Energy Sector Martina Gutik Colleen Hurley Ben Jekeli Ben Smalley
Agenda Size and Composition Business and Economic Analysis Financial Analysis Valuation Analysis Recommendation
SIZE AND COMPOSITION
Energy Sector Summary Composed of companies involved in the production and sale of energy – Fuel Extraction – Refining – Distribution 41 Companies 1.21 Trillion Market Capitalization
S&P 500 Breakdown As of 3/31/10 Compared to 9.76% SIM Weight
% SIM Over/Under S&P 500 As of 4/30/10 Recommend increasing sector weight to market level
Industries Oil & Gas Drilling Oil & Gas Equipment & Services Integrated Oil & Gas Oil & Gas Exploration & Production Oil & Gas Refining & Marketing Oil & Gas Storage & Transportation Coal & Consumable Fuels Transocean Ltd. Noble Corp. National Oilwell Varco Inc. Peabody Energy *Not currently owned SIM Stocks
Top 5 Companies As of 4/29/10 CompanyYTD Change Smith International Inc.75.78% Pioneer Natural Resources33.13% Rowan Companies, Inc.31.63% Denbury Resources Inc.29.39% Sunoco Inc.25.59% Company Index WeightRank Market Cap (billions) Exxon Mobil2.97% Chevron1.52% ConocoPhillips0.81% Schlumberger0.80% Anadarko Petroleum0.30% Largest CompaniesTop Performers
Sector Performance As of 4/30/10
Relative Strength
BUSINESS & ECONOMIC ANALYSIS
Five Forces Analysis Threat of Entry – High costs to enter all industries Threat of Rivalry – Slow industry growth rate, pretty much all mature companies – Relatively low industry-to-industry Threat of Substitutes – Coal, natural gas, oil, solar, nuclear etc – End consumer has few options Threat of Suppliers – OPEC and other strong suppliers Threat of Buyers – Currently buyers have very little power
Key Drivers of Energy Demand Oil Prices Production Capacity OPEC supply Inventories Political Influence
2008 Oil Consumption by Nation (thousand barrels per day)
Total U.S. Energy Consumption Liquid fuels Coal Natural gas Nuclear Renewables HistoryProjections quadrillion Btu
2008 Oil Production by Nation (thousand barrels per day)
Annual Energy Outlook for 2010 Low oil price High oil price ProjectionsHistory 2008 $/barrel
Month Prior OpenHighLowVolume Settle Jun ,546 Jul ,454 Aug ,821 Sep ,864 Oct ,178 Nov ,732 Dec ,461 Jan ,366 Feb ,216
$/Euro versus Crude Oil Price
FINANCIAL ANALYSIS
Average Annual Revenue Growth
Average Annual EPS Growth
S&P 500 Energy Sector Growth Q – Q EPSRevenue Mean8.9% Median11.5% Mean3.2% Median2.6% Note : Above mean calculated without outlier (950% on far left)
S&P 500 Energy Sector Expected Growth EPS Revenue Mean48.4% Median12.2% Mean15.9% Median12.7%
Sector Comparison Projected EPS Growth
Net Profit Margin Relative to S&P 500
VALUATION ANALYSIS
Industry Valuation Oil Drilling Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Energy Sector Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Oil Exploration Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Oil Integration Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Overvalued by >10% Inline with S&P Undervalued by >10%
Industry Valuation Oil Storage Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Oil Equipment Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF Oil Refining Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E nm Forward P/E P/S P/B P/CF Overvalued by >10% Inline with S&P Undervalued by >10% Coal Relative to S&P 500 RatioHighLowMedianCurrent Trailing P/E Forward P/E P/S P/B P/CF
Recommendation Currently underweight by 143 basis points Recommend increasing weight by ≈143 basis points to bring to market weight – Demand for energy will increase with economic recovery, still relatively cheap Possibly look to oil refining industry or coal industry
Questions