Chevron Corp CVX (XNYS)

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1 Morningstar Equity Analyst Report Report as of 10 Feb 2016 Page 1 of 12 Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow Valuation QQQQ Undervalued Uncertainty Medium Medium Financial Health Moderate Source: Morningstar Equity Research Quantitative Valuation CVX o USA Undervalued Fairly Valued Overvalued Current 5-Yr Avg Sector Country Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow 6, Dividend Yield % Source: Morningstar Bulls Say OGrowth is expected to increase after 2015 thanks to the startup of several projects, including the Gorgon LNG project, which should lead all majors while maintaining peer-leading liquids exposure. OChevron has accumulated U.S. unconventional acreage through smaller deals in higher-quality plays like the Permian and Marcellus, thus avoiding overpaying and destroying value like many peers. OChevron should realize improved downstream earnings and returns as conditions in its California refineries improve and new chemical production capacity is added via its CPChem joint venture. Bears Say OChevron's higher growth is the result of higher spending, which will result in returns deterioration and lower free cash flow unless oil prices remain above $100/bbl. OCost inflation and currency appreciation plagued Chevron's Gorgon LNG development in Australia, damaging returns on a key project. OThe completion of Gorgon and Wheatstone will significantly increase Chevron's exposure to LNG at a time when oversupply in the market is likely to depress prices for several years. Oil and Gas Price Outlook: Updating Our Near-Term Methodology for Forecasting Prices Allen Good, CFA, Analyst, 15 January 2016 Investment Thesis In recent years, Chevron's oil portfolio has led to peer-leading margins and returns on capital. New production from the Gulf of Mexico, West Africa, western Australia, and the Gulf of Thailand will preserve its liquids price exposure and serve as the growth engine for Chevron in years to come, setting it up for peer-leading growth for However, we expect elevated spending and lower oil prices to result in lower returns. Two liquefied natural gas projects in Australia, Gorgon and Wheatstone, will be the primary drivers of growth in the next few years. Gorgon, slated to start in 2016, will add more than 200,000 barrels of oil equivalent per day of production at peak levels. Wheatstone, scheduled for startup in late 2016, will add almost 200 mboed. The investment in LNG production, while primarily gas volumes, has prices indexed to oil, which should allow Chevron to preserve its peer-leading liquids exposure. Also, projects like LNG, with long-plateau production levels that require little additional capital expenditure, help reduce decline rates while generating significant free cash flow to support reinvestment elsewhere or shareholder returns. However, to achieve its growth, Chevron has spent more on a per-barrel basis than peers, while at the same time experiencing budget overruns on the Gorgon project. As a result, we expect returns to fall in the coming years on a combination of lower earnings (lower oil prices, higher depreciation) and increased capital employed, which should offset the benefit of greater production and higher downstream earnings. That said, we expect free cash flow to rise during the next five years thanks to improving oil prices, growing production, and falling capital spending, the combination of which should allow Chevron to be cash-flow-neutral after dividends in Stephen Simko, CFA, Sector Director, 10 February 2016 Analyst Note Given the large discrepancy that has emerged between Brent futures prices (currently $40-$47 per barrel) and the Morningstar energy team's outlook for midterm oil industry fundamentals, we are amending our methodology for forecasting near-term oil and gas prices. Historically, we used strip prices for 36 months (updated regularly) before moving to our midcycle prices, which are set by our long-term marginal cost expectations (unchanged at $70/bbl Brent and $4 per thousand cubic feet Henry Hub). Going forward, we plan to forecast near-term prices by starting with the current strip and making adjustments only for periods where we have a reasonably high degree of confidence that strip prices do not appropriately reflect our expectations for industry fundamentals. The valuation impact of this approach depends on two factors: the number of quarters we explicitly forecast (as opposed to relying on strip prices) and the variance in each of these periods relative to current strip pricing. We will review our forecasts regularly and adjust prices as warranted by changes in market fundamentals. Based on our current expectation that oil supply and demand will come into balance in mid-2017, we are launching updated Brent forecasts of $50-$55 for the second half of 2017 and $55-$60 for 2018 (approximately 20% higher than current strip prices on average). We continue to use strip prices for oil until the middle of next year, as well as for all periods during for Henry Hub natural gas. We will update our oil and gas producer valuations with this new pricing by the end of the current earnings period. In isolation, this will be a valuation tailwind, but in most cases it will be modest, since our midcycle price holds far more weight in determining our published fair value estimates. In many instances this uplift could be at least partially offset by other adjustments, including reductions to our 2016 and early 2017 Brent forecasts relative to strip prices. Economic Moat Allen Good, CFA, Analyst, 15 January 2016 Though an integrated energy company, Chevron has an economic moat that relies for the most part on its upstream operations. We generally regard refining operations as having no moat, since refiners produce a commodity

2 Morningstar Equity Analyst Report Page 2 of 12 Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Exxon Mobil Corporation XOM USD 333, , Total SA FP EUR 88, , BP PLC BP USD 88, , product in a highly competitive market. In addition, refiners have no pricing power over either their input or output. However, integrated firms can usually add value to refining operations through integration where independent refiners cannot. Compared with other supermajor firms, Chevron has a small refining footprint. In recent years, less exposure to refining has proved to be beneficial as margins fell. On the upstream side, Chevron benefits from skills and expertise developed through years of successful deep-water exploration in its core areas, which it can export to other parts of the world. Not only will the experience probably make Chevron more attractive to foreign governments in future bids for production-sharing opportunities, but it will also increasingly add value as more resources become available in deep-water locations. Chevron's expertise should open opportunities in deep-water areas where its peers and rivals may not have the qualifications necessary to operate. It also holds expertise in sour gas processing and heavy oil recovery, which it has leveraged to secure projects in Kazakhstan and the Middle East. As part of its deep-water exploration, Chevron is building out LNG infrastructure to capture value in its offshore gas reservoirs, which are capital-intensive and require years to develop. With its size and financial strength, Chevron is typically able to maintain the capital spending through commodity price cycles necessary for these types of projects. Smaller rivals may not be able to do so. Chevron's strength can be seen in its massive Gorgon LNG project, where it has continued to advance the project through the commodity price volatility of the past year. As a result, Chevron was able to sanction the project and secure resources before rivals. Valuation Allen Good, CFA, Analyst, 15 January 2016 We are reducing our fair value estimate to $102 from $107 per share, which corresponds to a forward enterprise value/ebitda multiple of 9.5 times our 2016 EBITDA forecast of $23.2 billion. The fair value estimate decrease is a result of the decline in futures prices since our last update. Our fair value estimate is derived using Morningstar s standard two-stage discounted cash flow methodology. With this methodology, a terminal value is derived using our assumptions of long-term earnings growth and return on new invested capital. This valuation methodology also more explicitly incorporates our moat rating, which reflects how long we expect a firm to deliver excess returns on invested capital from a discounted cash flow analysis. In our DCF model, our benchmark oil and gas prices are based on Nymex futures contracts for For natural gas, we use $2.64 per thousand cubic feet in 2015, $2.58 in 2016, and $2.90 in Our long-term assumptions is $4. For oil, we use Brent prices of $54 per barrel in 2015, $41 in 2016, and $48 in Our long-term oil price assumption is $70. We assume a cost of equity of 7.5%. Chevron's production growth should accelerate in the coming years thanks to the startup of LNG and offshore projects. However, with the reduction in expected capital spending, Chevron reduced its 2017 production target to mmboed, from 3.1 mmboed previously. We expect natural gas to contribute a greater share of production, about 39%, by 2017, compared with 34% in However, a significant portion of these volumes will be LNG, whose pricing is linked to oil. Also, close to 75% of Chevron's oil production comes from international assets and is tied to higher Brent prices. In the downstream segment, we expect profitability to improve in the coming years as a result of improved refining margins, stronger chemical results, and the benefit of recent restructuring. Risk Allen Good, CFA, Analyst, 15 January 2016 Chevron's profits and cash flow are largely tied to oil and gas production and could suffer as a result of a significant fall in prices. Additionally, long-term price depreciation would expose the company to overinvestment risk, as current projects would see returns languish with weaker economics. Regardless of commodity prices, these projects also are subject to cost overruns or completion delays. Many of the company's new investments are in

3 Morningstar Equity Analyst Report Page 3 of 12 politically challenging areas that sometimes have fickle leaders and populations hostile to outside firms. With significant exposure to the Gulf Coast, extended delays in permitting could result in higher costs and delayed production volumes. Management Allen Good, CFA, Analyst, 15 January 2016 John Watson assumed the CEO and chairman position in 2010 after serving as vice chairman. He joined Chevron in 1980 and has held several different senior management roles, including president of international exploration and production and CFO. We like that Watson has a mix of financial and operational experience that should lead to better capital allocation decisions, in our opinion. We also like that other senior executives have significant operating experience in various parts of Chevron's business throughout the world. We give Watson high marks for his leadership to date, despite some negative headlines over the past couple of years. He faces his greatest challenges now as Chevron completes its multibillion-dollar LNG projects and continues to invest at a high level in the face of falling oil prices. We think the actions taken to date, including slashing future capital spending to ensure the dividend, are prudent given the likelihood of low prices persisting for several years. We also like Chevron's measured approach to acquiring U.S. unconventional assets and the fact that it stayed out of places like southern Iraq, where the returns are questionable. We think this speaks to Chevron's overall emphasis on returns over growth and is reflected in its returns on capital, which rate near the highest in the sector. Unlike other majors, Chevron has been reluctant to rush into acquisitions or add projects in foreign countries where it cannot add value for the host countries or shareholders. We think this is wise, given the increasingly competitive environment for resources and the willingness of some international competitors to pay for access. As a direct result, Chevron's upstream segment's returns have outperformed peers in past years. Also, the firm remains focused on cash returns to shareholders. Its preferred method is through dividends, which it has historically steadily increased. Given these factors, we think Chevron earns an Exemplary stewardship grade.

4 Morningstar Equity Analyst Report Page 4 of 12 Analyst Notes Archive Oil and Gas Price Outlook: Updating Our Near-Term Methodology for Forecasting Prices Stephen Simko, Sector Director, 10 February 2016 Given the large discrepancy that has emerged between Brent futures prices (currently $40-$47 per barrel) and the Morningstar energy team's outlook for midterm oil industry fundamentals, we are amending our methodology for forecasting near-term oil and gas prices. Historically, we used strip prices for 36 months (updated regularly) before moving to our midcycle prices, which are set by our long-term marginal cost expectations (unchanged at $70/bbl Brent and $4 per thousand cubic feet Henry Hub). Going forward, we plan to forecast near-term prices by starting with the current strip and making adjustments only for periods where we have a reasonably high degree of confidence that strip prices do not appropriately reflect our expectations for industry fundamentals. The valuation impact of this approach depends on two factors: the number of quarters we explicitly forecast (as opposed to relying on strip prices) and the variance in each of these periods relative to current strip pricing. We will review our forecasts regularly and adjust prices as warranted by changes in market fundamentals. Based on our current expectation that oil supply and demand will come into balance in mid-2017, we are launching updated Brent forecasts of $50-$55 for the second half of 2017 and $55-$60 for 2018 (approximately 20% higher than current strip prices on average). We continue to use strip prices for oil until the middle of next year, as well as for all periods during for Henry Hub natural gas. We will update our oil and gas producer valuations with this new pricing by the end of the current earnings period. In isolation, this will be a valuation tailwind, but in most cases it will be modest, since our midcycle price holds far more weight in determining our published fair value estimates. In many instances this uplift could be at least partially offset by other adjustments, including reductions to our 2016 and early 2017 Brent forecasts relative to strip prices. Chevron Gets Aggressive on Capital Expenditures as Oil Prices Turn Down Allen Good, CFA, Analyst, 01 February 2016 Chevron turned in fourth-quarter results that looked remarkably similar to the prior three quarters of the year, with the U.S. upstream reporting a loss (punctuated with a $1.1 billion impairment charge), the international upstream turning in a modest profit that was substantially lower than that of prior years, and a rather strong contribution from the downstream segment. The combined result, however, was a loss for the quarter of $588 million, something Chevron had managed to avoid earlier in the year, even in the second quarter, when the company took a $2.7 billion impairment charge. With oil prices falling further in January from the $43/barrel average price in the fourth quarter, and with futures indicating continued low prices through the year, we expect results, excluding impairments, to worsen further. We make no change to our fair value estimate or our moat rating. With a dour outlook, management took the opportunity to reiterate its commitment to the dividend and update its capital spending plans. After cutting its capital spending guidance last quarter, and announcing a 2016 budget of $26.6 billion in December, management indicated that it would now likely spend less, with capital expenditure coming in at the bottom end of the previously guided range of $25 billion-$28 billion. Furthermore, it indicated greater flexibility and the potential to spend less than the $20 billion-$24 billion guided for However, capital expenditure of $25 billion in 2016 still leaves cash flow short of covering the dividend, meaning another year of funding the dividend with the balance sheet. With $11 billion in cash and a net debt/capital ratio of only 14%, we do not see this as worrisome, assuming that oil prices recover in 2017, which we think they will. Additionally, the willingness to spend as little as $20 billion in 2017 means that Chevron s cash flow break-even could fall to $50/bbl from a previously anticipated $60/bbl. Oil Price Outlook: Stage Still Set for Long-Term Recovery, but Near-Term Risk Elevated Stephen Simko, Sector Director, 17 December 2015 The downward pressure on oil prices has continued unabated in the past few weeks, raising the same critical issues for investors trying to find value and understand downside risks amid the current industry crisis. We remain convinced that a handful of compelling opportunities exist

5 Morningstar Equity Analyst Report Page 5 of 12 for long-term investors. However, we continue to caution that tremendous uncertainty exists as to how oil prices will trend until industry fundamentals improve, which is likely to be a drawn-out process that doesn't begin until the second half of Accordingly, investors should be discriminating in their stock-picking and prepared to weather additional volatility. Chevron Slashes Capital Spending Guidance to Cope With Lower Prices; Remains Preferred Integrated Allen Good, CFA, Analyst, 30 October 2015 Responding to the lower-for-longer outlook for oil prices, Chevron announced a sharp reduction to future capital spending in order to improve capital efficiency and safeguard the dividend. It now expects to spend $25 billion-$28 billion in 2016 and $20 billion-$24 billion in 2017 and Guidance from its March analyst day indicated capital spending of about $32 billion in 2016 and about $30 billion in We had already trimmed those March figures for use in our valuation model in anticipation of a reduction, but the new guidance will cause us to reduce our estimates further. The reduction in spending is a function of major project completion, project deferrals, and cost deflation. The lower spending is not without consequences, however, as Chevron also lowered its 2017 production target from 3.1 mmboe/d to mmboe/d as a result of a higher base decline rate and slower-than-expected shale production growth. However, it still will deliver peer-leading growth over the next two years and holds the potential for additional growth in 2018 and beyond given its shale portfolio and the likelihood that deferred projects are eventually sanctioned thanks to lower costs. Chevron also increased its expected spending reductions to $4 billion from $3 billion last quarter while reporting a 7% reduction in operating costs and 13% lower upstream unit operating costs year to date. We plan to incorporate the latest guidance into our model and expect the reduced production targets to partially offset the reduced capital spending, probably leaving our fair value little changed. As a result, we continue to see Chevron as one of the better opportunities in the space given valuation, dividend security, and asset quality. U.S. Oil Production Declines Will be More Meaningful than Markets Expect Stephen Simko, Sector Director, 24 September 2015 With the U.S. now the de facto swing producer for the global oil industry, a key factor in understanding when oil markets might rebalance is how much U.S. production could ultimately fall from recent record highs. Positively, U.S. supply resilience in the face of falling investment is turning out to be a temporary phenomenon. Production has in fact already started to fall, and since the March peak of 9.7mmb/d, crude oil output is down 5%. Consensus points toward U.S. oil production falling further in the coming months, but also appears to indicate that there will be resilience in As discussed below, we disagree with the latter notion and believe next year's declines are likely to be substantial. This is the case even after considering production tailwinds such as continued efficiency gains and inventory high-grading, as well the assumption that a sizable portion of the uncompleted well inventory is brought online next year. Based on our projections of a horizontal rig count of in the tight oil plays (the industry has been running between during the past three months), we expect U.S. oil production to fall by mb/d during 2016, with monthly volumes bottoming around 8.2mmb/d later next year. This is a bearish outlook relative to consensus, with the variance explained by the fact many forecasters continue to hedge their bets on what 2016 activity levels will be. Morningstar's projections assume U.S. rig counts will fall in the final months of 2015 and then stay at trough levels until the second half of next year. Such activity levels are simply too low to offset the high decline rates of tight oil production. If our expectations are correct that drilling does not pick up in the next few quarters, we'd expect industrywide production forecasts to be revised downwards just as they have during the last few months. Oil and Gas: When Will Global Oil Markets Rebalance? Stephen Simko, Sector Director, 18 September 2015 The most pressing question on the minds of energy investors is hardly a surprise: How long will it take for the industry to work through the current period of oversupply and rebalance itself? The answer, unfortunately, is "not any time soon". Current supply imbalances are such that as of today, oil production is effectively running two years ahead of demand. Declining U.S. oil production during the next several quarters will help reduce global oversupply,

6 Morningstar Equity Analyst Report Page 6 of 12 but in our opinion that alone cannot quickly fix the current global imbalances. For the market to approach any semblance of normalcy before 2017 and likely for prices to respond accordingly requires one or more of the following to occur: 1) Saudi Arabia reverses course from its "maintain market share at all costs" approach and cuts production; 2) global demand surprises to the upside from current expectations of 95 mmb/d in 2016 and 96 mmb/d in 2017; and 3) a geopolitical event (for example, political upheaval in Venezuela or another oil exporting nation). Without one or more of these occurring "lower for longer" looks to be the unavoidable near-term course for the industry. Based on our forecasts of OPEC volumes remaining more or less flat, the two critical variables for determining when the industry will reach a rebalancing point become: 1) demand growth, and 2) U.S. production. We presently project demand to grow by more than 1% in , as slowing (but still growing) demand from China is being offset by healthy growth elsewhere in the world. In terms of U.S. production, September output is expected to be 600 mb/d (or 6%) lower than the 9.6 mmb/d peak levels reached in March and April. Based on our expectation that rig counts will fall further, we project U.S. oil production will continue to fall from here, declining by 8% in This is quite an about-face given U.S. oil output will have grown 25% during Oil Price Outlook: Signs Point to a Meaningful Rebound Longer-Term, but the Road to Recovery is Long Allen Good, CFA, Analyst, 11 September 2015 Although we continue to believe that crude oil prices are well below the levels required to incentivize sufficient investment to meet demand beyond 2017, we are reducing our long-term price outlook by $5 per barrel to $70 Brent and $64 WTI to reflect bearish developments in recent quarters in the outlook for low-cost supply and industrywide cost deflation. While $5 represents a relatively small adjustment to our long-term oil price assumption, we are also adjusting our near-term activity and pricing forecasts to reflect our belief that industry oversupply is making it very likely that crude markets will not approach any semblance of normalcy until Taken together, these changes have a meaningful impact on a handful of our energy sector fair value estimates. For Chevron, our fair value estimate falls to $105 from $115. Our narrow moat rating is unchanged. Two key developments underpin our decision to adjust our long-term pricing outlook downward. First, cost-advantaged resources have continued growing in recent quarters, thanks to ongoing productivity improvements across U.S. tight oil plays as well sanctions relief that will result from the Iranian nuclear deal. Longer term, this makes it likely that low-cost oil will continue to crowd out more marginal projects that were being sanctioned prior to oil prices collapsing. Further, our originally anticipated point of global supply and demand coming into balance has continued to get pushed further into the future throughout This, in turn, has led to a collapse in near-term investment that has increased the magnitude of cost deflation and has considerably weakened the currencies of many commodity-exporting countries. The result is lowered breaking-even levels for both offshore and oil sands projects, which we expect will be the resources setting the industry s marginal cost once crude markets have rebalanced. Oil Price Outlook: All Signs Point to a Brutal Near- Term and a Meaningful Long-Term Recovery Stephen Simko, Sector Director, 11 September 2015 Although we continue to believe that crude oil prices are well below the levels required to incentivize sufficient investment to meet demand beyond 2017, we are reducing our long-term price outlook by $5 per barrel to $70 Brent and $64 WTI to reflect bearish developments in recent quarters in the outlook for low-cost supply and industrywide cost deflation. While $5 represents a relatively small adjustment to our long-term oil price assumption, we are also adjusting our near-term activity and pricing forecasts to reflect our belief that industry oversupply is making it very likely that crude markets will not approach any semblance of normalcy until Taken together, these changes have a meaningful impact on a handful of our energy sector fair value estimates, particularly firms that currently employ large amounts of leverage. We are beginning to publish new fair value estimates today, and all companies will be live two weeks from today. Two key developments underpin our decision to adjust our

7 Morningstar Equity Analyst Report Page 7 of 12 long-term pricing outlook downward. First, cost-advantaged resources have continued growing in recent quarters, thanks to ongoing productivity improvements across U.S. tight oil plays as well sanctions relief that will result from the Iranian nuclear deal. Longer term, this makes it likely that low-cost oil will continue to crowd out more marginal projects that were being sanctioned prior to oil prices collapsing. Further, our originally anticipated point of global supply and demand coming into balance has continued to get pushed further into the future throughout This, in turn, has led to a collapse in near-term investment that has increased the magnitude of cost deflation and has considerably weakened the currencies of many commodity-exporting countries. The result is lowered breaking-even levels for both offshore and oil sands projects, which we expect will be the resources setting the industry s marginal cost once crude markets have rebalanced. board. While we continue to believe the vicious sell-off of energy stocks has created a handful of compelling opportunities for long-term investors, we also note the industry hasn t faced a downturn of this magnitude since the 1980s. Tremendous uncertainty exists as to how commodity prices will trend over the next several quarters. Accordingly, investors should be both discriminatory in their stock-picking and duly prepared to weather additional volatility as the industry embarks on what is likely to be a long recovery process. Energy Sector Being Placed Under Review Pending Long-Term Oil Price Updates Stephen Simko, Sector Director, 01 September 2015 Although we continue to believe that crude oil futures prices are well below the levels required to incentivize sufficient investment to meet demand beyond 2017, recent industry developments point toward our current long-term oil price outlook ($75 Brent and $69 WTI) as being too high. We will launch our new long-term oil price forecast next week, which will be accompanied by updated fair value estimates for our sector coverage. Two developments underpin our decision to adjust our long-term pricing outlook. First, cost-advantaged supply continues to grow, thanks to ongoing productivity improvements across U.S. tight oil plays as well from sanctions relief that will result from the Iran nuclear deal. Longer term, this cost-advantaged supply will crowd out ever more marginal projects. Further, our originally anticipated point of global supply and demand coming into balance continues to get pushed further into the future, and it appears increasingly likely that crude markets will not approach any semblance of normalcy until This, in turn, has led to a collapse in near-term investment that has unleashed cost and currency deflation exceeding our previous expectations, resulting in lower industry break-even levels across the

8 Quantitative Equity Report Release: 10 Feb 2016, 10:11, GMT-06:00 Reporting Currency: USD Trading Currency: USD Chevron Corp CVX Page 1 of 1 Page 8 of 12 Last Close 09 Feb 2016 Quantitative Fair Value Est 09 Feb 2016 Market Cap 09 Feb 2016 Sector Industry Country of Domicile Bil o Energy Oil & Gas Integrated USA United States Chevron Corp provides administrative, financial, management and technology support to U.S. & international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, and power and energy services. Quantitative Scores Scores All Rel Sector Rel Country Quantitative Moat Narrow Valuation Undervalued Quantitative Uncertainty Medium Financial Health Moderate o USA CVX Undervalued Fairly Valued Overvalued Source: Morningstar Equity Research Valuation Current 5-Yr Avg Sector Median Country Median Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow 6, Dividend Yield % Price/Book Price/Sales Profitability Current 5-Yr Avg Sector Median Country Median Return on Equity % Return on Assets % Revenue/Employee (Mil) Quantitative Moat Financial Health Current 5-Yr Avg Sector Median Score Country Median Distance to Default Solvency Score Assets/Equity Long-Term Debt/Equity Price Versus Quantitative Fair Value Quantitative Fair Value Estimate Total Return Sales/Share Forecast Range Forcasted Price Dividend Split Momentum: Negative Standard Deviation: Liquidity: High Wk Yr Total Return % / Market (Morningstar US Index) Dividend Yield % Price/Earnings Price/Revenue Morningstar Rating Q QQQQQ QQQQ QQQ QQ Q TTM Financials (Fiscal Year in Mil) 204, , , , , ,318 Revenue % Change 32,105 39,549 46,332 35,905 31,202 12,436 Operating Income % Change 19,024 26,895 26,179 21,423 19,241 8,646 Net Income 31,359 41,098 38,812 35,002 31,475 21,396 Operating Cash Flow -19,612-26,500-30,938-37,985-35,407-31,723 Capital Spending 11,747 14,598 7,874-2,983-3,932-10,327 Free Cash Flow % Sales EPS % Change Free Cash Flow/Share Dividends/Share Book Value/Share 1,947 1,914 1,880 1,882 1,882 Shares Outstanding (Mil) Profitability Return on Equity % Return on Assets % Net Margin % Asset Turnover Financial Leverage Gross Margin % Operating Margin % 11,003 9,684 11,966 19,960 23,960 29,210 Long-Term Debt 105, , , , , ,912 Total Equity Fixed Asset Turns Growth Per Share 1-Year 3-Year 5-Year 10-Year Revenue % Operating Income % Earnings % Dividends % Book Value % Stock Total Return % Quarterly Revenue & EPS Revenue (Bil) Mar Jun Sep Dec Total Earnings Per Share () Revenue Growth Year On Year % Morningstar All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore is not an offer to buy or sell a security; are not warranted to be correct, complete or accurate; and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced, in any manner without the prior written consent of Morningstar. Please see important disclosures at the end of this report. ß

9 Morningstar Equity Analyst Report Page 9 of 12 Morningstar Equity Research Methodology Fundamental Analysis At Morningstar, we believe buying shares of superior businesses at a discount and allowing them to compound over time is the surest way to create wealth in the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus. Occasionally, this approach causes our recommendations to appear out of step with the market, but willingness to be contrarian is an important source of outperformance and a benefit of Morningstar s independence. Our analysts conduct primary research to inform our views on each firm s moat, fair value and uncertainty. Fundamental Analysis Economic Moat Rating Economic Moat Fair Value Estimate Uncertainty Assessment QQQQQ QQQQ QQQ QQ Q Star Rating The economic moat concept is a cornerstone of Morningstar s investment philosophy and is used to distinguish high-quality companies with sustainable competitive advantages. An economic moat is a structural feature that allows a firm to sustain excess returns over a long period of time. Without a moat, a company s profits are more susceptible to competition. Companies with narrow moats are likely to achieve normalized excess returns beyond 10 years while wide-moat companies are likely to sustain excess returns beyond 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe lower-quality no-moat companies will see their returns gravitate toward the firm s cost of capital more quickly than companies with moats will. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. Fair Value Estimate Our analyst-driven fair value estimate is based primarily on Morningstar s proprietary three-stage discounted cash flow model. We also use a variety of supplementary fundamental methods to triangulate a company s worth, such as sum-of-the-parts, multiples, and yields, among others. We re looking well beyond next quarter to determine the cash-generating ability of a company s assets because we believe the market price of a security will migrate toward the firm s intrinsic value over time. Economic moats are not only an important sorting mechanism for quality in our framework, but the designation also directly contributes to our estimate of a company s intrinsic value through sustained excess returns on invested capital. Uncertainty Rating The Morningstar Uncertainty Rating demonstrates our assessment of a firm s cash flow predictability, or valuation risk. From this rating, we determine appropriate margins of safety: The higher the uncertainty, the wider the margin of safety around our fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, medium, high, very high, and extreme. With each uncertainty rating is a corresponding set of price/fair value ratios that drive our recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, while higher price/fair value Economic Moat COM PETITIVE FORCES WIDE NARROW NONE COMPANY PROFITABILITY Moat Sources: Intangible Assets Switching Costs Network Effect Cost Advantage Efficient Scale

10 Morningstar Equity Analyst Report Page 10 of 12 Morningstar Equity Research Methodology ratios (>1.0) lead to negative recommendations. In very rare cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot be properly estimated. For these firms, we use a rating of extreme. Very high and extreme uncertainty companies tend to have higher risk and volatility. Quantitatively Driven Valuations To complement our analysts work, we produce Quantitative Ratings for a much larger universe of companies. These ratings are generated by statistical models that are meant to divine the relationships between Morningstar s analyst-driven ratings and key financial data points. Consequently, our quantitative ratings are directly analogous to our analyst-driven ratings. Quantitative Fair Value Estimate (QFVE): The QFVE is analogous to Morningstar s fair value estimate for stocks. It represents the per-share value of the equity of a company. The QFVE is displayed in the same currency as the company s last close price. Valuation: The valuation is based on the ratio of a company s quantitative fair value estimate to its last close price. Quantitative Uncertainty: This rating describes our level of uncertainty about the accuracy of our quantitative fair value estimate. In this way it is analogous to Morningstar s fair value uncertainty ratings. Understanding Differences Between Analyst and Quantitative Valuations If our analyst-driven ratings did not sometimes differ from our quantitative ratings, there would be little value in producing both. Differences occur because our quantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few comparable companies, the quantitative model will have more trouble assigning correct ratings, while an analyst will have an easier time recognizing the true characteristics of the company. On the other hand, the quantitative models incorporate new data efficiently and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerful predictors of future performance. When the analystdriven rating and the quantitative rating agree, we find the ratings to be much more predictive than when they differ. In this way, they provide an excellent second opinion for each other. When the ratings differ, it may be wise to follow the analyst s rating for a truly unique company with its own special situation, and follow the quantitative rating when a company has several reasonable comparable companies and relevant information is flowing at a rapid pace. Quantitative Economic Moat: The quantitative moat rating is analogous to Morningstar s analyst-driven economic moat rating in that both are meant to describe the strength of a firm s competitive position. Uncertainty Rating Price/Fair Value % 95% 135% 105% 110% 80% 90% 70% 155% 85% 115% 60% 175% 80% Low Medium High Very High Uncertainty Rating 125% 50% Q QQ QQQ QQQQ QQQQQ

11 Morningstar Equity Analyst Report Page 11 of 12 Unless stated otherwise, this Research Report was prepared by the person(s) noted in their capacity as Equity Analysts employed by Morningstar, Inc., or one of its affiliates. This Report has not been made available to the issuer of the relevant financial products prior to publication. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic value. Five-star stocks sell for the biggest risk-adjusted discount whereas one-star stocks trade at premiums to their intrinsic value. Based on a fundamentally focused methodology and a robust, standardized set of procedures and core valuation tools used by Morningstar's Equity Analysts, four key components drive the Morningstar Rating: 1. Assessment of the firm's economic moat, 2. Estimate of the stock's fair value, 3. Uncertainty around that fair value estimate, and 4. Current market price. Further information on Morningstar's methodology is available from This Report is current as of the date on the Report until it is replaced, updated or withdrawn. This Report may be withdrawn or changed at any time as other information becomes available to us. This Report will be updated if events affecting the Report materially change. Conflicts of Interest: -No material interests are held by Morningstar or the Equity Analyst in the financial products that are the subject of the Reports. -Equity Analysts are required to comply with the CFA Institute's Code of Ethics and Standards of Professional Conduct. -Equity Analysts compensation is derived from Morningstar's overall earnings and consists of salary, bonus and in some cases restricted stock. -Equity Analysts do not have authority over Morningstar's investment management group's business arrangements nor allow employees from the investment management group to participate or influence the analysis or opinion prepared by them. Morningstar will not receive any direct benefit from the publication of this Report. - Morningstar does not receive commissions for providing research and does not charge companies to be rated. -Equity Analysts use publicly available information. -Morningstar may provide the product issuer or its related entities with services or products for a fee and on an arms length basis including software products and licenses, research and consulting services, data services, licenses to republish our ratings and research in their promotional material, event sponsorship and website advertising. -Further information on Morningstar's conflict of interest policies is available from If you wish to obtain further information regarding previous Reports and recommendations and our services, please contact your local Morningstar office. Unless otherwise provided in a separate agreement, you may use this Report only in the country in which the Morningstar distributor is based. Unless stated otherwise, the original distributor of this document is Morningstar Inc. Redistribution, in any capacity, is prohibited without permission. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate, nor may they be construed as a representation regarding the legality of investing in the security/ies concerned, under the applicable investment or similar laws or regulations of any person or entity accessing this report. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar, its affiliates, and their officers, directors and employees shall not be responsible or liable for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. You should seek the advice of your financial, legal, tax, business and/or other consultant, and read all relevant issue documents pertaining to the security/ies concerned, including without limitation, the detailed risks involved in the investment, before making an investment decision. Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future performance. As the price / value / interest rate of a security fluctuates, the value of your investments in the said security, and in the income, if any, derived therefrom may go up or down. For Recipients in Australia: This report has been authorized by the Head of Equity and Credit Research, Asia Pacific, Morningstar Australasia Pty Limited and is circulated pursuant to RG 79.26(f) as a full written permission. To order reprints, call To license the research, call

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