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Stock Presentation: Energy. Isabel Collins, Ke Chen. Overview. Reccomendation. We recommend that the Energy sector be trimmed to S&P 500 weight of 6.5% by reducing our position in Royal Dutch Shell by 40 BPS. Recommendation: Trim Weight. Oil prices still struggling to recover
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Stock Presentation: Energy Isabel Collins, Ke Chen
Reccomendation • We recommend that the Energy sector be trimmed to S&P 500 weight of 6.5% by reducing our position in Royal Dutch Shell by 40 BPS.
Recommendation: Trim Weight • Oil prices still struggling to recover • Excess supply/falling demand • High P/E throughout the sector • Expected recovery overstated into stock prices • High Volatility • Uncertainty with OPEC • Uncertainty surrounding Trump/international politics • Outperformance in late phase • Historically energy outperforms in late phase of the business cycle. • Slow recovery, but oil prices expected to continue to improve for long term horizon
Kinder Morgan: KMI Industry • Energy infrastructure company - midstream - oil & gas • Transports: natural gas, refined petroleum, crude oil, CO2 etc • Cyclical but is contract fee based • less affected by commodity prices • Growth Opportunities & Risks • Drivers • Deregulation, larger territory • M&A • If Oil prices increase in short term; more contracts • Outperforms in Mid to Late expansion • Risks • Political environment in Canada and oil production countries • Changes in business environment • Sharp decline in crude oil price • Supply disruption • Higher development cost
Kinder Morgan • DCF • Targeted price of $19.51 • Downside of 9% Valuation • ROE • ROE in decline from 2014 to 2016, recently increases, but still at its historical low • P/B, P/S • P/B, P/S relative to sector are lower than their historical median - cheap • P/B is at its historical low - cheap, undervalued; • P/E is high – may show risk of overvaluation
Halliburton: HAL Industry • Oil & Gas Equipment & services industry - provides services & products to the upstream oil and natural gas industry • Completion and production services - bonding the well & well casing. • Completion tools • Oilfield production and completion chemicals • Cyclical and is hugely affected by commodity prices Growth Opportunities & Risks Drivers • Regulatory ease, larger territory • Oil price increase in short term, more contracts • Business Cycle: from mid to late expansion Risks • Fluctuation in oil price - unstable
Halliburton • DCF • Targeted price of $42.12 • Downside of 13.8% Valuation • ROE • ROE in decline from 2014 to 2016, recently increases, but still at its historical low from 2007 • P/B, P/S • P/B, P/S relative to sector are much higher than their historical median - expensive • P/B - much higher than the sector - expensive • P/S is higher than the sector - expensive
Schlumberger: SLB Industry • Oil Field Service Provider • Reservoir Characterization, Drilling & Production • Compensated for contracts through profit sharing • Heavily affected by weak oil prices/falling demand Growth Opportunities & Risks • M&A strategy has allowed them to expand offerings to a complete integrated “pore-to-pipeline” experience • Continue to expand: through JV • GOLAR LNG: Liquefied Natural Gas • Helps monetize stranded gas (estimated to be 40% of worlds gas reserves) • Slower recovery in international energy markets • 75% of contracts based overseas • Continued Strong Dollar • Exchange rate exposure
Schlumberger • DCF • Resulted in an implied price of $65.19 • Downside of 16.6% Valuation • ROE • ROE in decline since 2014, 2016: -4.4% • P/E • Recovery of oil prices overstated into stock price • Forward P/E is more than triple the sector median • P/CF • Lower average P/CF of 16.8 vs. Industry average of 19.8
Royal Dutch Shell Industry • Oil and Natural Gas Production • Upstream & Downstream • Upstream: Exploring & Recovering crude oil and natural gas • Downstream: Manufacturing, Distributing & Marketing for oil products and petrochemicals. • Growth Opportunities & Risks • Drivers • Reorganizing both upstream & downstream business segments • - Approx $30 B worth of divestments set for 2017-2018, reinvesting in core • BG Group acquisition could materialize cost synergies in 2017 • Risks • High dividend yield may be at risk • - Cash Flow issues • -Front loaded debt, $5 B current this year, $8 B current in 2018 • More volatile than midstream due to low activity in downstream segment, and oil price exposure in upstream • Excess supply affecting Petrochemical industry more heavily
Royal Dutch Shell DCF • Resulted in implied price of $37.86 • Downside of 28.5% Valuation • P/CF increasing faster than peers since 2014 • P/B is in line with the sector • ROE is 2.56% compared to industry median of 4.06%
KMI M&A, future projects, news Projects: http://www.kindermorgan.com/business/KinderMorganProjects.aspx M&A: Valero Energy (NYSE:VLO) agrees to acquire the remaining 50% membership interest in Parkway Pipeline from Kinder Morgan (NYSE:KMI) for an undisclosed sum. • The move gives VLO increased access to the eastern U.S. by connecting the pipeline to the Colonial Pipeline system that runs from Houston to New York Harbor. • News: Kinder Morgan currently delivers natural gas to Mexico through 17 interconnections. The pipeline giant expects exports to Mexico to increase by 2.0 Bcf/d to 5.6 Bcf/d by 2021. Presently, Kinder Morgan alone accounts for 76% of 2016 U.S. total natural gas exports to Mexico.
