Martina Gutik
Colleen Hurley
Ben Jekeli
Ben Smalley
Recommendation
 We recommend:
 Selling 368 basis points or 100% of Transocean
 Buying 418 basis points of Chevron Corp. (CVX)
 Holding our position in Noble Corp.
 Holding our position in National Oilwell
Agenda
 Sector Presentation Recap
 Transocean Analysis
 Chevron Analysis
 Recommendation Summary
% SIM Over/Under S&P 500
As of 4/30/10
Voted to increase weight by 50 bp
Current Stocks
Stock
Weight
Price
Target Price
Upside
BTU
0%
$37.29
$43
15.3%
NOV
3.30%
$39.16
$45
10.6%
NE
2.78%
$31.04
$37
19%
RIG
3.68%
$55.38
$64
15.6%
Transocean (RIG) Overview
 Sector: Energy
 Industry: Oil and Gas Drilling
 Price: $55.38
 Target: $64.00
 Upside: 15.6%
 SELL 368 basis points
RIG – Business Overview
 World’s largest offshore drilling contractor
 Owns and operates 139 rigs (including 45 high-
specification floaters)
 Industry leader in deepwater and harsh environment
drilling
RIG - Rig Locations
Notable
Far East : 25 units
U.K. North Sea : 16 units
Middle East : 16 units
U.S. Gulf of Mexico : 15 units
RIG - Initial Upside
 Recovering economies
 increase in oil demand, price
 Obama proposed increased offshore drilling
 Low utilization
 Industry leader
Oil Prices
 Current oil price : $70 / barrel
 European economy
 Contango
 Has been narrowing
 Projection : $78 / barrel
 Friday, oil dropped as much as 4.75% to $66
 Slower demand this year
 IEA cut projected demand by 220,000 barrels / day
(5/12/2010)
Oil Prices (2001 – Present)
RIG Stock Price (2001 – Present)
Transocean - Regression
SUMMARY OUTPUT
180.0
160.0
140.0
RIG Stock Price ($)
Regression Statistics
Multiple R
0.920519
R Square
0.847355
Adjusted R Square
0.846083
Standard Error
13.39675
Observations
122
Price of Oil and RIG Stock
Line Fit Plot
120.0
100.0
RIG Stock Price
Predicted RIG Stock Price
80.0
60.0
40.0
20.0
0.0
0.0
20.0
40.0
60.0
80.0
Price of Oil ($)
100.0
120.0
140.0
160.0
RIG - Deepwater Horizon
 On April 20th, the Deepwater Horizon (owned and
operated by Transocean) exploded.
 Lapses in safety caused blast
 Investigators told hydraulic leak found in BOP
 Dead battery in control pod
 Memo from Transocean, citing 260 failure modes in
blowout preventer
 Significantly slower/delayed operations
 Politics
 Minerals Management Service
Financial Impact
 10-Q : “We expect to incur significant legal fees and
costs”.
 Litigation
 Environmental damage and personal injuries
 Class action lawsuit – violation of federal securities laws
 Contract backlog : $590 M decline
 Loss of revenues amount to 3-4% decline in earnings
RIG - Revenues
Operating Revenues (in $ millions)
U.S.
U.K.
India
Other countries
Total
Years ended December 31
2009
2008
2007
$2,239
$2,578
$1,259
1563
2012
848
1084
890
761
6670
7194
3509
$11,556
$12,674
$6,377
RIG – Revenue and EPS
 Revenue
 2010 : 10852 M (-6%)
 2011 : 11705 M (8%)
 2012 : 11667 M (0%)
 EPS
 2010 : 8.87 (-22%)
 2011 : 10.23 (15%)
 2012 : 10.25 (0%)
RIG - Valuation
Absolute
High
Low
Median
Current
Target Multiple
Target E, S, B /share
Target Price
Forward P/E
88.0
3.1
21.8
6.1
7
8.87
62.09
P/S
14.3
.3
3.3
1.6
2
33.81
67.61
P/B
4.7
0.6
1.6
0.8
1
69.22
69.22
P/CF
49.3
2.8
11.2
3.7
4
14.97
59.88
P/EBITDA
56.3
1.8
10.6
3.0
3.5
18.46
64.61
Average Target
64.68
Upside
16.8%
Current Price
55.38
Transocean - DCF
Transocean (RIG)
Analyst: Ben Jekeli
Current Price (Input below)
$
55.38
$
63.04
Terminal Discount Rate =
17.0%
170 Implied equity value/share
Terminal FCF Growth =
3.0%
30 Upside/(Downside) to DCF
4/14/2010
(In $ millions)
Year
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Revenue
10,763
11,656
11,667
12,017
12,377
12,749
13,131
13,525
13,931
14,349
14,779
8.3%
0.1%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3,875
4,371
4,433
4,446
4,580
4,717
4,858
5,004
5,154
5,309
5,468
36.0%
37.5%
38.0%
37.0%
37.0%
37.0%
37.0%
37.0%
37.0%
37.0%
37.0%
% Grow th
Operating Income
Operating Margin
Other Inc. (Expense), net
Interest % of Sales
Taxes
Tax Rate
Net Income
(387.47)
-3.6%
% of Sales
Plus/(minus) Changes WC
% of Sales
-3.6%
(420.00)
(601)
(619)
(637)
(657)
(676)
(697)
(717)
(739)
-3.6%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
697
790
803
1,009
1,040
1,071
1,103
1,136
1,170
1,205
1,241
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
2,790
3,161
3,211
4,038
4,159
4,284
4,412
4,544
4,681
4,821
4,966
13.3%
1.6%
25.8%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
1,399
1,399
1,458
1,502
1,547
1,594
1,641
1,691
1,741
1,794
1,847
13.0%
12.0%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
% Grow th
Add Depreciation/Amort
(419.61)
13.8%
206
(116)
(1)
(36)
(37)
(38)
(39)
(41)
(42)
(43)
(44)
1.9%
-1.0%
0.0%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
Subtract Cap Ex
2,583
2,797
2,800
2,884
2,971
3,060
3,020
2,705
2,368
2,081
1,847
Capex % of sales
24.0%
24.0%
24.0%
24.0%
24.0%
24.0%
23.0%
20.0%
17.0%
14.5%
12.5%
Free Cash Flow
1,812
1,646
1,868
2,620
2,698
2,779
2,994
3,489
4,012
4,491
4,921
-9.1%
13.4%
40.3%
3.0%
3.0%
7.7%
16.6%
15.0%
11.9%
9.6%
% Grow th
Transocean - Summary
 Sell all of Transocean (368 basis points)
 Loss of upside
 Volatility in economic recovery
 Oil prices


European debt crisis
Strong dollar
 Aftermath of Deepwater Horizon incident
Chevron Corp. Overview
 Sector: Energy
 Industry: Oil and Gas Integrated
 Price: $72.57
 Target: $97
 Upside: 33%
 Dividend Yield: 3.90%
 BUY 418 basis points
Chevron Corp.
 Founded in 1879 based in San Ramon, CA
 Among largest U.S. integrated oil companies
 Exxon and ConocoPhillips
 Owns or has stake in 9,600 gas stations in the U.S. under
Chevron and Texaco
 Owns or has stakes in 12,400 outside the U.S.
Advantages of CVX
 11th largest company in S&P 500 by market capitalization
 Moves fairly inline with index
 3.9% dividend yield
 Increased dividend payout 22 consecutive years
 Geographically diversified:
 Worldwide with key operations in Kazakhstan, Thailand,
Indonesia, Saudi Arabia, Brazil, Venezuela, Africa, United
Kingdom, and California
Advantages cont.
 Diversified Business:
 Exploration and production of natural gas and crude oil
 Seven refineries in Singapore, Thailand, South Korea, and
Richmond and El Segundo, CA manufacture products for
countries in the Pacific Basin. Pascagoula, MI and
Pembroke, Wales, United Kingdom, supply countries
primarily in the Atlantic basin.
 Transportation and Storage via oil tankers and pipelines
 Other areas of business: Trading, mining, and chemicals
Risks to CVX
 Decrease in Oil Prices
 Stock price is highly correlated with oil prices r =.89
 Profit margins are already low
 Crack Spread – Currently $11.39 (1 month) typically ≈$20
 Currency Risk
 The strengthening of U.S. dollar
 Repatriated profits are going to decrease
 Oil is more expensive, demand falls
 Government regulations
 Restrictions on offshore drilling
 Economic Recovery
 EU concerns and the possible double dip recession
Stock Performance vs. S&P 500
2-year
Stock Performance vs. S&P 500
5-year
Revenue
Earnings per Share
Dividend per share
Valuation Analysis
Absolute
High
Low
Median
Current
Target Multiple
Target E, S, B /share
Target Price
Forward P/E
30.5
5.6
14.4
8.3
11
8.72
95.92
P/S
1.3
0.4
0.9
0.8
0.9
106.86
96.17
P/B
4.6
1.4
2.5
1.6
2
48.03
96.06
P/CF
11.6
3.8
7.2
6.1
7.2
12.60
90.71
P/EBITDA
8.42
2.37
5.06
4.44
5.06
17.31
87.58
Average Target
93.29
Upside
28.6%
Current Price
72.57
Relative to Industry
Hgih
Low
Median
Current
Forward P/E
1.6
0.59
0.9
0.82
P/S
1.1
0.8
1
1
P/B
1.3
0.8
0.9
0.9
P/CF
1.3
0.5
1
0.8
P/EBITDA
1.81
0.71
0.87
0.84
Recommendation Summary
 No action on NOV and NE
 SELL 368 basis points of Transocean
 Expected losses impacting offshore drilling
 BUY 418 basis points of Chevron Corp.
 Diversified business
Questions?