil prices remain stagnant
Industry Fundamentals

Coal & Consumable Fuels - 1.38%
 Recently,
high oil prices have spurred the
development of new coal conversion technologies.

Coal can now be economically converted into natural gas,
liquids and hydrogen.
 Quickly
becoming a significant source of
unconventional oil production as oil prices steadily
rise with increased demand over time.

Current conversion methods result in costs of about $35 per
barrel of liquid hydrocarbons
Recommendation
Buy 125 basis points of SLB
 Buy 167 basis points of BTU
 Sell 365 basis points (ALL) of VLO

Total SIM weight = 7.00%
 Total S&P 500 weight = 9.69%

Schlumberger Ltd. (SLB)

Oil & Gas Equipment & Services Industry
 Leading oilfield services company
 By market cap. and earnings (second to HAL in revenue)
 The
Oilfield Services segment provides technology,
project management and information solutions to the
petroleum industry.
 The WesternGeco segment provides reservoir
imaging, monitoring and development services.

Established 1926 and currently operates in 80
countries worldwide
SLB Comparative Financial Strength
Net Prof
Marg Adj
5yr Avg
-1.24
7.2
-6.2
3
3.5
3.5
3.5
3.5
3.5
Net Prof
Marg Adj
T4Q
10.23
14.41
-4.33
11.11
9.87
12.85
11.44
18.55
9.92
19.7
9.88
17.78
6.94
7.31
6.12
12.32
4.99
12.68
6.47
7.49
Current
Ratio
0.98
2.54
1.65
2.2
2.53
3.16
3.37
1.54
2.1
1.48
1.77
2.86
SCHLUMBERGER LIMITED
SEACOR HOLDINGS INCORPORATED
TIDEWATER INCORPORATED
DAWSON GEOPHYSICAL COMPANY
GLOBAL INDUSTRIES LIMITED
GULFMARK OFFSHORE INCORPORATED
KEY ENERGY SERVICES INC
MITCHAM INDUSTRIES INC
NEWPARK RESOURCES INCORPORATED
PRIDE INTERNATIONAL INCORPORATED
TETRA TECHNOLOGIES INCORPORATED
MATRIX SERVICE COMPANY
Median
Mean
3.5
19.64
11.42
1.42
1.12
48.61
30.92
39.6
3.5
3.5
4
4
4
4
4
4
4
4
4.5
4
3.8
13.94
28.77
10.11
13.25
26.9
1.69
19.11
4.29
10.74
12.39
3.18
12.39
12.73
8.3
15.24
3.57
-0.75
12.01
-0.01
-8.59
2.37
4
6.61
1.75
6.47
5.22
3.38
4.57
2.7
1.98
2.02
1.99
4.15
2.47
1.45
1.85
1.53
2.1
2.32
2.98
4.18
2.6
1.31
1.91
1.78
3.46
1.3
1.01
1.12
0.91
1.31
1.69
-5.39
39.2
-37.81
-162.82
33.23
47.57
19.83
-22.81
51.16
-68.74
84.35
7.13
-14.75
41.68
15.31
0
12.85
43.62
44.81
5.95
34.91
34.21
35.63
25.05
32.72
27.58
34.55
13.75
0
21.45
45.99
Mean Mkt-Cap Wtd
3.5
16.11
8.84
1.76
1.36
29.05
29.73
35.4
Stock Name
ACERGY SA ADR
CORE LABORATORIES NV
HORIZON OFFSHORE INCORPORATED
NATURAL GAS SERVICES GROUP INC
OIL STATES INTERNATIONAL INC
W-H ENERGY SERVICES INC
LUFKIN INDUSTRIES INCORPORATED
BJ SERVICES COMPANY
HALLIBURTON COMPANY
HELIX ENERGY SOLUTIONS GROUP INC
OCEANEERING INTERNATIONAL
RPC INCORPORATED
Financl
Strength
Rating
LT Debt
LT Debt
Quick
Free CF/
/Total
/Tot Cap
Ratio
Total CF
Capital% 5Yr Avg%
0.82
70.03
1.77
32.44
1.87
79.71
80.37
41.38
0.76 NEG
36.17
43.89
0.84
-367.35
32.72
39.14
1.1
-149.69
38.81
25.97
2.19
-22.4
32.74
37.69
1.89
33.26
0
0.06
1.08
44.74
18.88
14.21
1.62
7.13
30.15
36.15
1.14
-49.11
41.19
1.21
-2.27
24.26
27.95
2.41
-9.71
0
1.54
6.81
36.59
46.66
22.02
31.03
32.44
27.22
SLB Comparative Profitability
Stock Name
GULFMARK OFFSHORE INCORPORATED
TIDEWATER INCORPORATED
HELIX ENERGY SOLUTIONS GROUP INC
SCHLUMBERGER LIMITED
MITCHAM INDUSTRIES INC
BJ SERVICES COMPANY
RPC INCORPORATED
CORE LABORATORIES NV
SEACOR HOLDINGS INCORPORATED
GLOBAL INDUSTRIES LIMITED
W-H ENERGY SERVICES INC
TETRA TECHNOLOGIES INCORPORATED
LUFKIN INDUSTRIES INCORPORATED
NATURAL GAS SERVICES GROUP INC
PRIDE INTERNATIONAL INCORPORATED
ACERGY SA ADR
DAWSON GEOPHYSICAL COMPANY
HALLIBURTON COMPANY
OCEANEERING INTERNATIONAL
OIL STATES INTERNATIONAL INC
NEWPARK RESOURCES INCORPORATED
MATRIX SERVICE COMPANY
KEY ENERGY SERVICES INC
HORIZON OFFSHORE INCORPORATED
Median
Mean
Mean Mkt-Cap Wtd
Net Prof Net Prof Pre-Tax Pre-Tax
Marg Adj Marg Adj Margin
Margin
T4Q
5yr Avg
T4Q
5yr Avg
32.46
12.64
37.03
13.42
28.77
15.24
39.46
22.39
19.7
12.68
28.96
18.62
Gross
Margin
5yr Avg
47.91
42.02
27.5
Gross
Margin
LFY
53.02
48.12
35.41
EBITDA
Margin
5yr Avg
39.37
35.22
35.12
EBITDA
Margin
LFY
35.74
50.14
43.26
ROE
T4Q
19.6
18.66
27.99
19.64
11.42
25.73
12.63
22.39
31.29
27.48
35.07
40.55
19.11
18.55
17.78
14.41
13.94
13.25
12.85
12.39
11.44
11.11
10.74
10.23
10.11
9.92
9.88
9.87
4.29
3.18
1.69
-4.33
12.39
12.96
-8.59
12.32
7.49
7.2
8.3
-0.75
7.31
6.61
6.12
-14
18.71
13.02
8.92
14.12
-0.91
11.58
9.95
9.63
70.66
26.41
39.95
22.79
77.05
33.7
46.8
29.28
4
-1.24
3.57
4.99
6.47
6.94
2.37
1.75
-0.01
-6.2
6.47
5.24
18.58
27.07
29.99
20.47
27.03
20.82
20.79
18.82
17.31
17.67
18.32
14.07
16.28
15.26
14.91
15.68
4.11
4.53
2.7
8.42
18.58
19.33
7.42
-4.35
5.11
5.83
9.49
10.01
3.79
0.78
0.15
-13.76
9.49
7.07
11.45
44.32
23.63
21.03
46.97
34.29
11.35
17.22
7.63
18.43
20.64
9.88
9.31
10.88
22.79
26.67
16.97
43.6
24.48
23.03
36.45
31.72
16.08
25.33
13.57
17.95
21.25
10.8
9.53
31.44
17.46
29.28
30.19
45.52
24.01
22.52
16.26
31.93
12.5
23.04
18.53
12.75
34.63
29.73
2.64
14.04
9.09
18.99
13.6
13.7
2.97
-0.11
18.99
21.02
49.3
30.99
23.66
24.47
38.09
18.74
16.47
21.66
13.35
26.94
29.21
8.56
22.88
14.17
14.38
12.64
13.7
5.07
20.1
6.53
22.88
23.96
17.16
35.82
36.05
50.63
12.84
25.81
26.23
26.45
22.89
8.08
10.66
35.45
16.15
31.31
20.02
24.53
7.74
20.91
2.19
-10.77
22.89
21.96
16.12
8.83
22.42
10.58
20.3
27.31
22.19
28.24
34.06
SLB DCF Assumptions


CAPM produced 9.4% terminal discount rate
(Beta = 1.35)
Terminal Growth Rate of 5.75%
 Increasing
demand for oil and oil drilling/production
services


Current high operating margins declining to
industry average of 18%
Cap Ex. and Depreciation approaching 5% of
sales
SLB DCF Output
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
28%
72%
100%
$27,862.4
$72,692.0
100,554.4
1.34%
1,242.2
Current Price
62.80
Implied equity value/share
80.95
Upside/(Downside) to DCF
28.9%
SLB Multiple Valuations
Absolute
Valuation
A.
P/Forward E
P/S
P/EBITDA
P/CF
AVERAGE
DCF
Market
High
Low
B.
Mean
C.
51.1
5.73
99.9
23.5
Current
D.
14.7
2.11
3.9
7.6
24.4
3.61
14.2
15.7
#Your Target *Your Target Your Target
Multiple
E, S, B,
Price
(F x G)
etc/Share
E.
F.
G.
H.
67.1
16
24.4
2.75
69.8535
4.17
3.61
19.35
78.384
12
14.2
5.52
17.113
15
15.7
1.09
71.78
80.95
64.58
Peabody Energy (BTU)

The world’s largest coal producer founded in
1883. (IPO May, 2001)
 owns
interests in 36 coal operations in the United
States and Australia.
 Produces about 240 million tons of coal annually
 Has approximately 9.8 billion tons of proven and
probable coal reserves

Markets, brokerages and trades coal
 US
customers, primarily power companies,
currently account for more than 90% of sales

Participates in BTU conversion technologies
that convert coal into natural gas, liquids and
hydrogen.
BTU Comparative Financial
Strength
Stock Name
ALLIANCE RESOURCE PARTNERS LP
CONSOL ENERGY INCORPORATED
PEABODY ENERGY CORPORATION
PENN VIRGINIA RESOURCE PTNR LP
YANZHOU COAL MINING CO LTD
MASSEY ENERGY COMPANY
ARCH COAL INCORPORATED
WESTMORELAND COAL COMPANY
Median
Mean
Mean Mkt-Cap Wtd
Financl
Strength
Rating
EPS
Net Prof Net Prof
Stabilty Marg Adj Marg Adj
5-Yrs
T4Q
5yr Avg
10.73
11.53
8.95
115.01
11.13
3.86
37.45
11.02
3
4
4
4
3.7
14.01
14.68
538.17
481.62
112.52
112.52
165.52
3.7
143.85
Current
Ratio
1.58
1.24
LT Debt
LT Debt
Quick Free CF/
/Total /Tot Cap
Ratio
Total CF Capital% 5Yr Avg%
1.34
42.92
48.04
92.5
0.71
0.9
29.08
48.05
5.26
1.29
0.71
28.47
38.8
45.78
7.81
21.96
1.14
10.54
2.48
11.02
9.7
22.57
0.72
1.33
2.09
3.86
6.4
1.1
3.19
2.79
1.42
1.09
1.42
1.71
0.98
2.75
1.26
0.86
0.4
0.98
1.13
86.41
66.61
-28.29
-40.27
36.21
36.21
24.12
46.5
0.18
56.73
45.07
63.73
46.5
41.02
37.96
3.13
42.64
51.8
74.04
48.05
49.49
11.85
6.89
1.68
1.1
17.61
33.82
42.27
BTU Comparative Profitability
Stock Name
YANZHOU COAL MINING CO LTD
ALLIANCE RESOURCE PARTNERS LP
CONSOL ENERGY INCORPORATED
PEABODY ENERGY CORPORATION
ARCH COAL INCORPORATED
PENN VIRGINIA RESOURCE PTNR LP
WESTMORELAND COAL COMPANY
MASSEY ENERGY COMPANY
Median
Mean
Mean Mkt-Cap Wtd
Net Prof Net Prof Pre-Tax Pre-Tax
Gross
Marg Adj Marg Adj Margin Margin Margin
T4Q 5yr Avg
T4Q 5yr Avg 5yr Avg
21.96
22.57
32.17
33.51
49.28
11.53
8.95
18.1
11.94
11.13
3.86
14.83
5.44
31.47
Gross EBITDA
Margin Margin
LFY 5yr Avg
54.08
46.48
21.76
37.11
17.14
11.02
5.26
9.91
4.63
18.39
19.99
16.17
10.54
7.81
2.48
1.14
11.02
9.7
1.33
2.47
11.46
13.34
2.09
0.72
3.86
6.4
10.74
14.41
1.89
2.03
14.41
13.01
0.94
-2.06
4.63
8.12
26.13
17.36
26.13
25.68
22.6
22.79
22.79
28.32
15.02
69.58
8.51
12.63
17.14
25.91
11.96
7.07
14.52
9.08
25.54
28.85
22.81
EBITDA
Margin
LFY
46.97
24.14
23.48
ROE
T4Q
15.14
50.97
35.66
16.08
25.15
11.52
20.13
18.51
15.24
7.02 NMN
10.19
3.5
18.51
20.13
19.74
23.68
21.85
24.37
BTU DCF Assumptions




CAPM produced 12% terminal discount rate
(Beta = 2.01)
Terminal Growth Rate of 5.00%
Current moderate operating margins increasing
slightly to industry average of 14%
Cap Ex. and Depreciation approaching 5.5% of
sales
BTU DCF Output
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
47%
53%
100%
$6,897.5
$7,841.4
14,738.9
1.78%
Shares Outstanding
268.0
Current Price
40.42
Implied equity value/share
54.99
Upside/(Downside) to DCF
36.1%
Valero Energy (VLO)

Oil & Gas Refining & Marketing
 Founded
1955
 Operates 18 refineries in the United States, Canada
and Aruba

Markets transportation fuels and home heating
oils to residential consumers
 Operates
1,008 company owned gas stations and
5,000 retail and wholesale outlets
VLO Comparative Financial
Strength
Stock Name
BUCKEYE PARTNERS LP
ENBRIDGE ENERGY PARTNERS LP
GENESIS ENERGY LP
KINDER MORGAN ENERGY PARTNERS LP
KINDER MORGAN MANAGEMENT LLC
MAGELLAN MIDSTREAM PARTNERS LP
MARKWEST ENERGY PARTNERS LP
ONEOK PARTNERS LP
PLAINS ALL AMERICAN PIPELINES LP
TC PIPELINES LP
TEPPCO PARTNERS LP
VALERO LP
ENBRIDGE INCORPORATED
TRANSCANADA CORPORATION
Financl
Strength
Rating
2
3
EPS
Net Prof
Net Prof
Stabilty
Marg Adj Marg Adj
5-Yrs
T4Q
5yr Avg
2.13
22.61
26.48
27.13
4.05
3.52
376.97
1.08
0.2
4.72
4.97
6.19
19.76
59.57
8.02
12.2
15.13
59.47
6.48
6.02
10.32
19.68
8.42
0.97
0.68
4.87
66.92
88.81
6.34
1.29
1.83
6.53
11.71
31.47
8.64
5.79
7.88
5.28
13.82
14.63
VALERO ENERGY CORPORATION
Median
Mean
3
3
2.7
32.07
8.02
38.42
6.02
2.86
6.48
12.02
Mean Mkt-Cap Wtd
2.8
17.71
7.95
Current
Ratio
1.58
1.01
0.98
0.67
1
1
1.09
1.25
1.01
0.96
1.44
0.95
0.5
LT Debt
LT Debt
Quick
Free CF/
/Total
/Tot Cap
Ratio
Total CF Capital% 5Yr Avg%
1.03
45.41
53.61
53.37
0.86
-29.09
57.36
54.75
0.92
35.66
0
16
0.57
33.07
59.27
52.69
0.87
0
0
0.46
58.72
49.2
48.11
1.01
-68.09
66.19
45.83
1.12
77.6
56.53
54
0.44
-580.91
41.7
45.24
99.99
0
4.14
0.86
-30.76
55.94
57.56
0.71
63.48
38.09
32.69
0.63
24.67
61.42
61.15
0.32
61.36
55.37
58.41
14.63
19.92
1.13
1.01
1.04
0.55
0.86
0.74
63.22
45.41
-10.4
25.52
53.61
41.35
39.23
48.11
41.54
10.22
0.96
0.6
19.51
43.05
47.13
VLO Comparative Profitability
Stock Name
TC PIPELINES LP
BUCKEYE PARTNERS LP
TRANSCANADA CORPORATION
MAGELLAN MIDSTREAM PARTNERS LP
VALERO LP
ONEOK PARTNERS LP
MARKWEST ENERGY PARTNERS LP
Net Prof Net Prof Pre-Tax Pre-Tax
Gross
Marg Adj Marg Adj Margin
Margin
Margin
T4Q
5yr Avg
T4Q
5yr Avg 5yr Avg
66.92
88.81
71.52
93.14
22.61
26.48
23.89
23.3
53.84
13.82
14.63
21.34
26.21 82.15*
12.2
15.13
16
18.23
41.52
11.71
31.47
13.72
33.48
10.32
19.68
13.57
14.16
6.48
8.8
Gross
Margin
LFY
16.88
EBITDA
Margin
5yr Avg
96.73
41.26
58.73
31.02
56.13
45.09
12.52
EBITDA
Margin
LFY
81.92
39
50.35
21.93
19.61
48.1
10.82
ROE
T4Q
13.82
12.97
13.83
16.48
7.12
17.49
12.12
52.97
80.93
29.61
VALERO ENERGY CORPORATION
ENBRIDGE INCORPORATED
KINDER MORGAN ENERGY PARTNERS LP
ENBRIDGE ENERGY PARTNERS LP
TEPPCO PARTNERS LP
GENESIS ENERGY LP
PLAINS ALL AMERICAN PIPELINES LP
KINDER MORGAN MANAGEMENT LLC
Median
Mean
6.02
2.86
8.92
4.26
8.13
9.2
6.18
7.15
34.5
5.79
4.97
3.94
1.29
1.08
0.97
7.7
11.07
4.38
1.98
0.87
1.27
99.99
11.07
20.33
10.94
11.72
4.25
2.65
-0.18
0.72
99.9
14.16
24.48
38.49
21.92
16.92
32.23
17.26
13.62
1.94
1.8
2.3
1.48
28.17
19.7
10
6.36
0.8
1.29
17.65
16.31
8.31
3.46
1.31
1.62
6.48
12.01
7.88
6.19
3.51
1.83
0.2
0.68
59.57
14.63
19.92
21.92
29.63
17.26
25.65
28.17
29.57
17.65
23.4
14.06
12.14
15.02
10.55
11.34
11.66
3.59
12.97
13.78
Mean Mkt-Cap Wtd
7.87
10.1
14.01
14.38
29.2
27.33
23.75
19.81
20.28
Comparative Dupont Analysis
% Change from 2003 to 2005
Asset
Margin
Turnover Leverage
ROE
SLB
BTU
VLO
180%
65%
-28%
105%
236%
31%
-29%
199%
102%
25%
-25%
147%
Recommendation

Buy 125 basis points of SLB
 Increasing
demand for oil and oil will result in stable
growth despite stagnant oil prices.

Buy 167 basis points of BTU
 Coal
becoming a viable unconventional source of oil
and gas

Sell 365 basis points (ALL) of VLO
 Stagnant
industry
oil prices will limit short-term growth in this
Final Energy Sector Portfolio
Stocks
% of Portfolio
XOM
2.24% (224bp)
HAL
1.84% (184bp)
SLB
1.25% (125bp)
BTU
1.67% (167bp)
Final Sector Weight
7.00%
S&P 500 Weight
9.69%
Underweight
(2.69%)