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ENERGY SECTOR

Dive into the energy sector with focused insights on Halliburton & Valero. Business, financial, and valuation analyses for informed investment decisions. Sector performance, recommendations & risk factors discussed.

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ENERGY SECTOR

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  1. ENERGY SECTOR Mike Essig Brian Geiser Chris Gagnon

  2. TABLE OF CONTENTS SECTOR OVERVIEW HALLIBURTON VALERO ENERGY CORPORATION PATTERSON UTI ENTERPRISE PRODUCTS PARTNERS L.P. RECOMMENDATION

  3. SECTOR OVERVIEW

  4. 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 TTM RETURN ENERGY SECTOR RETURN • Three Month Price Change • -5.88% • Three Month Dividends Reinvested at Index • -5.17% • TTM Price Change • -0.1669% • 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 THREE MONTH 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. 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 • 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 • 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 • 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 • 11.25% • Volatile Stock Price • Cyclical sales • Growth Rate • 3.00% • Conservative rate • Reflect volatility in sales

  21. Valuation Analysis • Implied Price by EV • Resulted in higher valuations • $99.03-$130.18 mean range • Implied Price by Market • Moderate valuations • $82.52-$101.97 mean range

  22. Recommendation • Recommendation: HOLD • 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 Directional Drilling Pressure Pumping

  25. PTEN Business Analysis IT’S ALL ABOUT THE https://www.statista.com/statistics/326762/revenue-of-top-energy-services-and-equipment-land-drilling-companies-global/ http://www.macrotrends.net/1369/crude-oil-price-history-chart https://www.vanguardngr.com/2018/04/oil-prices-rise-due-lower-u-s-drilling-activity/

  26. Financial Analysis Morningstar

  27. Operating Margin Concerns

  28. DCF Forecast

  29. ENTERPRISE PRODUCTS PARTNERS L.P.

  30. 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 Onshore NG Pipelines & Services NGL Pipelines and Services Onshore CO Pipelines & Services Offshore Pipelines & Services Petrochemical

  31. EPD Business Analysis [Projected] [Projected]

  32. Financial Analysis 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?

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