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Energy Sector Stock Evaluations

Energy Sector Stock Evaluations. Brian R. Boulter Fisher College of Business 2/27/07. Comparative SIM Sector Allocation. $96. $57. $34. Sector Recommendation. Oil Prices are likely to remain relatively flat between $45 and $60 per barrel.

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Energy Sector Stock Evaluations

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  1. Energy Sector Stock Evaluations Brian R. Boulter Fisher College of Business 2/27/07

  2. Comparative SIM Sector Allocation

  3. $96 $57 $34

  4. Sector Recommendation • Oil Prices are likely to remain relatively flat between $45 and $60 per barrel. • Energy sector performance is still adjusting to the decline and energy companies in general are likely see flatter earnings in the future. • Recommend to decrease current SIM portfolio weighting to 7.00% • Sell 73 basis points to reach 269 basis points below S&P 500 weighting • Look to move towards equal weighting after 12-14 months

  5. Industry Fundamentals • Integrated Oil & Gas - 63.76% • Oil & Gas Refining & Marketing – 3.30% • Oil & Gas Exploration & Production – 9.61% • Revenues and earnings in these industries are very tightly correlated to oil prices • Crude oil is either a major input for production of goods for sale or is itself the sole output of production. • Short-term oil price volatility results in more earnings volatility in these industries. • Stagnant oil prices are likely to limit growth and performance in the near future.

  6. Industry Fundamentals • Oil & Gas Drilling – 4.21% • Oil & Gas Equipment & Services – 13.39% • Oil & Gas Storage & Transportation – 4.34% • Revenues and earnings in these industries are driven by global supply and demand factors more than actual oil prices (not as highly correlated to oil prices) • As long as oil is a primary source of energy, drilling, storage and transportation services will be in high demand. • Revenues and earnings tend to be more stable than short-term oil prices • May be an opportunity for stable growth when demand is growing yet oil prices remain stagnant

  7. Industry Fundamentals • Coal & Consumable Fuels - 1.38% • Recently, high oil prices have spurred the development of new coal conversion technologies. • Coal can now be economically converted into natural gas, liquids and hydrogen. • Quickly becoming a significant source of unconventional oil production as oil prices steadily rise with increased demand over time. • Current conversion methods result in costs of about $35 per barrel of liquid hydrocarbons

  8. Recommendation • Buy 125 basis points of SLB • Buy 167 basis points of BTU • Sell 365 basis points (ALL) of VLO • Total SIM weight = 7.00% • Total S&P 500 weight = 9.69%

  9. Schlumberger Ltd. (SLB) • Oil & Gas Equipment & Services Industry • Leading oilfield services company • By market cap. and earnings (second to HAL in revenue) • The Oilfield Services segment provides technology, project management and information solutions to the petroleum industry. • The WesternGeco segment provides reservoir imaging, monitoring and development services. • Established 1926 and currently operates in 80 countries worldwide

  10. SLB Comparative Financial Strength

  11. SLB Comparative Profitability

  12. SLB DCF Assumptions • CAPM produced 9.4% terminal discount rate (Beta = 1.35) • Terminal Growth Rate of 5.75% • Increasing demand for oil and oil drilling/production services • Current high operating margins declining to industry average of 18% • Cap Ex. and Depreciation approaching 5% of sales

  13. SLB DCF Output

  14. SLB Multiple Valuations

  15. Peabody Energy (BTU) • The world’s largest coal producer founded in 1883. (IPO May, 2001) • owns interests in 36 coal operations in the United States and Australia. • Produces about 240 million tons of coal annually • Has approximately 9.8 billion tons of proven and probable coal reserves • Markets, brokerages and trades coal • US customers, primarily power companies, currently account for more than 90% of sales • Participates in BTU conversion technologies that convert coal into natural gas, liquids and hydrogen.

  16. BTU Comparative Financial Strength

  17. BTU Comparative Profitability

  18. BTU DCF Assumptions • CAPM produced 12% terminal discount rate (Beta = 2.01) • Terminal Growth Rate of 5.00% • Current moderate operating margins increasing slightly to industry average of 14% • Cap Ex. and Depreciation approaching 5.5% of sales

  19. BTU DCF Output

  20. Valero Energy (VLO) • Oil & Gas Refining & Marketing • Founded 1955 • Operates 18 refineries in the United States, Canada and Aruba • Markets transportation fuels and home heating oils to residential consumers • Operates 1,008 company owned gas stations and 5,000 retail and wholesale outlets

  21. VLO Comparative Financial Strength

  22. VLO Comparative Profitability

  23. Comparative Dupont Analysis

  24. Recommendation • Buy 125 basis points of SLB • Increasing demand for oil and oil will result in stable growth despite stagnant oil prices. • Buy 167 basis points of BTU • Coal becoming a viable unconventional source of oil and gas • Sell 365 basis points (ALL) of VLO • Stagnant oil prices will limit short-term growth in this industry

  25. Final Energy Sector Portfolio Final Sector Weight 7.00% S&P 500 Weight 9.69% Underweight (2.69%)

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