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ENERGY SECTOR. Janelle R. Courtright John C. Williams July 17, 2007. AGENDA. Size and Composition of Sector Business Analysis of Sector Economic Analysis Financial Analysis Valuation Analysis Recommendation. S&P SECTOR SIZES. SIM SECTOR SIZE. Industries in Energy Sector.
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ENERGY SECTOR Janelle R. Courtright John C. Williams July 17, 2007
AGENDA • Size and Composition of Sector • Business Analysis of Sector • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation
Industries in Energy Sector • Coal - Peabody • Oil and Gas Domestic • Oil and Gas International - Exxon • Oil and Gas Pipelines • Oil Refining and Marketing • Oil Well Contract Drilling • Oil Well Drill Contracting • Oil Well Equipment • Oil Well Services - Schlumberger
Largest Companies in Sector • Exxon Mobile ** • Chevron Corp. ** • ConocoPhillips • Schlumberger Limited ** 2 of top ten largest in S&P 500
32 COMPANIES IN SECTOR APA Apache Corp APC Anadarko Petroleum BHI Baker Hughes, Inc BJS BJ Services BTU Peabody Energy CHK Chesapeake Energy Corp CNX Consol Energy Inc COP ConocoPhillips CVX Chevron Corp DVN Devon Energy EOG EOG Resources EP El Paso Corp ESV Ensco International HAL Halliburton Company HES Hess Corp MRO Marathon Oil MUR Murphy Oil Corp NBR Nabors Industries NE Noble Corp NOV National Oil Well Varco OXY Occidental Petroleum RDC Rowan Companies RIG Transocean Inc SE Spectra Energy SII Smith International SLB Schlumberger Limited SUN Sunoco VLO Valero Energy Corp WFT Weatherford Int’l WMB Williams Companies XOM Exxon Mobile XTO XTO Energy HELD IN SIM PORTFOLIO
Sector Life Cycle • Mature • Growth Slowing • Stabilized or shrinking margins • Extraction, refining, and processing increasing capex increasing • Looking for resources in more difficult areas and moving away from core business of “oil”
Sector Influences • U.S. Economy • Excessive Profits Tax • Commercial Petrochemical Use • Environmental Concern • Movement to Alternative Energy Sources • Domestic Reserves • Natural Gas, Coal, Oil • Consumer Driving Habits • Stable even at higher gasoline prices
Sector Influences • External Factors • Environmental Laws • Kyoto Treaty, EU • New Industrial Ages • China, India • Geopolitical Climate • Venezuela, Russia, Iran
Sector Evaluation • Growing demand with a limited supply • Petroleum, Natural Gas, Alternatives • Concentrated in Oil and Gas • EXPENSIVE to enter • Customers are weak, suppliers are strong • Strong Competition, prices stable • Alternatives are becoming more available
Energy Sector Valuation • Absolute Sector Valuation • Trading around its ten year average: inline • Relative Sector Valuation • Selling Inline to market • Sector earnings/stock price driven by oil • Oil near all-time high increasing earnings and cash flow • Energy stocks likely to plateau and possibly decline in 3 – 6 months
SHORTTERM ENERGY OUTLOOK • Average price of gas has gone down • Refinery problems being resolved • Higher levels of product imports • Price of gas will go up modestly • High Inventories, will decrease with strong demand • Stabilizing crude oil prices • Strong demand
RECOMMENDATION • Continue to underweight to S&P 500 • Oil forecasted to retreat • Recommend to hold at 217 basis points below S&P • Sell equipment suppliers, specifically, Schlumberger Limited due to being overpriced • Increase holdings in other energy industries • Look to underweight in the next 6 months • Short-term returns to outperform S&P 500 • Long-term returns will under perform • Drop in oil prices, cheaper alternatives becoming more available