S&P 500 Energy Sector

Luke DiTomas Alex Foisel Ian McLeod February 10, 2009

Agenda

     

Size and Composition Industry Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

Size and Composition

Portfolio Weights



The energy sector in the SIM portfolio is currently underweight when compared to the S&P 500 by 6.04%

S&P 500 Weight Telecommunication Services, 3.72% Materials, 3.04% Utilities, 4.61% Consumer Discretionary, 8.19% Consumer Staples, 12.85% Information Technology, 16.22% Energy, 14.09% Industrials, 10.62% Health Care, 15.94% Financials, 10.72% Telecommunication Services, 2.19% Materials, 1.79% SIM Weight Utilities, 2.89% Consumer Discretionary, 9.67% Information Technology, 18.97% Consumer Staples, 14.22% Energy, 8.05% Industrials, 8.27% Health Care, 21.50% Financials, 9.59%

Size and Composition

S&P 500 and Sector Performance

     The energy sector: Contains 39 stocks 3 rd largest market cap* 4 th best YTD return: (3.16%) * 6 th best YTD return in 2008: (36.74%)

Sector S&P 500

Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Telecommunications Services Utilities

Market Cap Level Daily 7,192,455 $825.88 -2.28%

1,014,055 $374.13

218,994 $127.62

763,552 $180.98

589,017 $151.37

924,124 $227.75

1,146,392 $305.40

770,678 $123.98

1,166,403 $224.67

267,760 $99.34

331,480 $146.71

MTD -8.57% QTD -8.57% YTD -8.57%

-1.24% -3.16% -3.16% -3.16% -3.67% -7.24% -7.24% -7.24% -2.48% -12.66% -12.66% -12.66% -2.94% -10.64% -10.64% -10.64% -3.22% -1.19% -7.67% -1.30% -7.67% -1.30% -7.67% -1.30% -2.47% -26.55% -26.55% -26.55% -2.89% -3.08% -3.08% -3.08% -0.96% -11.06% -11.06% -11.06% -2.39% -0.83% -0.83% -0.83%

* As of January 30, 2009

Size and Composition

Top Stocks

   Top 10 energy stocks based on S&P 500 Index Weight † ConocoPhillips is currently held in the SIM portfolio* BP is currently the only other energy stock in the SIM portfolio

Company

Exxon Mobil Corp.

Chevron Corp.

ConocoPhillips * Occidental Petroleum Corporation Apache Corp.

Devon Energy Corporation XTO Energy Inc.

Anadarko Petroleum Corp.

Marathon Oil Corporation Halliburton Company

Quote

80.34

74.90

47.94

56.77

78.74

58.20

39.34

41.78

27.15

19.71

Market Cap

399.77B

152.18B

P/E

9.24

EPS

8.69

6.42 11.67

71.47B

N/A -11.16

45.98B

26.35B

6.80

8.35

5.62 14.02

25.84B

N/A 22.69B 10.01

-4.85

3.93

19.18B

5.93

19.25B

5.49

17.50B 11.59

7.05

4.95

1.70

Dividend Yield

2.00% 3.50% 3.90% 2.30% 0.80% 1.10% 1.20% 0.90% 3.50% 1.80%

S&P 500 Index Weight (%)

5.40% 2.01% 0.94% 0.61% 0.35% 0.34% 0.30% 0.25% 0.25% 0.23% †

As of February 6, 2009

Size and Composition

Sector Composition

       Natural gas transmission & distribution This industry classification includes establishments engaged in both the transmission and distribution of natural gas, but not in distribution to end users  Pipe lines, except natural gas This industry classification includes establishments engaged in the gathering system and transportation via pipeline of refined and semi-refined products  Oil & gas field machinery & equipment This category covers establishments primarily engaged in the manufacturing of machinery and equipment for use in oil and gas fields  Petroleum (Integrated) This category covers establishments primarily engaged in the exploration, production, refinement, transportation and sale of crude oil and natural gas  Petroleum (Producing) This industry classification includes establishments engaged in the exploration, developing and producing natural gas, crude oil and natural gas liquids  Coal This industry includes establishments primarily engaged in mining operations producing bituminous coal, anthracite, and lignites

Size and Composition

Energy Stocks

    BP- Petroleum (Integrated) Engages in the exploration, production, transportation, and sale of crude oil and natural gas

Quote Market Cap Beta

$45.46

143.79B 0.65

 ConocoPhillips- Petroleum (Integrated) Operates as an integrated energy company which explores, produces and markets crude oil, natural gas and natural gas liquids

Quote Market Cap Beta

$45.83

72.35B 1.18

 Pengrowth Energy Trust- Petroleum (Producing) Engages in the acquisition, ownership and management of working interests and royalty interests in oil and natural gas properties

P/E

6.79

Dividend Yield

7.40%

P/E

N/A

Dividend Yield

3.90%

Quote Market Cap Beta

$8.49

P/E

2.16B 0.84 10.61

Dividend Yield

20.10%

Diluted EPS

6.70

2008 Revenue

367.05B

Diluted EPS

-11.16

2008 Revenue

225.42B

Diluted EPS

0.80

2007 Revenue

1.26B

 Stock price quotes and market caps as of February 9, 2009

Industry

Industry Analysis

     Mature phase of life cycle   Global economy influence Foreign & domestic economies   Global recession Credit crisis OPEC  Controls 40% of world’s crude oil    Government factors Volume controls Price regulation Imposition of taxes and subsidies     External factors Threat to entry Intensity of rivalry  Supplier bargaining power Buyer bargaining power Substitutes Inputs: crude oil, labor, equipment / outputs: fuels, plastics

Source: EIA

Industry Analysis Cont.

      Threat to entry (Low) High start-up costs Economies of scale Multiple permits and licenses needed for exploration of oil Oil exploration requires large amounts of cash reinvested in the business each year     Intensity of rivalry (High) Heightened government control has restricted access to new upstream resources Oil and gas are facing growing competition from other fuel sources Increasing difficulties in extracting the remainder of the world’s oil will lead companies to strive for greater efficiencies - hence increasing rivalry Increasing security of supply and transport costs has pushed companies to build plants closer to major demand centers

Industry

Industry Analysis Cont.

      Supplier bargaining power (Moderate) Foreign governments require permits and licenses in order to conduct drilling/extraction Facilities need specialized parts and equipment to ensure proper functioning Vertical integration has reduced the reliance of input suppliers   Buyer bargaining power (Low) Commodity traders effect oil prices, shifting price power away from buyers Demand by foreign countries is expected to increase   Substitutes (Moderate) Although there is movement towards alternative energies, there hasn’t been a sustainable energy source which could be a true substitute for oil Oil is one of the main commodities that drives the US/global economy

Industry

Industry

Business Segmentation

      

Exploration & Development Hydrocarbon Production Shipping Refining & Blending Storage Distribution Market

Exploration & Development t & Production Developmen n Production Value Chain Blending Blending Distribution Storage Market

Source: UTC Energy Investment

  

Rise in Future Crude Oil Prices

     Subsiding global recession Rise in crude oil prices and demand Turnaround in company earnings and job numbers The dollar’s rally ends   Demand in China and India Growing rapidly from continued industrialization Factories expected to pump up crude oil demand OPEC crude oil pricing goals OPEC countries need $60 to $80 per barrel  To balance budgets and invest in social programs Further supply cuts

Industry

Rise in Crude Oil Prices Cont.

    Crude oil producers Crude oil is becoming scarcer Price of crude oil too low to support the income needs of producing countries       Alternative energy Start-up phase High costs Hard to access more capital Expensive to implement Lack of demand given lower crude oil prices Traditional energy has more benefits     Cheaper source Fossil fuels readily available Easy to use Easily transportable

Industry

Alternative Energy

    Solar Advantages:  Always there with no pollution being created Disadvantages:  Low efficiency (15%) which can only be compensated for by large collecting areas    Very high initial costs Lack of adequate storage materials (batteries) High cost to the consumer  Wind  Advantages:  None on large scale; supplemental power in windy areas Disadvantages:     Relatively low efficiency (30%) Disruption of migratory birds (note this is what killed the recently proposed Columbia River Gorge wind turbine project) Unreliable and its strength depends on local weather patterns, temperature, time of year and location Equipment is very expensive compared to other energy sources and initial expense is high

Industry

Alternative Energy Cont.

   Biomass Advantages:   Theoretically inexhaustible fuel source Alcohols and other fuels produced by biomass are efficient, viable, and relatively clean-burning Disadvantages:    Could contribute a great deal to global warming and create pollution if directly burned Still an expensive source, both in terms of producing the biomass and converting it to alcohols On a small scale there is most likely a net loss of energy

Industry

Crude Oil Prices vs. Energy Sector

$160,00 $140,00 $120,00 $100,00 $80,00 $60,00 $40,00 $20,00 $0,00 SP-10

Economic

Regression: Crude Oil Prices and Energy Sector

100 90 80 70 60 50 40 30 20 10 0 $0,00 $20,00 $40,00 $60,00 $80,00

Crude Oil Prices

$100,00 • Correlation: 0.9288

• R-Square: 0.8626 $120,00 $140,00 $160,00

Economic

Yen/Euro Cross vs. Crude Oil Prices

$180,00 $160,00 $140,00 $120,00 $100,00 $80,00 $60,00 $40,00 $20,00 $0,00

Economic

Regression: Yen/Euro Cross and Crude Oil Prices

Economic

$160,00 $140,00 $120,00 $100,00 $80,00 $60,00 $40,00 $20,00 $ $0,00 $20,00 $40,00 $60,00 •Correlation: 0.7919

•R-square: 0.6272 $80,00 $100,00

Yen/Euro Cross

$120,00 $140,00 $160,00 $180,00

EPS Growth Rates



All growth rates represent a 3, 5, or 10-year trailing average

60.0% 54.3% 50.0% 41.3% 40.4% 40.0% 30.0% 20.0% 10.0% 27.1% 24.0% 27.2% 23.1% 16.1% 7.1% 6.9% 11.5% 9.2% 25.4% 19.9% 15.4% 1.7% 2.5% 0.0% -0.3% SP5A -10.0% SP-10 XOM XTO COP -2.3% BP PGH -4.7% -20.0% -30.0% -25.4% 3-year 5-year 10-year

Financial

10-Year EPS Growth Rate

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% 6.9% 24.0% 6.3% 8.7% -0.5% 9.3% 10.6% -10.7% 9.9% -1.8% 2.6%

Financial

Revenue Growth Rates



All growth rates represent a 3, 5, or 10-year trailing average

50.0% 46.1% 45.0% 41.6% 40.0% 35.0% 35.8% 36.4% 34.7% 32.1% 30.0% 26.1% 25.0% 18.6% 19.9% 18.0% 20.0% 17.9% 15.0% 10.0% 8.7% 7.1% 7.2% 12.8% 9.8% 7.4% 13.8% 12.2% 5.0% 9.3% 13.8% 0.0% SP5A SP-10 XOM XTO COP BP PGH 3-year 5-year 10-year

Financial

Pre-Tax Margins



All margins represent a 5-year trailing average

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% SP5A SP-10 XOM XTO COP BP PGH Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008

Financial

Energy Sector Free Cash Flow



All cash flows represent 12-month calendar years

millions

7,700.0

6,781.5

6,700.0

5,773.1

5,700.0

5,012.8

5,694.4

4,700.0

3,858.6

3,600.0

3,700.0

2,700.0

2,312.5

1,700.0

1,225.9

602.9

700.0

-223.2

-300.0

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008

Financial

Valuation

Sector Segmentation

   Segmented the sector based on SIC code Established in 1937 , The Standard Industrial Classification (abbreviated SIC) is a United States Government system for classifying industries by a four-digit code       Segmented sector by SIC code: Natural gas Transmission &Distribution- 7 stocks Pipe Lines, Except Natural Gas- 2 stocks Oil & Gas Field Machinery & Equipment- 12 stocks Petroleum (Integrated)- 12 stocks Petroleum (Producing)- 10 stocks  *Petroleum stocks make up over 56% of sector Coal- 3 stocks Sector Weight by SIC Code 12.8% 7.7% 17.9% 5.1% 25.6% 30.8% Natural Gas Transmission & Distribution Pipe Lines, Except Natural Gas Oil & Gas Field Machinery & Equipment Petroleum (Integrated) Petroleum (Producing) Coal

Valuation

Valuation Analysis

       Price/Earnings Ratio Energy sector mean: 12.3

 S&P 500 mean: 18.2

Earnings are very correlated to oil prices   Gasoline sold for 37% less in Q408 than Q407 OPEC production cuts Met apx. 67% of the total 4.2 million barrel-per-day cut Additional exploration costs Real GDP explains about 93% of the demand for petroleum products    Price/Earnings/Growth Ratio Energy sector mean: 1.4

 S&P 500 mean: 1.3

Additional OPEC production cuts Analyst/U.S. Government oil price predictions   Consensus 2009 price per barrel- apx. $60 Optimistic analysts- $100 per barrel 2.5

2.0

1.5

1.0

0.5

0.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

13.6

15.1

Price/Earnings Ratio 17.5

12.3

17.8

9.0

8.8

16.6

15.0

40.4

24.3

6.7

3.5

Coal Natural Gas Transmission & Distribution Pipe Lines, Except Natural Gas Oil & Gas Field Machinery & Equipment Petroleum (Integrated) Petroleum (Producing) Mean Current Energy Sector (mean) S&P 500 (mean) Price/Earnings/Growth Ratio 2.9

3.0

1.3

1.3

2.1

1.2

1.1

0.9

1.4

1.6

1.3

1.3

0.1

Natural Gas Transmission & Distribution Pipe Lines, Except Natural Gas Oil & Gas Field Machinery & Equipment Petroleum (Integrated) Petroleum (Producing) Coal Mean Current Energy Sector (mean) S&P 500 (mean)

Valuation

Valuation Analysis Cont.

     Price/EBITDA Energy sector mean: 5.8x

S&P 500 mean: 8.5x

Decrease in EBITDA margins    Return on Equity Energy sector mean: 22.1% S&P 500 mean: 17.0% Increased revenue arising from higher petroleum product prices flowed through to profit  10-year revenue growth rate for 6 largest oil refiners- 17.99% 14.0x

12.0x

10.0x

8.0x

6.0x

4.0x

2.0x

0.0x

6.5x

4.3x

5.6x

2.6x

Price/EBITDA 11.5x

3.3x

5.1x

4.2x

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Natural Gas Transmission & Distribution Pipe Lines, Except Natural Gas Oil & Gas Field Machinery & Equipment Petroleum (Integrated) Return on Equity Petroleum (Producing) Coal Mean Current Energy Sector (mean) S&P 500 (mean) 31.5% 18.2% 13.8% 15.9% 12.3% 24.3% 12.2% 23.3% 21.6% 15.5% Natural Gas Transmission & Distribution Pipe Lines, Except Natural Gas Oil & Gas Field Machinery & Equipment Petroleum (Integrated) 5.5x

3.3x

Petroleum (Producing) 8.8x

4.0x

Coal Mean Current Energy Sector (mean) S&P 500 (mean)

Technical Analysis

        Period of consolidation Lower volumes  Wedge formation Upside breakout imminent Constant highs, higher lows  20 & 50-day moving averages  Broken to the upside Creation of new support levels  Relative strength index (RSI) Upward trend developing  Moving average convergence divergence (MACD) Narrow gap  ADX directional movement index Crossover signals a buy

Source: Stockcharts.com

Valuation

Recommendation

      Current SIM Weight: 8.05% Current S&P 500 Weight: 14.09% Currently underweight 604 basis points  Underweight the sector by 209 basis points relative to the S&P 500 An increase in current SIM Weight of 3.95% Why not underweight more?

 Energy prices near bottom   Valuation looks very cheap Increase in global energy demand Why not overweight?

 Short-term demand for oil could further contract  Recession could extend longer than expected

Recommendation