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John Goik John Glankler Christian Töpfner von Schütz

John Goik John Glankler Christian Töpfner von Schütz. Energy Sector Stock Recommendation. John Goik John Glankler Christian Töpfner von Schütz. Agenda. Energy Sector – Review and Proposal BP & ConocoPhillips Transocean Ltd. (RIG) Summary. Energy Sector - Review.

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John Goik John Glankler Christian Töpfner von Schütz

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  1. John Goik John Glankler Christian Töpfner von Schütz Energy Sector Stock Recommendation John Goik John Glankler Christian Töpfner von Schütz

  2. Agenda • Energy Sector – Review and Proposal • BP & ConocoPhillips • Transocean Ltd. (RIG) • Summary

  3. Energy Sector - Review Industry to overweight Oil & Gas Drilling Integrated Oil & Gas Industry to underweight Oil & Gas Storage & Transportation Refining & Manufacturing

  4. Energy Sector - Review

  5. Energy Sector - Review • Short Term: • High Inventories • Demand down by 3.2 mb/d 2Q 2009 • Demand down by 2.2 mb/d 3Q 2009 • Demand expected to rise again by 1.4 mb/d 1Q 2010 to 85.9 mb/d • Strong oil price reaction to signs of economic recovery • Long Term: • Structural capacity issues • Production capacity likely to decline (weak price environment) • Utilization at 100% by 2013 • Demand limited by flat supply capacity • Morgan Stanley oil price predictions: $85 for 2010, $95 for 2011

  6. Energy Sector - Review Increase weight of Energy sector by 131 basis points to par with S&P 500 : • Sector is undervalued and has mid to long-term growth potential • Current weakness should be used to add stock in this sector • Waiting until the next SIM trading window in Nov/Dec 09 could be too long since stocks will most likely move quickly on positive news • Positives: • Economic recovery (especially in China and India) • Expected rise in oil prices (mid to long-term) • Structural problems on the supply side (mid to long-term) • Risks: • High inventory/low demand in short term • Overall uncertainty in oil price predictions

  7. Energy Sector - Proposal

  8. Agenda • Energy Sector – Review and Proposal • BP & ConocoPhillips • Transocean Ltd. (RIG) • Summary

  9. BP – DCF Valuation

  10. BP – Multiples Valuation • Average Target Price for Multiples Valuation: • $74.94 • Final Average Target Price for BP: • 80% DCF weight and 20% Multiples = $91.51 • 76.78% Upside • Correlation to oil price: r = 0.70

  11. ConocoPhillips – DCF Valuation

  12. ConocoPhillips – Multiples Valuation • Average Target Price for Multiples Valuation: • $52.21 • Final Average Target Price for COP: • 80% DCF weight and 20% Multiples = $49.00 • 10.81% Upside • Correlation to oil price: r = 0.94

  13. COP - Recommendation • Hold: • Some upside potential, but not enough to add to current position • Should profit from increasing oil price • Review position next quarter and potentially replace if upside potential has been exhausted

  14. Agenda • Energy Sector – Review and Proposal • BP & ConocoPhillips • Transocean Ltd. (RIG) • Summary

  15. Transocean (RIG) • Industry: Oil & Gas Drilling and Exploration • Company: Provides offshore contract drilling services for oil and gas wells worldwide • Market Cap: $24.07 Billion (08/09/2009) • Makes up 33% of SIM Energy Sector and 3.54% of Total Assets in the SIM portfolio • 7,670 shares • Cost Basis: $71.50 • Current Price: $75.06 (08/09/2009)

  16. RIG – Business Analysis

  17. RIG – Business Analysis • Competition • High cost, small number of similar companies • Diversity of Location • China, India • Strong Ultra Deepwater Market • Deep water is where major new oil finds are most likely • Contract with Petrobras (Brazil)

  18. RIG – Financial Analysis • S&P projects earnings of Oil and Gas Drillers to grow at 22% annually over the next 5 years • Strong contract backlog of $33.7B

  19. RIG – Financial Analysis • $900M in cash • Buyback shares or pay down debt • 2Q 2009 EPS $2.79 below analyst estimates of $3.02 • “Operational Incident” - $30M • Swap of Legend and Sedco 703 rigs - $22m • 4% drop in stock price • Market overreaction?

  20. RIG – DCF Valuation

  21. RIG – DCF Valuation • Average Operating Margin is 41.30% • Too High? • Average Target Price for DCF Valuation: • 30% Weighting towards low end margin • 60% Weighting towards middle margin • 10% Weighting towards continuing trend on high end • Result = Average Price $110.69

  22. RIG – Multiples Valuation

  23. RIG – Multiples Valuation

  24. RIG – Multiples Valuation • Average Target Price for Multiples Valuation: • $156.87 • Final Average Target Price for RIG: • 80% DCF weight and 20% Multiples = $119.93 • 59.78% Upside • Correlation to oil price: r = 0.93

  25. RIG - Recommendation • Buy 100 bps of RIG • Strong business position • Favorable valuations • Increase in price of oil • Weakening value of dollar • Risks • Decline in oil price • Stronger dollar

  26. Agenda • Energy Sector – Review and Proposal • BP & ConocoPhillips • Transocean Ltd. (RIG) • Summary

  27. Energy Sector - Summary

  28. Energy Sector - Stock Recommendation What Questions Do You Have? What Questions Do You Have?

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