Energy Sector SUMMER 2015 ANALYSTS: DANIEL J. ERIN & JONATHAN CREMEANS

Transcription

1 Energy Sector SUMMER 2015 ANALYSTS: DANIEL J. ERIN & JONATHAN CREMEANS

2 Agenda Overview Chevron Conoco Phillips Recommendation 2

3 Overview 3

4 Business Cycle Energy 4

5 Industries Energy Equipment & Services ($349.38B) Oil, Gas, and Consumable Fuels ($3.07T) Down 35.91% over the past year Down 23.30% over the past year 5

6 Sector Performance Brent Crude PPB Increase from prior week: $4.57 Brent Crude PPB Increase from prior month: $10.86 Brent Crude PPB decrease from prior week: $5 Brent Crude PPB decrease from prior week: $5 Brent Crude PPB decrease from prior month: $5.50 6

7 Energy Sector Operating Margin 7

8 US EIA Projections: Price Per Barrel of Brent Crude 7/24: $ : $ : $ : $

9 Recommendation Add at least 40 bps of exposure to match S&P Industry is highly dependent on the price per barrel of oil equivalent The price of Brent Crude is expected to increase; however this is based on the relationship between global GDP (demand proxy) and global supply. A divergence between the 2 in either direction will significantly impact the price per barrel of oil and the valuation of the companies in the sector. 9

10 Chevron 10

11 Business Analysis: Competitive Advantage Value creation and capture: by the efficient deployment of cash in the world s key hydrocarbon basins, the transportation of crude products, and the effective differentiation of hydrocarbon products. Upstream: drilling success rate in 2014 was 66% beating the industry average of 59%. When the price per barrel of oil is high, Chevron is able to leverage their production capacity and industry leading earnings per barrel of oil Downstream: Chevron has a strong position in gasoline, diesel and other fuels, as well as in additives, petrochemicals and lubricants. Chevron has effectively differentiated many of its premium base fuel and petrochemical products to capture an industry leading earnings BOE Industry leader in earnings per BOE in

12 Business Analysis: Future Positioning The current Oil and Gas market is terrible; however, Chevron has taken the following steps to position itself for success if the price per BOE increases: Reducing capital spend; with a renewed focus on less-risky fields Lowering costs - leveraging purchasing power, negotiating supplier reductions, and rebidding contracts Improving efficiency Divesting low performing assets 12

13 Business Analysis: Key Economic Drivers and Recent Performance The price of per barrel of Brent Crude The S&P 500 Global GDP Growth CVX regressed against the S&P 500 and the price per barrel of Brent Crude (10YR) Regression Statistics Multiple R 90% R Square 81% Adjusted R Square 80% Standard Error 9.17 Observations Brent Crude CVX Predicted Y (CVX Stock Price) = ( * Brent Crude Spot Price) + (0.037 * S&P500 Price) 13

14 Financial Analysis: 3 yr. Projections Decrease in revenue is consistent with other companies projections Gradual increase in revenue is expected from a rebound in the price per BOE Income and EPS are expected to increase as a result of the Cash Flow improvement initiatives discussed above FY 2017E FY 2016E FY 2015E Net Income $13,303 $10,468 $7,781 Basic Diluted Consensus - GAAP Table1: Forecasted Segment Revenues (000$) FY 2017E FY 2016E FY 2015E Net Revenue: Upstream 56,483 52,788 43,990 Downstream 143, , ,043 Other 1,500 1,500 1,500 Total Segments 201, , ,533 Elimination of intersegment sales -39,505-37,269-31,318 Total Core Business Revenue 162, , ,214 Income from equity affiliates 6,000 6,000 6,000 Other income 2,000 2,000 2,000 Total net revenue 170, , ,214 Consensus 174, , ,146 Expected improvement due to better margins and price per BOE rebound 14

15 Financial Analysis: History and Comps Sector Valuation: Absolute Basis High Low Median Current P/E P/B P/S P/EBITDA Stock Valuation: Ticker P/E TTM P/S TTM P/B P/CF TTM EV/ EBITDA TTM Average CVX XOM US RDSA LN BP/ LN HES US FP FP IMO CN Chevron s P/E is below the industry average and the low when compared to peers 15

16 Financial Analysis: DCF High discount rate to appropriately account for the risk in the global oil market Strong projected upside Revenue and EPS estimates are in-line with analyst consensus opinion 16

17 Financial Analysis: Predictive Regression 10 year 2 variable regression model: S&P 500 Brent Crude Monthly Spot Price Predicted Y (CVX Stock Price) = ( * Brent Crude Spot Price) + (0.037 * S&P500 Price). Strong potential upside; consistent with the DCF model Bret Crude Spot Price 7/ S&P 500 7/24 2, Predicted Price of CVX (as of 7/24): Actual Price Potential Upside 12% Regression Statistics Multiple R 90% R Square 81% Adjusted R Square 80% Standard Error 9.17 Observations

18 Recommendation: Target Price $105.0, representing 13.7% upside over 7/28 close CVX currently accounts for 3.58% of the SIM portfolio Increase 40BPS to the 3.98% bringing the energy sector to market neutral Why CVX: Positioned well for future growth Industry leader in profitability per BOE in both the upstream and downstream segments Appears to be cheaper than comparable based on P/E ratio (in spite of poor earnings) Strong DCF and predictive historical regression upsides Risks: Global geo-political peace 80% of CVX earnings are directly related to the price of a commodity CVX is unable to implement their Cash Flow improvement initiatives and margins are worse than expected Improvements to the attractiveness of oil& gas alternatives Environmental disaster 18

19 ConocoPhillips 19

20 Overview Formed in 2002 from merger between Conoco, Inc. and Phillips Petroleum Largest independent oil & gas exploration and production company Conventional and unconventional assets in North America, Europe, Asia, Australia and Africa Currently 3.79% of SIM Portfolio 1,610 MBOED Production - 1Q' BBOE Reserves - YE % Liquids 16% 24% 58% North American Gas LNG + International Gas 84% OECD Non-OECD Source: COP Q1 Investor Update 20

21 Key Investment Considerations Commitment to steady, compelling dividend Annualized 4.7% dividend in 2Q 15 Diversification/Portfolio management capabilities Robust geographic and product diversification Hand in nearly every significant production play throughout the world Capital Flexibility Recently freed $5bn+ in capital Strong position to capitalize on upcoming opportunities in industry changes 21

22 Business Analysis - Diversification Unique cost structures, regulatory environments and risk profiles across locations No more than 33% production from one geographic segment Production (MMBOED) Europe Europe Alaska Alaska AP&ME AP&ME Canada Canada Lower 48 Lower Income/(loss) by Business Segment ($mm) 4,000 3,000 2,000 1,000 - (1,000) (2,000) Alaska Lower 48 Canada Europe Asia Pacific and Middle East Other International Corporate and Other

23 Business Analysis Capital Flexibility Recently freed ~ $5bn in capital Excess creates enhanced ability to quickly shuffle invested capital to highest-returning geographic segment, products, etc. Ability to quickly close acquisitions Key for distressed assets $12.0bn $10.0bn $8.0bn $6.0bn $4.0bn $2.0bn $ Avg. Capital ~11.5bn Europe Alaska AP&ME Canada Lower 48 23

24 Financial Projections Forecast Methodology Management production targets WTI/Brent Crude & HH futures through 2017 Expenses projected as Cost/BOE where applicable, otherwise % sales Summary Sharp decline in revenue in 15 Strong top-line growth after 15 from increased production & appreciation in oil & gas prices Significant EPS growth from cost savings FY FY FY MRQ FY FY FY FY FY 2017E 2016E 2015E 1Q A 2013A 2012A 2011A 2010A Total Revenue $44,294,312 $41,797,656 $36,364,169 $8,002,000 $55,517,000 $58,248,000 $62,004,000 $66,069,000 $63,335,000 Costs and Expenses 37,605,871 36,949,128 33,964,133 8,358,000 46,127,000 43,802,000 46,581,000 50,673,000 45,460,000 Income Taxes 2,541,608 1,842, ,013 (642,000) 3,583,000 6,409,000 7,942,000 8,208,000 7,570,000 Net Income 4,146,833 3,006,087 1,488, ,000 5,807,000 8,037,000 7,481,000 7,188,000 10,305,000 Diluted EPS $3.27 $2.36 $1.14 $0.22 $5.51 $7.39 $6.73 $8.97 $

25 Trading Comps ($ in millions except per share data) Price Market Enterprise EBITDAX ROIC% ROE% Dividend 6/30/15 Cap Value Margin Yield Exxon Mobil Corp (XOM) $83.20 $347,868.2 $378, % 9.4% 16.3% 3.3% Chevron Corp (CVX) $96.47 $181,409.7 $206, % 5.4% 11.3% 4.4% ConocoPhillips (COP) $61.41 $75,715.3 $96, % 3.8% 9.9% 4.7% Imperial Oil Ltd (IMO) $38.66 $32,761.9 $40, % 8.7% 15.1% 1.1% Hess Corp (HES) $66.88 $19,220.1 $23, % 4.0% 6.7% 1.5% Husky Energy Inc (HSE) $19.14 $18,828.8 $28, % 2.8% 3.8% 5.0% Murphy Oil Corp (MUR) $41.57 $7,398.2 $8, % 8.5% 8.9% 4.1% Median 25.6% 5.4% 9.9% 4.1% Average 34.8% 6.1% 10.3% 3.5% P/E P/CF EV/EBITDA EV/EBITDAX EV/Reserves TTM 2015E 2016E 2015E 2016E 2014A 1Q'15 Exxon Mobil Corp (XOM) 19.4 x 9.9 x 8.3 x 8.1 x 6.9 x 45.0 x 15.1 x Chevron Corp (CVX) 23.4 x 7.9 x 5.9 x 6.5 x 5.4 x 35.9 x 18.3 x ConocoPhillips (COP) x 7.7 x 5.8 x 8.5 x 5.9 x 43.4 x 10.8 x Imperial Oil Ltd (IMO) 22.2 x 11.9 x 9.6 x 11.6 x 9.3 x 55.9 x 10.1 x Hess Corp (HES) N/A 6.7 x 5.0 x 7.9 x 6.1 x 41.5 x 16.6 x Husky Energy Inc (HSE) 63.7 x 6.7 x 5.6 x 7.8 x 5.9 x 33.6 x 21.6 x Murphy Oil Corp (MUR) N/A 5.1 x 4.0 x 5.8 x 4.7 x 16.2 x 11.4 x Median 23.4 x 7.7 x 5.8 x 7.9 x 5.9 x 41.5 x 15.1 x Average 53.9 x 8.0 x 6.3 x 8.0 x 6.3 x 38.8 x 14.8 x 25

26 Cost of Equity Cost of Equity Cost of Equity Cost of Equity DCF Analysis Price Weight GG-Implied Share Price $ % EMM-Implied Share Price $ % DCF-Implied Share Price $60.2 Implied Return 15.7% Terminal Growth Rate EBITDA Exit Multiple % 2.5% 3.0% x 8.0x 9.0x 9.0% $57.7 $60.7 $ % $64.9 $73.4 $ % $49.2 $51.3 $ % $58.5 $66.2 $ % $42.6 $44.1 $ % $52.7 $59.8 $66.8 Avg. Crude Price Avg. Nat. Gas Price 44 $70.0 $75.0 $ $4.0 $5.0 $ % $62.6 $64.2 $ % $62.1 $64.2 $ % $52.8 $54.2 $ % $52.5 $54.2 $ % $45.5 $46.7 $ % $45.2 $46.7 $

27 COP Recommendation Target price: $61.0, representing 16% upside over 7/28 close No change to current position Uncertainty over the next 3-6 months for the industry outweighs positive valuation & growth potential 27

28 Conclusion Increase position in CVX 40BPS to 3.98% to bring the energy sector to market neutral No change to current COP position 28

29 Appendix 29

30 COP Production Profile FY FY FY MRQ FY FY FY FY FY $000s 2017E 2016E 2015E 1Q A 2013A 2012A 2011A 2010A Production Profile Crude Oil Average net production (MBD) % Growth 5.0% 5.0% 5.0% 8.0% 2.5% -0.9% N/A -12.9% N/A Average price per barrel Average Daily Revenue 42,945 39,638 32,965 29,887 51,679 56,262 58,225 72,549 62,317 Annual Revenue 15,674,830 14,507,655 12,032,088 2,727,198 18,862,733 20,535,564 21,310,434 26,480,254 22,745,537 Natural Gas Liquids Average net production (MBD) % Growth 1.5% 1.5% 2.6% 2.6% 1.3% 0.7% N/A N/A N/A Average price per barrel Average Daily Revenue 3,192 3,145 2,944 3,038 5,655 5,900 6, Annual Revenue 1,165,143 1,151,069 1,074, ,218 2,064,057 2,153,646 2,416, Bitumen Average net production (MBD) % Growth 0.0% 0.0% % % -7.7% 8.3% N/A N/A N/A Average price per barrel Average Daily Revenue 3,120 3,120 3,120 2, Annual Revenue 1,138,800 1,141,920 1,138, , , , , , ,515 Natural Gas Average net production (MMCFD) 4,060 4,060 4,060 4,059 3,438 3,458 3,611 4,024 4,437 % Growth 0.0% 0.0% 18.1% 18.1% -0.6% -4.2% -10.3% -9.3% N/A Average price per thousand cubic ft Average Daily Revenue 13,404 12,505 13,205 19,158 20,652 19,641 18,236 22,695 22,496 Annual Revenue 4,892,510 4,576,699 4,819,654 1,748,211 7,538,004 7,169,126 6,674,211 8,283,806 8,210,890 Income Statement Total COP Production Revenue 22,871,283 21,377,343 19,064,954 4,997,753 28,727,725 30,120,497 30,654,513 34,965,394 31,142,942 % Growth 7.0% 12.1% -33.6% N/A -4.6% -1.7% -12.3% 12.3% Revenue from Operating Subsidiaries 17,989,984 17,133,318 14,277,765 2,718,247 23,796,275 24,292,503 27,312,487 29,230,606 25,072,058 % Growth 5.0% 20.0% -40.0% N/A -2.0% -11.1% -6.6% 16.6% Equity in earnings of affiliates 3,067,045 2,920,995 2,655, ,000 2,529,000 2,219,000 1,911,000 1,239,000 1,376,000 Gain on dispositions ,000 98,000 1,242,000 1,657, ,000 5,563,000 Other income 366, , ,000 29, , , , , ,000 Total Other Revenue 3,433,045 3,286,995 3,021, ,000 2,993,000 3,835,000 4,037,000 1,873,000 7,120,000 Total Revenue 44,294,312 41,797,656 36,364,169 8,002,000 55,517,000 58,248,000 62,004,000 66,069,000 63,335,000 Consensus 45,689,000 41,990,000 33,756,000 30

31 COP Free Cash Flow ConocoPhillips (NYSE:COP) Discounted Cash Flow Analysis Analyst: Jon Cremeans Terminal Discount Rate = 9.0% EBITDA Exit Multiple= 9.0 x 6/10/15 Terminal FCF Growth = 2.5% $000s 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Revenue 36,364,169 41,797,656 44,294,312 46,951,970 49,299,569 51,764,547 54,352,775 57,070,413 59,923,934 62,920,131 % Growth -33.6% 14.9% 6.0% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Operating Income 1,309,110 4,848,528 7,574,327 7,981,835 9,120,420 9,835,264 10,870,555 11,414,083 11,984,787 12,584,026 Margin 3.6% 11.6% 17.1% 17.0% 18.5% 19.0% 20.0% 20.0% 20.0% 20.0% Interest (Income)/Expense 363, , , , , , , , , ,201 % Sales 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Taxes 359,278 1,683,610 2,709,926 2,854,680 3,278,421 3,540,695 3,924,270 4,120,484 4,326,508 4,542,833 Rate 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% Net Income 586,190 2,746,942 4,421,458 4,657,635 5,349,003 5,776,923 6,402,757 6,722,895 7,059,039 7,411,991 % Sales 1.6% 6.6% 10.0% 9.9% 10.9% 11.2% 11.8% 11.8% 11.8% 11.8% Plus: Depreciation, Depletion and Amortization 7,272,834 8,359,531 8,858,862 9,390,394 9,859,914 10,352,909 10,870,555 11,414,083 11,984,787 12,584,026 % Sales 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Less: Δ NWC (24,000) 167,191 9,987 10,586 11,115 11,671 12,254 12,867 13,510 14,186 % Sales -0.1% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Less: Capital Expenditures 9,091,042 9,404,473 8,858,862 9,390,394 9,859,914 10,352,909 10,870,555 11,414,083 11,984,787 12,584,026 % Sales 25.0% 22.5% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Free Cash Flow (1,208,018) 1,534,810 4,411,472 4,647,050 5,337,888 5,765,253 6,390,502 6,710,028 7,045,529 7,397,805 Discount Factor PV of FCF (1,108,273) 1,291,819 3,406,465 3,292,087 3,469,261 3,437,632 3,495,824 3,367,537 3,243,957 3,124,913 31

32 Cost of Equity COP DCF Calc Implied Equity Value (Gordon Growth) Terminal Value (EMM) Terminal Value (Gordon Growth) Cumulative PV of Cash Flows 27,021, % 2024E EBITDA 25,168,052 Terminal FCF 7,397,805 PV of Terminal Value 49,277, % EBITDA Exit Multiple 9.0x Terminal Growth Rate 2.5% Implied Equity Value 76,298, % Discount Rate 9.0% Terminal Value 226,512,471 FCF Yield 3.3% Terminal Value 116,657,700 Implied Multiples (GG) FCF Yield 6.3% Market P/E 136.1x 29.0x 18.0x PV of Terminal Value 95,681,315 Projected P/E 130.2x 27.8x 17.3x PV of Terminal Value 49,277,473 Market EV/EBITDA 11.9x 7.7x 6.2x Terminal P/E 30.6x Projected EV/EBITDA 11.5x 7.5x 6.0x Terminal P/E 15.7x Implied Share Price Implied Share Price (GG) DCF-Implied Return 29.2% Shares Outstanding 1,245,531 Implied Equity Value/Share Current Price $64.06 Implied Equity Value/Share $61.26 Terminal Growth Rate GG-Implied Return -4.4% % 2.25% 2.50% 2.75% 3.00% 8.0% $69.8 $72.0 $74.3 $76.9 $79.7 Debt 22,318, % $58.3 $59.7 $61.3 $62.9 $64.8 Cash 2,664, % $49.7 $50.7 $51.8 $52.9 $54.1 Cash/Share % $43.0 $43.7 $44.5 $45.4 $ % $37.7 $38.3 $38.9 $39.5 $40.1 Terminal EV/EBITDA 4.6x Calculated Share Price Price Weight GG Implied Share Price $ % EMM Implied Share Price % DCF-Implied Share Price $69.8 Implied Return 9% 32