ENERGY SECTOR Mike Essig Chris Gagnon Brian Geiser

VALERO ENERGY CORPORATION ENTERPRISE PRODUCTS PARTNERS L.P. TABLE OF CONTENTS SECTOR OVERVIEW HALLIBURTON VALERO ENERGY CORPORATION PATTERSON UTI ENTERPRISE PRODUCTS PARTNERS L.P. RECOMMENDATION

SECTOR OVERVIEW

ENERGY SECTOR ALLOCATION Sector Weights ENERGY SECTOR ALLOCATION Sector Weights Currently 5.61% of the S&P 500 SIM Portfolio Weight of 6.68% Overweight by 1.07% Industries Energy Equipment and Services Oil, Gas, and Consumable Fuels SIM Portfolio Halliburton (HAL): 2.24% of portfolio Enterprise Products Partners LP (EPD): 1.09% of portfolio Valero Energy Corp (VLO): 3.34% of portfolio

Sector Return THREE MONTH RETURN ENERGY SECTOR RETURN TTM RETURN Three Month Price Change -5.88% Three Month Dividends Reinvested at Index -5.17% TTM Price Change -0.1669% TTM Dividends Reinvested at Index 2.81% Business Cycle Energy Sector performs best in the late stages of the business cycle Macro Analysis Drilling productivity is forecasted to increase with increased supply from the U.S. and other nations TTM RETURN Source: Bloomberg

Sector Recommendation ENERGY SECTOR STOCK RECOMMENDATION Keep Sector Overweighted Change previous recommendation from neutral to overweight Sector as a whole is underperforming BUT Certain stocks are outperforming their benchmark and the S&P 500 Risks to Overweight Decline in oil prices Currently entering the late stage of economic expansion Potential for overproduction from U.S. and other countries will force decline in WTI and Brent BUY HOLD SELL

HALLIBURTON

Business Analysis Founded in 1919 Multinational company that provides services and products for the energy sector Operates in over 70 countries, over 50,000 employees, and owns hundreds of subsidiaries Second largest company in it’s industry (Schlumberger)

Business Analysis Operates in the Energy Equipment and Services Industry Two Segments: Completion and Production Drilling and Evaluation 14 Product Service Lines Completion and Production larger: 63% of revenue Competitive Advantage: New technology for evaluation and drilling; Most horsepower for pressure pumping (fracking) Over 50% of revenue was earned in the United States

Financial Analysis Since 2015, revenue has been on the rise Growth Drivers: Rising oil prices Large increase in drilling in North America, Latin America, and the Middle East Increase in pressure pumping capital expenditures (largest in market)

HAL vs WTI 1 Year Historical Graph Financial Analysis HAL vs WTI 1 Year Historical Graph

Valuation Analysis Expensive historically Higher than average industry growth predicted

Valuation Analysis 10 Year DCF Current Price: $46.94 Target Price: $ 60.68 Implied Upside: 29.3%

Valuation Analysis

Valuation Analysis BUY Growth: Increase in Pressure Pumping services More wells drilled than completed Increase in Revenue per Rig Increase in Completion BUY Risks to Recommendation: Oil price movement Political instability Government Regulation Disasters and Accidents that cause fines and loss of capital Alternative Energy

VALERO ENERGY CORPORATION

Business Overview The Valero Energy Corporation (VLO), is an international manufacturer and marketer of transportation fuels and other petrochemical products. 15 petroleum refineries with a combined throughput capacity of approximately 3.1 million barrels per day 11 ethanol plants with a combined production capacity of approximately 1.45 billion gallons per year. As of January 1, 2017 VLO operates with three business segments Refining: $90,657MM (96.5%) Ethanol $3,500MM (3.7%) VLO Energy Partners, LP (VLP) $452MM (0.5%)

Business Analysis Refiner Segment Drivers Ethanol Segment Drivers Demand for Oil Gasoline & Distillate Margins Throughput Volumes Biofuel Credit Cost Ethanol Segment Drivers Ethanol Prices Corn Prices Co-product Prices Production Volumes VLP Segment Drivers Increased Throughput Volume

Financial Analysis Revenue and Margins Return Metrics Debt Metrics YOY growth mostly negative Gross Margin mixed Operating Margin Mixed Return Metrics ROA 9.2%; above mean ROE: 19.3%; at mean ROIC: 14.6%; below mean Debt Metrics Trend positively compared to peers Debt/EV, Debt/EBITDA on low end of peers EBITDA & EBIT to Interest Expense high in class

DCF Analysis ASSUMPTIONS Discount Rate Growth Rate 11.25% Volatile Stock Price Cyclical sales Growth Rate 3.00% Conservative rate Reflect volatility in sales

Valuation Analysis Implied Price by EV Implied Price by Market Resulted in higher valuations $99.03-$130.18 mean range Implied Price by Market Moderate valuations $82.52-$101.97 mean range

Recommendation Recommendation: HOLD Risks and Concerns Historical stock performance has been positive Potential downside only -5.96% 03/30/18 to 04/16/18 VLO increased from $92.27 to $105.49 Risks and Concerns Change in supply & demand of oil Fluctuations in oil prices Volatile refining margins Compliance with & changes in environmental laws Lack of sustainable competitive advantage

PATTERSON UTI

PATTERSON UTI Patterson-UTI (PTEN) is an oil drilling company headquartered in Houston, Texas formed from the merger of Patterson Energy and UTI Energy in 2001. The company specializes primarily in on-shore contract drilling and pressure pumping in the United States and Canada, especially in the Permian, Appalachian, and Mid-Con Basins. Along with its drilling and pumping services, Patterson-UTI is a provider of drilling rental equipment and technology. Fracking has been critical for revenues*** Patterson-UTI Contract Drilling Pressure Pumping Directional Drilling

PTEN Business Analysis IT’S ALL ABOUT THE https://www.statista.com/statistics/326762/revenue-of-top-energy-services-and-equipment-land-drilling-companies-global/ http://www.macrotrends.net/1369/crude-oil-price-history-chart https://www.vanguardngr.com/2018/04/oil-prices-rise-due-lower-u-s-drilling-activity/

Financial Analysis TTM 2017-12 2016-12 2015-12 2014-12 2013-12 2012-12 Morningstar TTM 2017-12 2016-12 2015-12 2014-12 2013-12 2012-12 2011-12 2010-12 2009-12 2008-12 Return on Equity 0.18 -13.25 -10.66 5.75 6.97 11.52 13.71 5.48 -1.82 17.25

Operating Margin Concerns

DCF Forecast

ENTERPRISE PRODUCTS PARTNERS L.P.

Target Price Change: -16.4% Dividend Yield: 6.63% Recommendation: SELL Enterprise Products Partners specializes in the gathering, treating, processing, transportation and storage of crude oil, natural gas, and petrochemical products The company operates throughout North America Marine transportation services are provided primarily in the United States “Master Limited Partnership” - No corporate income tax paid Stock Rating Current Stock Price: $24.46 Target Price: $20.45 Target Price Change: -16.4% Dividend Yield: 6.63% Recommendation: SELL Key Statistics 52 Week Price Range: $23.10-$29.51 Market Capitalization: $55.936B Diluted Shares Outstanding: 2.16B Beta: 1.07 2017 Revenue: $29.2B 2017 Net Income: $2.8B 2017 EPS: $1.30 EPD NGL Pipelines and Services Onshore NG Pipelines & Services Onshore CO Pipelines & Services Offshore Pipelines & Services Petrochemical

EPD Business Analysis [Projected] [Projected]

Financial Analysis TTM 2017-12 2016-12 2015-12 2014-12 2013-12 2012-12 2011-12 2010-12 2009-12 2008-12 Return on Equity 12.55 11.87 13.15 16.75 18.29 19.13 17.43 3.07 13.22 15.62 Morningstar

Operating Margin Concerns (again…) Troubling Decrease

DCF Forecast

PORTFOLIO RECOMMENDATION

Portfolio Recommendation SECTOR WEIGHTING Remain overweight in Energy Sector BUY 100 bps of Halliburton HOLD Valero Energy Corporation SELL 109 bps of Enterprise Products

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