1. Energy Sector
Isabel Collins
Ke Chen

2. Agenda Overview of Energy Sector Business Analysis Economic Analysis
Financial Analysis
Valuation
Recommendations

3. Energy Sector - S&P 500, SIM S&P 500 SIM
Currently, the energy sector makes up about 6.6% of the S&P 500. Our portfolio is slightly overweight at 6.7%

4. Sub-Sectors & Industries
Energy, Equipment & Services
•Oil & Gas Drilling
•Oil & Gas Evaluation, Completion & Drilling Services
•Oil Related Equipment Manufacturers
Oil, Gas & Consumable Fuels
•Oil & Gas Exploration & Production
•Coal & Consumable Fuels
•Oil & Gas Storage & Transportation
•Oil & Gas Refining & Marketing
The energy sector is made up of two smaller sub sectors. The energy equipment & Services sector includes companies that offer drilling services, support services for evaluation, completion and production. It also includes Equipment manufactures and so forth. Traditionally this subsector is actually the supplier for the second sub sector, which is the Oil, Gas & Consumable fuels. This Sub sector is made up of companies that are involved in exploration, production, coal, storage, transportation, refining and marketing of Oil & Gas.

5. Largest 15 Companies in the Sector

6. Business Cycle
As the U.S. enters into the Late cycle phase the inflationary pressures build and help drive commodity prices upwards, this in turn drives revenue for the Energy sector and typically leads to outperformance

7. Energy Sector vs. S&P Y

8. S&P 500 YTD Performance by Sector
YTD Energy Sector has had very weak performance
Crude oil price recovery expected to begin in late 2017
Average price for fiscal 2017: $55.00 a barrel

9. Break Even Prices
As energy prices continue to recover more sources of energy become profitable
$55.00/bbl expected as average price in fiscal 2017

10. OPEC & Energy Supply Excess Supply in the market
More efficient technology
Falling demand
OPEC cuts went into effect last September
Drove a 10% increase of crude oil prices
Energy prices expected to continue to recover through 2018

11. Trump Administration Effect on Energy Sector
Benefits from potential deregulation of:
gas drilling
o-zone rules
methane emissions
federal land restrictions
fracking restrictions, etc
Harold Hamm, CEO of oil drilling company Continental Resources, advising President Trump on several deregulation issues
U.S. energy independence could mean substantially more production reversing progress OPEC made, which drove oil prices up 10% in the final quarter of 2016
Increased uncertainty for entire sector

12. Porters 5 Forces Threats of New Entrants Bargaining Power of Supplier
Threat of Substitutes
Rivaly
Bargaining Power of Buyers
High Capital requirements
Economies of scale
Patented technology
Government regulation
Can limit production to cut excess supply
OPEC, 13 members
Alternative energy
I.E. innovation in biofuels
Most major players are relatively similar in size, power, and competencies
High exit costs
3 benchmarks set price
WTI, Brent, Dubai
Low switching cost
Joint Venture

13. Financial Analysis Sales & EPS Major Companies Energy Sector
Industries in the Sector
Major Companies
Major Companies
R&D, ROE
Margins
Margins Versus the Market
I’m going to talk about the financial analysis and the valuation analysis. In the the financial analysis part, I will first talk about two important financial indicators sales and EPS of the energy sector, industries in the sector, and major companies in the sector. Then I will show some data on those those major companies, such as R&D, ROE and margins.

14. Performance of the Energy Sector - S5ENRS
Sales
This is a picture showing the sales and EPD of the energy sector.
Sales: We can see now sales is 382, which is over 100 point below the median 494.
EPS: EPS is 39, and it is about 300% higher than the median 7.43.
EPS is really high whereas the sales is low.

15. Industries in the Energy Sector
Two industries: Oil, Gas & Consumable Fuels(83.74%), and Energy Equipment & Services (16.26%).
Then we will talk about the industries. Based on GICS, the energy sector has two industries: one is called Oil, Gas & Consumable Fuels, which occupies 83% of the whole sector in terms of market. The other one is the Energy Equipment & Services.

16. Oil & Gas - S5OILG
Sales
First take a look at the Oil & Gas industry. Sales is 428, which is over 130 point below the median 552.
EPS: EPS is 48, and it is about 700% higher than the median 6.6.

17. Energy Equipment -S5ENRE
Sales
As for the energy equipment industry: Sales is 253, which is over 60 points higher the median 193, and this is different from the the energy sector and the Oil & Gas industry.
EPS: EPS is 15, and it is about 5 points higher than the median 20.

18. Weight of S5OILG & S5ENRE in S5ENRS
Major companies in S5OILG are Exxon Mobil Corp and Chevron Corp. (composed of 48% of the industry)
Major companies in S5ENRE are Schlumberger Ltd and Halliburton Co. (composed of 68% of the industry)
Now take a look at the big companies in those two industries and see how they performances compared their pasts. In the Oil & Gas Industry, I picked Exxon, Chevron and ConocoPhillips and picked Schlumberger and Halliburton in the Energy equipment industry, since they are largest companies in market capitalization. Besides, I studied Kinder Morgan since it is in our portfolio.

19. XOM - Sales & EPS
Sales
Now we move to the first company. For Exxon, its sales 300 billion is 25% lower than its median, and its EPS 13.8 is much higher than its median 6.6 per share.
Exxon Mobil Corp and Chevron Corp

20. XOM - R&D, CFC, ROE and Turnover
The 12m R&D is R1 is 0.53 since it spent a lot in The ROE is 9.9, the Inventory turnover is 11 and the FCF is about So this company generate free cash flows.

21. XOM - Margin
The profit margin is 3, which is 5 point below its median. And its operating margin is negative 3.4, much lower than its median positive 10 points. Historically, XOM is under performance.

22. XOM - Versus the Market
How is XOM’s margin versus the market? Typically XOM’s performance, in terms of both operating margin and gross margin, is worse than the market. It usually performs better in the sector than in the whole S&P 500 market. But now its ratios of margin relative to both market are negative.

23. Major Companies
So here is the excel sheet of the data of the major companies. In the Free cash flow row, the red numbers represent that this company is generating free cash flow, and the green numbers show that that company is a net user of cash.
And for other numbers in green in the middle of the chart, they show that those company’s margin is less than their median. We can find Kinder Morgan is so different from other companies since it is the only one company that has the operating margin greater than its median. Also its margins are much greater than its peers.
At the bottom of the chart, red numbers show that this company’s margin beats the industry or and market. Again Kinder Morgan’s very different.

24. Valuation Analysis P/S, P/E, P/B and P/CF Industries Major Companies
Relative to the Market
Sector
Major Companies
How I will talk about the valuation analysis. In the first section, I will show the 4 ratios of the industries and major companies’. Then in the second section, I will about how the sector and the major companies versus the spx.

25. P/S, P/E, P/B and P/CF
First we will look at the 4 ratios: p/s, p/e, p/b and p/cf.
The three charts from top to bottom are the 4 ratios of the energy sector, Energy Equipment & service industry and the Oil, Gas & Consumable Fuels industry. We found that the P/CF ratio is greater than its median in all three charts. The situations are similar in P/S, P/E and P/B since there is a rapid increase in 2016.

26. P/S - Sector and Industries
Does valuation vary widely across the sector from industry to industry?
First take a look at P/S. The white line represents the sector, the purple line represents the Oil & Gas Industry and the blue line represents the Energy Equipment industry. Obviously the valuation vary widely across the two industries: P/S ratio of Energy Equipment industry is about 100% greater than the ratio of the Oil & Gas Industry. But the fluctuations in each line are similar.

27. P/E
For the ratio P/E, the green is the sector, red is the energy equipment industry and the grey is the Oil & gas industry. Smilarly, the P/E ratios of the energy sector and of the Oil & gas industry are similar, but the ratio of the energy equipment industry went super high in 2016.

28. P/B
Similarly, for the P/B ratio, the light yellow line, which represents the energy equipment industry is much higher than the energy sector and the oil & gas industry.

29. P/CF
And that similarity also is shown in the p/cf ratio. The dark brown line is the energy equipment industry.

30. P/S - Major Companies
Now we want to see will the ratios vary wildly across the sector from company to company. The light blue and dark blue lines are companies in the energy equipment industry and we can see within that industry the valuation varies. The white line is the sector, and it is similar to most of the comanies in the oil and gas industry. The grey line is Kinder Morgan, its p/s ratio is very different from the companies that are also in the gas and oil industry. Kinder Morgan’s P/S ratio is very large: now it is 3.6 where as its peer companies in the same industry are around 1.3.

31. C-P/E
For the P/E ratio, this purple line is KMI’s P/E ratio, and this green line is HAL’s. These two companies’ ratios are very different from the rest of companies.

32. C-P/B
For the P/B ratio, the yellow line is KMI, which is very different from others. Then the green line and this red line are companies in the energy equipment industry, and they are somehow varies. The rest of lines does not vary wildly, and they represent companies in the oil and gas industry and the energy sector.

33. C-P/CF
Move to the P/CF ratio,situation is similar. This dark red line and this orange line are companies in the energy equipment industry, and they are somehow varies. The bright red line is KMI, and it is still kind of different. The rest of lines does not vary wildly, and they represent companies in the oil and gas industry and the energy sector.

34. Sector vs SPX P/E P/S P/S P/CF
Now I’m going to talk about how how the 4 ratios of the energy sector and of the SPX. These four lines represent the ratios of the energy sector. From these chart we can find that expect in 2016 the p/cf became greater than the SPX, other times the secor ratios are smaller than the ratios of SPX. As for whether the relative ratio of sector to the market expand, contract or remain the same, we want to make our conclusion based on these pictures. In all four charts, the two lines seem to expand.

35. Industry vs SPX P/S P/E P/B P/CF
These are 4 ratios of the two industry versus the market. These 4 lines represent the market. We can find that still at most of time the industry ratios are smaller than the ratios of SPX. And also the relative ratios of the industry versus the market seem to get smaller.

36. Hold/Maintain Current Weight
Recommendation
Hold/Maintain Current Weight
Energy Sector typically outperforms in late cycle of business phase
Demand is still weak/excess supply in the marketplace
Price of Oil is still recovering
Uncertainty in the marketplace
Low Margins, low sales
High P/E, P/S ratios
High EPS
Margins of CVX is similar to XOM: Its profit margin and operating margin are much below their medians.

37. Questions?
Margins of CVX is similar to XOM: Its profit margin and operating margin are much below their medians.

38. Appendix
Margins of CVX is similar to XOM: Its profit margin and operating margin are much below their medians.

39. CVX
Margins of CVX is similar to XOM: Its profit margin and operating margin are much below their medians.

40. CVX
The 12m R&D is R1 is 0.46, which is similar to XOM. The ROE is 9.9, the Inventory turnover is 11 and the FCF is about So this company generate free cash flows.

41. CVX

42. SLB

43. SLB

44. SLB

45. HAL

46. HAL

47. HAL

48. KMI

49. KMI

50. KMI