Energy Sector

Winter 2010 Eric Dewees Honglei Gong Charles Hathaway Danqing Zhou

Agenda

 Sector Analysis  Business & Economic Analysis  Financial Analysis  Valuation Analysis  Recommendations

S&P 500 Components

Largest S&P Members

Exxon Mobil Microsoft Procter & Gamble Apple Inc.

Johnson & Johnson General Electric International Business Machines JP Morgan Chase AT&T Bank of America

Total S&P Weight in Top 10 Holdings S&P Weight

3.24% 2.28% 1.89% 1.85% 1.82% 1.77% 1.71% 1.59% 1.57% 1.57%

19.29% Market Cap (Billions)

307 246 179 177 173 168 162 151 149 130

1,841

S&P 500 vs. SIM Sector Weights

Sector Weights

20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% C on su m er D iscr et C io na on ry su m er S ta pl es E ne rg y Fi na nci al s H ea lth C ar e In In fo du rm st at ria io ls n Te ch no Te lo le gy co M m m at er un ia ica ls tio n S er vi ce s U til iti es S&P 500 Weight SIM Weight Energy is overweight the S&P by 51 Basis points

S&P 500 Performance by Sector 0% -2% -4% -6% -8% -10% -12%

Sector

Energy Materials Industrials Consumer Discretionary Consumer Staples Healthcare Financials Information Technology Telecom Services Utilities -6% -9% -3% -4% -2% -2% -5% -8% -8% -11%

Quarter Returns

Energy Materials Industrials Consumer Discretionary Consumer Staples Healthcare Financials Information Technology Telecom Services Utilities -6% -9% -3% -4% -2% -2% -5% -8% -11% -8%

Energy Sector

     1.08 Trillion in Market Capitalization 5 th Largest Sector in S&P 39 Companies SIM holds 2 S&P Companies • ConocoPhillips • National Oilwell Varco Non-S&P Holdings • BP Plc.

• Transocean

Largest Companies in Energy Sector

Top 10 S&P Energy Components

Exxon Mobil

Symbol

XOM

Market Cap (Billions)

307

Industry

Oil & Gas Integrated Chevron Schlumberger CVX 142 Oil & Gas Integrated Oil & Gas Equipment/Services SLB 75 ConocoPhillips COP 72 Oil & Gas Integrated Occidental Petroleum Apache Anadarko Petroleum Devon Energy XTO Energy EOG Resources OXY APA APC DVN XTO 63 33 31 30 26 Oil & Gas Integrated Oil & Gas Exploration/Production Oil & Gas Exploration/Production Oil & Gas Exploration/Production Oil & Gas Exploration/Production Oil & Gas Exploration/Production EOG 24

S&P Energy Sector

Sector Energy (39) Industry Group Energy (39) Industry Sub-Industry Energy Equipment & Services (11) Oil & Gas Drilling (3) Oil & Gas Equipment & Services (8) National Oilwell Varco Integrated Oil & Gas (7) Oil, Gas & Consumable Fuels (28) ConocoPhillips Oil & Gas Exploration & Production (12) Oil & Gas Refining & Marketing (3) Oil & Gas Storage & Transportation (3) Coal & Consumable Fuels (3)

Energy Sector: Industry Returns

Industry

Oil & Gas Refining/Marketing Oil & Gas Storage Oil & Gas Equipment/Services Oil & Gas Drilling Oil & Gas Exploration/Production Oil & Gas Integrated Coal & Consumable Fuels

Baseline Symbol

OGREF OGSTO OGEQP OGDRL OGEXP OGINT COCOF

Relative Strength to S&P Since Jan 1

8% 7% 1% 0% -1% -2% -3%

1 Year

-58% 7% 22% 20% 4% -34% 42%

10 Year

120% -17% 104% 118% 377% 101% 578%

SIM Energy Holdings

Energy Holdings Symbol Market Value % of Fund S&P Weight Annual Return (Ex. Dividends)

ConocoPhillips COP $ 590,400 3.11% 0.75% Transocean RIG $ 864,348 4.55% National Oilwell Varco NOV $ 613,500 3.23% Not in S&P 0.19% 0.95% 53.77% 59.98% 25.22% BP Plc. - ADR BP $ 190,808 1.00% Not in S&P

SIM Energy Portfolio $ 2,259,056 11.89%

Energy Vs. S&P

Energy has been lagging the S&P over the past year. What’s to blame? Oil prices and oil demand

Business & Economic Analysis

Porter’s 5 Forces

Threat of New Entrants

 Costly  Require highly specialized professionals

Power of Suppliers

 Small handful of powerful companies

Power of buyers

 Lack of product differentiation

Substitutes.

 Coal, gas, solar power, wind power, hydroelectricity and nuclear energy.

Competitive Rivalry.

 Slow industry growth rates  High exit barriers

Life Cycle

  Low Margins Industry Maturation • Growth Rates Low • Consolidation

Key Drivers to Energy Prices

       Consumption / Demand Production Capacity Distributional Bottlenecks OPEC Supply Response Geopolitics Weather Reserves

Who’s Consuming?

25 000 000 20 000 000 15 000 000 10 000 000 5 000 000 0 United States Russia Mexico Germany Canada China Brazil India Japan

Oil Futures

Oil Futures

100 90 80 70 60 50 40 30 20 10 0 Price Oil is currently in Contango, the future price is Spot Price + Carry Cost Contango has been narrowing, indicating lower prices in future Geometric Mean is 3.29% annual increase

Oil Price Projections

Price Scenarios

250.0

200.0

150.0

100.0

50.0

0.0

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 Reference Low Price High Price EIA Report We expect prices to trend along the reference line

Inventories

Oil Demand Forecast 1Q 2010 EIA Report  In 2010, oil demand is expected to average 86.3 million barrels a day.

Oil Supply Forecast 1Q 2010 EIA Report  In 2010, oil supply is expected to average 85.62 million barrels a day.

Long Term Oil Demand

Demand over the next 2 years is expected to rise marginally.

Long Term Oil Supply

No dramatic growth in production between now and 2011

Dollar vs. Oil

• USD has been gaining on the Euro during the past 3 months • As the dollar strengthens Oil prices go down

Dollar vs. Energy

Oil vs. Energy Sector

Oil prices are highly correlated with the Energy sector performance

Financial / Valuation Analysis

Revenue Growth

EPS Growth

Sector Margins

Refining Industry Net Margins

• Sector margins have fallen below the mean - Excess Capacity in Refining - Less Production

Sector Valuation

Industry Valuation

Industry Valuation

Industry Valuation

Industry Valuation

Recommendations

 

Recommendations

Drop 101 Basis Points to bring us to 50 basis points under weight from 51 basis points overweight.

Based on • Oil prices aren’t going anywhere • Dollar strengthening • Demand not picking up in next 3 Months • Refining Margins down from excess capacity • Oil inventories have been increasing in the past couple months • Industry Ratios show we are overvalued relative to S&P

Recommendations

 We would like to underweight • Oil & Gas Refining • Oil and Gas Integrated Because of the excess capacity in refining.

We would hold onto Exploration and Production as that’s our hedge to higher oil prices.

Questions?