1. ENERGY SECTOR
Mike Essig
Chris Gagnon
Brian Geiser

2. 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

3. SECTOR OVERVIEW

4. 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

5. 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 %
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

6. 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

7. HALLIBURTON

8. 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)

9. 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

10. 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)

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

12. Valuation Analysis Expensive historically
Higher than average industry growth predicted

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

14. Valuation Analysis

15. 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

16. VALERO ENERGY CORPORATION

17. 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%)

18. 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

19. 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

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

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

22. 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

23. PATTERSON UTI

24. 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

25. PTEN Business Analysis
IT’S ALL ABOUT THE

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

27. Operating Margin Concerns

28. DCF Forecast

29. ENTERPRISE PRODUCTS PARTNERS L.P.

30. 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

31. EPD Business Analysis
[Projected]
[Projected]

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

33. Operating Margin Concerns (again…)
Troubling Decrease

34. DCF Forecast

35. PORTFOLIO RECOMMENDATION

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

37. WHAT QUESTIONS DO YOU HAVE?