NOVEMBER 16TH 2 0 10 S T U D E N T I N V E ST M E N T M A N A G E M E N T P R O G R A M T H E O H I O S T A T E U N I V E R S I T Y ENERGY SECTOR PRESENTATION David Clark- Joseph Felice Green Jiri Woschitz
OVERVIEW BUSINESS ANALYSIS FINANCIAL ANALYSIS VALUATION ANALYSIS RECOMMENDATION
OVERVIEW
Energy Sector 3rd Largest Sector in S&P 1.27 Trillion in Market Capitalization SIM holds 3 S&P 500 Energy Companies SIM Energy Holdings Symbol SIM Weight Industry Chevron CVX 3.78% Oil & Gas Integrated Murphy Oil MUR 3.70% Oil & Gas Integrated NaEonal- Oilwell Varco NOV 4.06% Oil & Gas Equipment Services
2 of the Largest in the S&P 500 Largest S&P Members S&P Market Cap (B) Weight Exxon Mobil 3.24% 358 Apple Inc. 2.60% 283 MicrosoX Corp 2.07% 225 Procter & Gamble 1.68% 183 IBM 1.64% 179 Johnson & Johnson 1.61% 175 GE 1.60% 174 Chevron Corp 1.58% 172 AT&T Inc 1.55% 168 JP Morgan Chase & Co 1.43% 156 Total S&P Weight in Top 10 Holdings 19.04% 2070
SIM: Energy Overweight 60 bps S&P Sector Breakdown SIM Sector Breakdown 3.4% 3.1% 3.7% 10.6% 19.1% 15.6% 10.7% 11.0% 11.2% 11.7% 2.1% 4.0% 19.8% 12.2% 11.6% 4.2% 13.0% 10.7% 10.2% 12.3%
Energy Vs. S&P 500 Trailed S&P by 801 bps Over past 12 Mo. Outperformed S&P by 222 bps Over past 3 Mo.
S&P 500 Performance by Sector 25.00% 20.00% 15.00% MTD 10.00% 5.00% 0.00% - 5.00% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecom Svc UEliEes Sector Quarter Returns Energy 11.99% Materials 8.72% Industrials 3.17% Cons Disc 7.70% Cons Staples 2.91% Health Care 1.20% Financials 4.04% Info Tech 6.54% Telecom Svc 0.31% UEliEes - 0.63% QTD YTD
S&P Energy Sector Industry Makeup of Energy Sector 1% 2% Year to Date Performance: Energy Sector 59% 2% 3% 16% 16% Oil & Gas Refining & MarkeEng Oil & Gas Drilling Coal & Consumable Fuels Oil & Gas Storage & TransportaEon Oil & Gas Equipment & Services Oil & Gas ExploraEon & ProducEon Integrated Oil & Gas 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% - 5.00% YTD: Equipment & Services Refining & MarkeEng Storage & TransportaEon
Largest Companies in Energy Sector Top 10 S&P Energy Components Symbol Market Cap (Billions) Industry Exxon Mobil XOM 358 Oil & Gas Integrated Chevron CVX 171 Oil & Gas Integrated Schlumberger SLB 101 Oil & Gas Equipment Services ConocoPhillips COP 94 Oil & Gas Integrated Occidental Petroleum OXY 71 Oil & Gas Integrated Suncor Energy SU 54 Oil & Gas Integrated Apache APA 40 Halliburton HAL 33 Devon Energy DVN 31 National-Oilwell Varco NOV 24 Oil & Gas Exploration Production Oil & Gas Equipment Services Oil & Gas Exploration Production Oil & Gas Equipment/ Services
Porter s 5 Forces: Acracdve Threat of New Entrants (low) n Capital Intensive, Knowledge Intensive n Interest from BRIC and Sovereign Wealth Power of Suppliers (high) n Few, Powerful n Countries increasingly interested in their own energy resources Power of Buyers (low) n Lack of product differeneaeon, but price is inelasec in short run Subsdtutes (medium) n Petroleum AlternaEves - Imperfect subsetutes Compeddve Rivalry (medium) n Mature industry growth rates n Tacit Collusion
BUSINESS ANALYSIS
Key Drivers for the S&P 500 Energy Sector Energy demand - World populaeon - Demand for Cars, heaeng etc. Energy supply (produceon) - Capacity - Oil reserves, gas reserves etc. Prices of Oil, Natural Gas etc. OPEC Decisions
S&P 500 E vs. LIBOR (3Mth.) 700 8 600 7 500 400 300 200 100 0 6 5 4 3 2 1 0 S&P500 ENERGY PI [U$] US INTERB 3 MTH OR [U$]
S&P 500 E vs. US CPI Energy 700 250 600 500 400 300 200 100 0 200 150 100 50 0 S&P500 ENERGY PI [U$] US CPI ENERGY Y [U$]
S&P 500 E vs. OPEC Oil Price and Brent Crude Oil Price 700 160 600 140 500 400 300 200 100 0 120 100 80 60 40 20 0 S&P500 ENERGY PI [U$] OPEC Oil Price [U$] Crude Oil- Brent [U$]
S&P 500 E vs. Natural Gas 1600 14 1400 12 1200 1000 800 600 400 200 0 10 8 6 4 2 0 S&P500 ENERGY PI [U $] Natural Gas US BL [US Cents/MM Btu] Natural Gas US DS [U$]
S&P 500 E vs. Crude Oil Producdon 700 76.0000 600 500 400 300 200 100 0 74.0000 72.0000 70.0000 68.0000 66.0000 64.0000 62.0000 60.0000 58.0000 56.0000 S&P500 ENERGY PI [U$] CrudeOilProd WW M- 1 [mbarrels/day]
S&P 500 E vs. World Populadon 700 6400 600 6200 500 400 300 200 100 0 6000 5800 5600 5400 5200 5000 4800 S&P500 ENERGY PI [U$] WD POPULATION [Millions]
Model to explain S&P 500 Energy Index ln (#$) ' = ) 0 + ) 1 * ' + ) 2 ln (+, ' ) + ) 3 ln (-., ' ) + ) 4 ln (/,$ # ' ) + ) 5 /+, ' 1 + ) 6 01, ' +2 Where EI: S&P 500 Energy Index L: LIBOR (3 Mth.) OP: Opec Oil Price NGP: Natural Gas Prices CPIE: US ConsumpEon Price Index Energy COP: Crude Oil ProducEon WDP: World PopulaEon
Model to explain S&P 500 Energy Index
Forecast explaining variables L: LIBOR (3 Mth.) hlp://www.forecasts.org OP: Opec Oil Price - hlp://www.forecasts.org, - Annual Energy Outlook 2010 of the US Department of Energy, - World Oil Outlook_2009_OPEC NGP: Natural Gas Prices Annual Energy Outlook 2010 of the US Department of Energy CPIE: US ConsumpEon Price Index Energy AssumpEons based on the forecasts of the price trends of Oil and Gas COP: Crude Oil ProducEon Annual Energy Outlook 2010 of the US Department of Energy, WDP: World PopulaEon Stable
S&P 500 Energy Index Model Forecast 600.0000 500.0000 400.0000 300.0000 200.0000 100.0000 0.0000 S&P 500 Energy Index upper bound 95% lower bound 95%
FINANCIAL ANALYSIS
REVENUE GROWTH YEAR- OVER- YEAR 250% ENERGY S&P 500 CVX MUR NOV 200% 150% 100% 50% 0% - 50% - 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
10- YEAR ENERGY REVENUE 700 600 500 400 300 200 100 Energy Revenue high 609.6 low 182.9 median 381.4 current 461.0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
EPS GROWTH YEAR- OVER- YEAR 200% ENERGY S&P 500 CVX MUR NOV 150% 100% 50% 0% - 50% - 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
12.0% 10.0% 8.0% 6.0% Energy: Net Profit Margin Absolute NPM Energy Absolute high 9.8 low 4.9 median 7.4 current 7.1 4.0% 2.0% 0.0% 1.60 1.40 1.20 1.00 0.80 0.60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Energy: Net Profit Margin Reladve to S&P 500 NPM Reladve to S&P 500 high 1.4 low 0.7 median 0.9 current 0.9 0.40 0.20 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
VALUATION ANALYSIS
Industry & Sector Valuadon Energy Sector Reladve to S&P 500 Rado High Low Median Current Trailing P/E 1.1 0.5 0.74.98 Forward P/E 1.2 0.57 0.78 0.84 P/S 1 0.6 0.7 0.8 P/B 1.4 0.7 0.9 1.0 P/CF 0.9 0.6 0.7 0.9 Oil Exploradon Reladve to S&P 500 Rado High Low Median Current Trailing P/E 1.4 0.31.69 1.2 Forward P/E 1.9 0.5 0.75 1.1 P/S 3.5 0.9 1.9 2.7 P/B 1.3 0.5 0.7 0.9 P/CF 0.9.3 0.5.8 Overvalued by >10% Inline with S&P Undervalued by >10% Oil Equipment Reladve to S&P 500 Rado High Low Median Current Trailing P/E 3.3.58 1.5 1.7 Forward P/E 1.7.61 1.3 1.2 P/S 2.8 1 1.5 2 P/B 2.8.9 1.4 1.5 P/CF 1.6.8 1.2 1.6 Oil Integradon Reladve to S&P 500 Rado High Low Median Current Trailing P/E 1.4 0.5 0.68.81 Forward P/E 1.2 0.46 0.73 0.73 P/S.8 0.5 0.7 0.7 P/B 1.4 0.7 1.0 1.0 P/CF 0.9 0.6 0.7 0.8
RECOMMENDATION: REDUCE 60 BPS
RECOMMENDATION Current SIM weight: 12.3% vs S&P 500 weight of 11.7% Reduce holdings by 60 bps to mirror S&P 500 Do not foresee much movement within the energy sector Opportunity to allocate addieonal holdings to another area of the pornolio with larger upside