Energy Sector Winter 2010 Eric Dewees Honglei Gong Charles Hathaway Danqing Zhou Agenda Sector Analysis Business & Economic Analysis Financial Analysis Valuation Analysis Recommendations.
Download ReportTranscript Energy Sector Winter 2010 Eric Dewees Honglei Gong Charles Hathaway Danqing Zhou Agenda Sector Analysis Business & Economic Analysis Financial Analysis Valuation Analysis Recommendations.
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?