S&P 500 Energy Sector
Luke DiTomas
Alex Foisel
Ian McLeod
March 3, 2009
Agenda







Review of Sector Presentation
Proposal
BP
Pengrowth Energy Trust
Transocean
Technical Analysis
Summary
Review
Sector Presentation Review


Current S&P 500 Weight: 14.09%

Currently underweight 604 basis points

Underweight the sector by 209 basis points
relative to the S&P 500



S&P 500 Weight
Current SIM Weight: 8.05%
An increase in current SIM Weight of 3.95%
Why not underweight more?

Energy prices near bottom

Valuation looks very cheap

Increase in global energy demand
Why not overweight?

Short-term demand for oil could further contract

Recession could extend longer than expected
Telecommunication
Services, 3.72%
Consumer
Discretionary, 8.19%
Utilities, 4.61%
Materials, 3.04%
Consumer
Staples, 12.85%
Information
Technology, 16.22%
Energy, 14.09%
Industrials,
10.62%
Health Care,
15.94%
Financials,
10.72%
SIM Weight
Telecommunication
Services, 2.19%
Materials, 1.79%
Utilities, 2.89%
Information
Technology, 18.97%
Consumer
Discretionary, 9.67%
Consumer
Staples, 14.22%
Energy, 8.05%
Industrials,
8.27%
Health Care, 21.50%
Financials,
9.59%
Review
Current Energy Holdings
Company
Market Value
Current Portfolio Weight
ConocoPhillips
$459,405
381 bp
BP
$502,516
416 bp
Total
$961,921
797 bp

Class voted to increase energy sector portfolio weight by 395 bp
Review
Regression: Crude Oil Prices and
Energy Sector
100
90
80
70
SP-10
60
50
•Correlation: 0.9288
•R-Square: 0.8626
40
30
20
10
0
$0.00
$20.00
$40.00
$60.00
$80.00
Crude Oil Prices
$100.00
$120.00
$140.00
$160.00
Proposal
Proposal
Company
BUY
SELL
HOLD
Resulting
Portfolio
Weight
ConocoPhillips
0 bp
0 bp
381 bp
381 bp
BP
170 bp
0 bp
416 bp
586 bp
Pengrowth
75 bp
0 bp
0 bp
75 bp
Transocean
150 bp
0 bp
0 bp
150 bp
Total
395 bp
0 bp
797 bp
1192 bp
BP
British Petroleum- BP

BP plc, also known as British Petroleum, is the second largest publicly traded oil
company and fourth largest U.S. refiner. Headquartered in London, England, they
operate in three different business segments:

Exploration and Production



Upstream Activities: Include oil and natural gas exploration and field development and production

Midstream Activities: Include the management of crude oil and natural gas pipelines, processing and
export terminals and LNG processing facilities
Refining and Marketing

Responsible for the supply and trading, refining, marketing and transportation of crude oil and
petroleum products to wholesale and retail customers

BP markets its products in more than 100 countries
Other

BP Alternative Energy: Segment has already had substantial businesses in solar photovoltaic, wind and
gas-fired power and is developing projects in advanced biofuels and carbon capture and storage as well
as new areas such as concentrated solar thermal power
BP
Business Analysis: BP

Upsides

Dividend yield- 8.78%- $3.36 per share


Slight GDP growth means an increase in demand for petroleum based products
.93 correlation between GDP growth and demand for petroleum based products


Intends to distribute more money to shareholders through dividends rather than share
repurchases
BP is expected to intensify its reserve acquisitions because of depressed asset values and
tight credit

Balance sheet is very strong and can support growth through acquisitions
EBIT
Interest Expense
Interest Coverage
2008
$35,239
$1,547
22.78
2007
$32,352
$1,393
23.22
2006
$35,158
$986
35.66
2005
$32,682
$874
37.39
2004
$25,746
$768
33.52

BP’s balance sheet is strong enough to withstand oil at $40-$50/bbl oil for 2-3 years

Reserve replenishment ratio- 15th straight year the ratio was >100%

When oil prices are low, supply begins to contract, mature projects loose marginal CAPEX
meaning new growth is postponed, and EOR investments are cut

Year-end reserves were: 18.2 billion barrels and a resource base of 43.4 billion barrels

BP’s combined reserved and non-proved resources were sufficient for 43 years of production at
the same rates as last year
BP
Business Analysis: BP Cont.


Upsides Cont.

US auto industry is bailed out or nationalized

Low crude oil prices provide an opportunity to launch another wave of cost cutting and
trim CAPEX- potential margin expansion in 2009 & 2010
Downsides


Russia is currently experiencing policy change by the government and may cause
production to fall up to 10% or 1MBD

BP’s joint venture, TNK-BP may see production fall

Revenue was just under $35 billion in 2008

Reserve replacement was 146% for 2008
Obama administration proposed raising at least $31.5 billion over 10 years from the oil
sector as part of a fiscal 2010 budget proposal


Tax benefits may be revoked which gave incentives to US refiners for hiring US workers
Crude oil prices continue to fall to $20-$30/bbl and remain there through 2009

Given the before mentioned correlation of the energy sector vs. oil prices
BP
DuPont Analysis

BP is currently outperforming both the industry and market when examining
ROE

Decrease in ROE can be attributed to large-scale projects which are only profitable when oil is above
$70/barrel
ROE
ROA
Profit Margin
Asset Turnover
Equity Muitiplier
BP- 2008 Industry Median- 2008
Market Median- 2008
BP- 2007 BP- 2006
23.5%
20.4%
6.5%
22.37%
26.08%
9.3%
9.0%
0.5%
8.97%
10.24%
7.4%
3.4%
2.1%
7.33%
8.24%
1.30x
1.90x
0.60x
1.24x
1.30x
2.52x
NA
NA
2.49x
2.55x
BP
DCF Valuation- V1

The implied equity value per share is $58.02, an upside of 51.26%
($ in million)
Year
Forecast
2013E
2014E
2009E
2010E
2011E
2012E
365,700
281,884
-22.92%
293,191
4.01%
301,606
2.87%
310,714
3.02%
320,564
3.17%
35,239
9.64%
26,107
9.26%
27,509
9.38%
28,291
9.38%
29,145
9.38%
956
0.26%
141
0.05%
0.00%
90
0.03%
Taxes
Tax Rate
Minority Interest
12,617
33.0%
509
8,569
33.0%
373
9,078
33.0%
472
Net Income
% Growth
17,397
18,431
6%
10,985
3.00%
(15,683)
-4.29%
26,074
7.13%
Free Cash Flow
YOY growth
(13,375)
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
257,428
90,335
90,662
180,997
-7.39%
Revenue
% Growth
Operating Income
Operating Margin
Interest Expense and Income
Interest (net) % of Sales
Add Depreciation, Depletion and
Amortization
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
2008E
2015E
2016E
2017E
2018E
331,206
3.32%
342,699
3.47%
355,105
3.62%
368,493
3.77%
382,937
3.92%
30,069
9.38%
31,067
9.38%
32,145
9.38%
33,309
9.38%
34,565
9.38%
35,920
9.38%
93
0.03%
96
0.03%
99
0.03%
103
0.03%
107
0.03%
111
0.03%
115
0.03%
9,306
33.0%
562
9,587
33.0%
668
9,891
33.0%
795
10,219
33.0%
947
10,574
33.0%
1,126
10,957
33.0%
1,340
11,370
33.0%
1,595
11,816
33.0%
1,898
19,744
7%
19,456
-1%
20,133
3%
20,877
4%
21,695
4%
22,595
4%
23,586
4%
24,679
5%
25,887
5%
10,317
3.66%
17,373
6.16%
20,098
7.13%
11,265
3.84%
9,177
3.13%
20,905
7.13%
12,138
4.02%
(1,056)
-0.35%
21,504
7.13%
13,071
4.21%
(1,087)
-0.35%
22,154
7.13%
14,069
4.39%
(1,122)
-0.35%
22,856
7.13%
15,139
4.57%
(1,159)
-0.35%
23,615
7.13%
16,289
4.75%
(1,199)
-0.35%
24,434
7.13%
17,526
4.94%
(1,243)
-0.35%
25,319
7.13%
18,858
5.12%
(1,290)
-0.35%
26,274
7.13%
20,295
5.30%
(1,340)
-0.35%
27,303
7.13%
26,023
-295%
19,282
-26%
9,033
-53%
9,962
10%
10,968
10%
12,060
10%
13,250
10%
14,550
10%
15,974
10%
17,538
10%
Terminal Discount Rate =
Terminal FCF Growth =
Terminal
257,428.1
P/E
9.9
EV/EBITDA
5.02
Free Cash Yield
6.81%
11.0%
3.92%
Shares Outstanding
50%
50%
3,119.4
Current Price
$ 38.36
Implied equity value/share
$ 58.02
Upside/(Downside) to DCF
51.26%
*Stock Price as of February 29, 2009 close
BP
DCF Valuation- V2

The implied equity value per share is $50.81, an upside of 32.46%
($ in million)
Year
2009E
2010E
Forecast
2011E
2012E
2013E
292,955
-19.89%
300,808
2.68%
308,598
2.59%
321,872
4.30%
323,686
0.56%
52,575
41.00%
14.38%
54,152
3.00%
18.48%
56,995
5.25%
18.95%
60,985
7.00%
19.76%
66,474
9.00%
20.65%
72,988
9.80%
22.55%
35,239
9.64%
28,710
9.80%
29,479
9.80%
30,243
9.80%
31,543
9.80%
31,721
9.80%
148,494
2.8x
0.41x
178,702
3.3x
0.61x
216,582
3.8x
0.72x
256,137
4.2x
0.83x
305,778
4.6x
0.95x
372,239
5.1x
1.15x
Net Income
Margin
21,666
5.92%
20,038
6.84%
20,575
6.84%
21,108
6.84%
22,016
6.84%
22,140
6.84%
EPS
Analyst Estimates
$8.17
$5.74
$4.37
$6.30
$5.97
Revenue
% Growth
EBITDA
Growth
Margin
Operating Income
Operating Margin
Enterprise Vaule
EV/EBITDA
EV/Revenue
Add Depreciation, Depletion
and Amortization
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
EV/FCF
2008
365,700
10,985
3.00%
(15,683)
-4.29%
26,074
7.13%
10,722
3.66%
17,373
5.93%
20,888
7.13%
11,558
3.84%
9,177
3.05%
21,448
7.13%
12,419
4.02%
9,412
3.05%
22,003
7.13%
13,540
4.21%
9,817
3.05%
22,949
7.13%
14,206
4.39%
9,872
3.05%
23,079
7.13%
(9,106)
27,246
-399%
6.56x
19,862
-27%
10.90x
20,937
5%
12.23x
22,424
7%
13.64x
23,140
3%
16.09x
-16.31x
Terminal
Value
Terminal Discount Rate =
Terminal FCF Growth =
Terminal
P/E
EV/EBITDA
Free Cash Yield
13.0%
3.92%
264,831.7
12.0
5.22
8.74%
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
264,832
80,488
78,016
158,505
-5.75%
Shares Outstanding
3,119.4
Current Price
$
38.36
Implied equity value/share
$
50.81
Upside/(Downside) to DCF
32.46%
Cash
Debt
8,197
33,205
51%
49%
*Stock Price as of February 29, 2009 close
BP
Multiples Valuation

The implied equity value per share is $64.67

Target multiples are 90% of 10-year mean values

When compared to it sector and the market, BP is currently undervalued in nearly all multiple
calculations
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Stock vs.
S&P500
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
Low
1.14
1.32
1.10
1.70
1.34
2.22
1.72
B.
30.1
3.0
5.5
18.6
22.6
3.0
30.1
Mean
0.42
0.39
0.43
0.41
0.45
0.54
0.50
Low
0.63
0.64
0.83
0.75
0.68
1.30
1.19
Mean
C.
8.2
0.3
1.2
2.2
3.4
0.7
9.0
Current
0.75
0.49
0.82
0.50
0.62
1.58
1.37
D.
11.5
1.0
2.7
6.4
8.5
1.8
20.0
Current #Your
*Your Target
Target E, S, B,
Multiple etc/Share
E.
9.2
0.3
1.3
2.5
4.1
1.8
19.8
F.
10.35
0.93
2.43
5.76
7.65
1.62
20.00
G.
4.17
112.82
29.51
15.34
9.36
21.31
1.94
Your
Target
Price
(F x G)
H.
$43.16
$104.59
$71.70
$88.38
$71.57
$34.52
$38.75
Stock vs. Sector High
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Low
1.21
1.84
1.6
1.66
1.38
2.61
1.44
Mean
0.69
0.51
0.67
0.69
0.67
0.68
0.83
0.98
0.97
0.98
1.11
0.96
1.23
1.04
Current
0.75
0.6
0.86
0.75
0.89
1.37
0.83
BP
12-Month Price Target Calculation

12-month price target calculated based on a weighted average of:

DCF v1: 20%

DCF v2: 20%

P/Forward EPS: 20%

ROE: 20%


BP plans to start at least 29 different projects in 2009, all with different hurdle rates of average
crude oil prices
P/EBITDA: 20%

Both DCF models are trying to find the equity value of BP
12-Month Price Target: $55.82- 45.52% Upside
*Upside Calculated Based off February 29, 2009 close
Pengrowth Energy Trust
Business Analysis: PGH



One of North America's largest energy
royalty trusts that acquires and manages
working interests and royalty interests in
oil and natural gas properties
The Trust owns all of the royalty units and
91% of the common shares of the
Corporation
Employs over 600 people who support its
operations and activities

Sector: Energy

Industry: Oil and Gas Equipment and
Services

Current Price

52-Week High $21.90

52-Week Low
$4.87

Market Cap
$1.24B

Beta
1.09

P/E
6.31

Average Volume

Shares Outstanding 254.94M
$4.87
1,476,130
Pengrowth Energy Trust
Business Analysis: PGH

Upsides







Longer term trade
Growth through combination of cheap
acquisitions and organic development
Strong track record of meeting guidance
estimates
 Recorded better than expected EPS
numbers for Q408 and Full-Year 2008
Generates reasonably big monthly payouts to
investors
Revenue is easily quantifiable through stable
and predictable production levels unlike
traditional E&P companies
Expansion of oil exploration and drilling will
continue even if the price of oil does not
increase further
Not highly correlated with the price of oil
 approximately .51

Downsides

Canadian government proposal to tax energy
trusts could hurt future cash flows

Possibly more cuts to their cash distributions
(dividend payments)

Recession and cash strapped economy could
extend longer than expected

Unattractive technical analysis

Near 52-week low

Broke through key support level
Pengrowth Energy Trust
Financial Analysis: PGH

RECOMMENDATION = Buy 75bp

Current Price: $4.87

Yield: 0.96 (17.00%)

Target Value by DCF: $10.97

Potential Upside: 125.18%
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
$
$
$
$
Shares Outstanding
1,935,954
1,982,962
681,813
2,664,775
12.70%
243,000.5
Current Price
$
4.87
Implied equity value/share
$
10.97
Upside/(Downside) to DCF
Cash
Debt
125.18%
6,182
Pengrowth Energy Trust
Valuation Analysis: PGH

The current price related ratios
are all below the mean
estimates and all have created
new lows

Pengrowth GRE: 22.0%

S&P 500 and SP-10 GRE: 10.0%
Pengrowth Energy Trust
Valuation Analysis: PGH

Revenues numbers continue
to be very strong amidst this
economic downturn

ROE hit a bottom in mid-08
and is starting to show
strength as it is starting to
revert back to its mean
Transocean
Transocean (RIG)
The world’s largest offshore drilling
contractor, provides the most versatile
fleet of mobile offshore drilling units to
help clients find and develop oil and natural
gas reserves

Sector: Energy

Industry: Oil and Gas Drilling &
Exploration
Operates 139 rigs with a presence in every
major offshore market

Current Price

52-Week High $163.00

Planning on building 10 new ultradeepwater units

52-Week Low
$41.95

Employees approximately 21,200
employees with operations around the
world

Market Cap
$17.55B

Beta
.65

P/E
4.20

Average Volume 10,865,400

Shares Outstanding 319.26M


$54.98
DCF Valuation

The implied equity value per share is $115.56, an upside of 110%
($ in million)
Year
Revenue
% Growth
Forecast
2009E
16,476
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
22,243
35.0%
30,028
35.0%
36,033
20.0%
43,240
20.0%
51,023
18.0%
60,208
18.0%
69,239
15.0%
79,625
15.0%
91,568
15.0%
105,303
15.0%
Operating Income
Operating Margin
3,954
24.0%
5,783
26.0%
8,408
28.0%
8,648
24.0%
9,513
22.0%
10,205
20.0%
12,042
20.0%
13,155
19.0%
14,332
18.0%
15,567
17.0%
16,849
16.0%
Interest - net
Interest % of Sales
247
1.5%
334
1.5%
450
1.5%
473
1.3%
497
1.1%
521
1.0%
547
0.9%
575
0.8%
604
0.8%
634
0.7%
665
0.6%
Taxes
Tax Rate
Minority Interest
556
15.0%
872
15.0%
1,353
15.0%
1,226
15.0%
1,352
15.0%
1,549
16.0%
1,839
16.0%
2,013
16.0%
2,334
17.0%
2,539
17.0%
2,751
17.0%
Net Income
% Growth
3,151
4,578
45%
6,605
44%
6,949
5%
7,664
10%
8,134
6%
9,655
19%
10,568
9%
11,395
8%
12,394
9%
13,432
8%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
1,500
9.1%
240
1%
2,200
13.4%
2,002
9.0%
(750)
-3%
2,400
10.8%
2,703
9.0%
(1,012)
-3%
4,804
16.0%
3,243
9.0%
(721)
-2.0%
5,765
16.0%
3,892
9.0%
(865)
-2.0%
6,918
16.0%
4,592
9.0%
(1,020)
-2.0%
8,164
16.0%
5,419
9.0%
(1,204)
-2.0%
9,633
16.0%
6,231
9.0%
(1,385)
-2.0%
11,078
16.0%
7,166
9.0%
(1,592)
-2.0%
12,740
16.0%
8,241
9.0%
(1,831)
-2.0%
14,651
16.0%
9,477
9.0%
(2,106)
-2.0%
16,849
16.0%
Free Cash Flow
YOY growth
2,691
3,430
27.4%
3,491
1.8%
3,706
6.2%
3,772
1.8%
3,542
-6.1%
4,236
19.6%
4,336
2.4%
4,229
-2.5%
4,153
-1.8%
3,955
-4.8%
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
50,916
22,424
14,554
36,978
7%
Shares Outstanding
61%
39%
320
Current Price
$
54.98
Implied equity value/share
$
115.56
Upside/(Downside) to DCF
110%
Terminal
P/E
EV/EBITDA
Free Cash Yield
50,916.04
3.79
2.44x
7.77%
Multiples Valuation

The implied equity value per share is $139.57

Target multiples are 90% of 5-year mean values
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Stock vs.
S&P500
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
Low
5.1
6.31
1.38
2.53
2.48
2.3
2.18
B.
93.2
9.7
4.2
21.3
30.4
3.6
30.9
Mean
0.23
1.46
0.36
0.39
0.37
0.17
0.07
Low
0.63
3.62
0.95
1.4
1.46
0.32
0.47
Mean
C.
3.3
1.2
0.9
2.1
2.7
0.2
1.0
Current
0.36
2.11
0.68
0.54
0.52
0.45
2.18
D.
10.9
5.5
2.7
11.8
17.4
0.4
8.3
Current #Your
*Your Target Your
Target E, S, B,
Target
Multiple etc/Share
Price
(F x G)
E.
F.
G.
H.
4.1
13.84
9.36 $129.49
1.4
4.92
39.55 $194.72
1.1
2.43
49.98 $121.46
2.6
10.62
21.15 $224.57
3.4
15.66
16.17 $253.23
0.5
0.36
109.96
$39.59
29.5
7.47
1.86
$13.92
Stock vs. Sector High
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Low
1.14
1.32
1.49
1.70
1.34
1.94
1.28
Mean
0.42
0.39
0.46
0.41
0.45
0.23
0.06
0.63
0.64
0.98
0.75
0.68
0.41
0.29
Current
0.75
0.49
0.73
0.50
0.62
0.39
1.23
Transocean
Transocean (RIG)
Upsides
Downsides

High oil prices support growth
opportunities for RIG
•
Price is highly correlated with price of
commodities

Substantial financial flexibility from free
cash flow backlog
•
Success is highly dependent on other
integrated oil and gas companies

Planning a $3+ billion share repurchase
program in May 2009
•
Political instability can lead to price
fluctuations in crude oil and thus in RIG

About a 121% larger worldwide rig fleet
compared to closest competitor
•
Weakens with strength in US Dollar

Owns the most modern and versatile fleet
of rigs in the industry

Majority of high specification fleets
contracted into 2011
Transocean
Transocean (RIG)

All current values are well
below the 5-year mean
and very close to 5-year
lows

Expect the values to
revert back to the mean
over time
Technical Analysis
Technical Analysis: BP
Technical Analysis
Technical Analysis: RIG
Technical Analysis
Technical Analysis: PGH
Technical Analysis
Technical Analysis: COP
Summary
Summary

Buy:




BP- 170 basis points
Transocean- 150 basis points
Pengrowth Energy Trust- 75 basis points
Hold:

ConocoPhillips
Appendix: ConocoPhillips vs. BP