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Energy and Utilities. ConocoPhillips. Analysis of: Business, Financials and Valuation. Recommended action: Maintain current weight in SIM Portfolio – 0.74%. ConocoPhillips (COP) Business Analysis.

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conocophillips

ConocoPhillips

Analysis of:

Business, Financials and Valuation

Recommended action: Maintain current weight in SIM Portfolio – 0.74%.

conocophillips cop business analysis
ConocoPhillips (COP)Business Analysis

ConocoPhillips is an integrated, global energy company. The Company is the result of the merger between Conoco Inc. (Conoco) and Phillips Petroleum Company (Phillips), which was consumated on August 30, 2002, at which time Conoco and Phillips combined their businesses by merging with separate acquisition subsidiaries of ConocoPhillips. As a result of the merger, Conoco and Phillips each became wholly owned subsidiaries of ConocoPhillips. The Company\'s business is organized into five operating segments: exploration and production, midstream, refining and marketing, chemicals and emerging businesses. August 31, 2001 (fiscal 2001).

conocophillips cop business analysis4
Petroleum exploration and production

Petroleum refining, marketing, supply, and transportation

Emerging technologies

30.3% interest in Duke Energy Field Services - Natural gas gathering, processing, and marketing

50% interest in Chevron Phillips Chemical Company – chemicals and plastics distribution and production

ConocoPhillips (COP)Business Analysis
conocophillips cop business analysis5
ConocoPhillips (COP)Business Analysis

Factors Impacting Valuation

Positive Factors

Negative Factors

  • Innovative company
  • Economic cycles and demand volatility
  • Threat of lower oil prices (Current valuations reflect a forecast of $20/BBL)
  • Improving credit rating
  • Tight inventories and capacity in industry
slide6

ConocoPhillips (COP)Business Analysis

Catalysts

Major shifts in supply and demand

Revolutionary Technologies

Revolutionary energy sources

Force a major restructuring of the industry

Increases energy price volatility

Reduces cost of exploration, production, distribution, etc.

  • Forecast:
  • Lower energy prices are “baked” into valuations ($20/BBL)
  • Economic recovery could drive prices higher than expectations
slide7

SUMMARY OF 2002

  • Continued benefit from merger, cost cutting
  • CAPEX up (negative factor for valuation)
  • Negative financing cash flow (positive factor for valuation)
conocophillips cop conclusions
ConocoPhillips (COP)Conclusions

Recommended action:

NONE

exxonmobil

ExxonMobil

Analysis of:

Business, Financials and Valuation

Recommended action: Increase the number of shares in the portfolio by 10%

exxonmobil xom business analysis
ExxonMobil (XOM)Business Analysis

XOM is a global integrated energy company

Major Business Segments

Upstream

Downstream

Chemicals

  • Production
  • Exploration
  • Refining & Supply
  • Fuels Marketing
  • Specialties

83%

10%

7%

% Earnings

51%

% Capital

32%

17%

22%

5%

6%

ROCE

slide17

ExxonMobil (XOM)Business Analysis

Competitor Analysis: ROCE 1985-2002

16

14

ExxonMobil

12

Royal Dutch

10

Shell

8

BP

6

ChevronTexaco

4

2

0

$10-15

$15-20

$20-25

$25-30

Brent Price in $’s per barrel

XOM has outperformed its competition at all price levels during this period.

exxonmobil xom business analysis18
ExxonMobil (XOM)Business Analysis

Sources of Competitive Advantage

Low cost producer

(Economies of scale)

XOM cost/barrel oil

Last 5 yrs. Avg. cost $4.39

Current cost $3.50 to $3.75

  • Hydrocarbon detection
  • Optimal drilling location
  • Long-distance pipelines
  • Liquefy natural gas
  • Greenhouse-gas emissions

Technology

(Future low cost leadership)

exxonmobil xom business analysis19
ExxonMobil (XOM)Business Analysis

Factors Impacting Valuation

Positive Factors

Negative Factors

  • Economic cycles and demand volatility
  • Threat of lower oil prices (Current valuations reflect a forecast of $20/BBL)
  • Declining net reserve base
  • Disruptive innovations creating substitute products (e.g. hydrogen)
  • Dividend up 21 consecutive yrs.
  • AAA debt rating 84 years
  • Share repurchase program
  • Stronger emphasis on natural gas (Qatar deal)
  • Reserve additions in 2003 should outpace declining base
  • Tight inventories and capacity in industry
slide20

ExxonMobil (XOM)Business Analysis

Catalysts

Major shifts in supply and demand

Revolutionary Technologies

Revolutionary energy sources

Force a major restructuring of the industry

Increases energy price volatility

Reduces cost of exploration, production, distribution, etc.

  • Forecast:
  • Lower energy prices are “baked” into valuations ($20/BBL)
  • Economic recovery could drive prices higher than expectations
slide21

a

a

b

c

Summary of 2002

  • Weak economy, lower natural gas prices, poor downstream margins
  • CAPEX up (negative factor for valuation)
  • Negative financing cash flow (positive factor for valuation)
slide23

EPS 1.69 in 2002

  • Lower oil prices projected 2004 - 2005

Attractive dividend

slide24

Neutral

Good

Good

Bad

slide25

Bad

Neutral

Good

slide28

ExxonMobil (XOM)Conclusions

  • Recommended action:
  • Increase the number of shares in the portfolio by 10%
  • Positive Factors:
  • Economic recovery is driving higher earnings in 2003
  • Current valuations seem reasonable
  • Current valuations reflect expectations of lower oil prices
    • Risk of lower than expected oil prices seems low
    • Low inventories, low refining capacity, and a strong economic recovery bode well for higher prices
entergy
Entergy

Continue to hold weight at 1.09% of SIM

entergy business analysis
Entergy - Business Analysis
  • ETR is in electric production, retail distribution operations, energy marketing and trading and gas transportation.
  • Major business segments
entergy business analysis sources of competitive advantage
Entergy- Business AnalysisSources of competitive advantage
  • Asset based revenues with generating plants of about 30000 MW.
  • Second largest nuclear power generator in US
  • Regulated utility business in mainly Arkansas, Louisiana, Mississippi (Retail competition only in Texas)
  • Trading contracts of short duration unlike competitors
entergy business analysis factors impacting valuation
Entergy – Business AnalysisFactors Impacting Valuation
  • Positive factors

Strong credit rating

Tight capacity in industry

Leader in nuclear energy (low cost and safe producer)

  • Negative factors

Economic cycles and weather dependency

Uncertainty in utility regulation

Likely consolidation in the industry with repeal of PUHCA

entergy business analysis catalysts
Entergy – Business AnalysisCatalysts
  • Major shifts in supply and demand (resulting in energy price volatility)
  • Shifts in utility regulatory policies (retail and wholesale markets, FERC and EPA)
  • Revolutionary technologies
conclusions
Conclusions

Though there is higher expected dividend, it is recommended to continue to hold at 1.09% of portfolio because of the following reasons:

  • Already overweight against S&P 500 of 0.13%
  • Uncertainty in utility regulation
sempra energy

Sempra Energy

Analysis of:

Business, Financials and Valuation

Recommended action: Hold weight at 1.08% of SIM

sempra energy sre business analysis
Sempra Energy (SRE)Business Analysis

SRE is a gas and electric utility also engaged in unregulated power, natural gas, and international energy products

sempra energy sre business analysis45
Sempra Energy (SRE)Business Analysis

Factors Impacting Valuation

Positive Factors

Negative Factors

  • Strong emphasis on LNG
  • Economic cycles and demand volatility
  • Heavily regulated
  • Geographic concentration (California)
  • Strong credit rating
  • Tight inventories and capacity in industry
slide46

Sempra Energy (SRE)Business Analysis

Catalysts

Major shifts in supply and demand

Revolutionary Technologies

Revolutionary energy sources

Force a major restructuring of the industry

Increases energy price volatility

Reduces cost of exploration, production, distribution, etc.

  • Forecast:
  • Increased consumption of gas as well as low US reserves
  • Natural Gas importing is becoming increasingly important
natural gas reserves
Natural Gas Reserves
  • United States 5%
  • Middle East 35%
  • Former Soviet Union 38%
natural gas consumption
Natural Gas Consumption
  • United States 22.9% of world production
  • United States 27.2% of total consumption
liquefied natural gas
Liquefied Natural Gas
  • Sempra Energy has taken an aggressive approach towards LNG
    • Regasification facilities
      • Baja, CA will begin operations in 2006
      • Hackberry, LA will begin operations in 2007
    • Goal is to position Sempra as the leading North American LNG developer
slide50

a

a

b

c

Summary of 2002

  • Weak economy, lower natural gas prices
  • CAPEX up (negative factor for valuation)
  • Positive financing cash flow (negative factor for valuation)
slide51

2002 marked large year for investing activities

  • Investing expected to increase while earnings increase
slide53

a

a

b

c

Summary of 2002

  • Large Dividend Yield
  • Estimate EPS increasing
slide54

Neutral

Neutral

Neutral

slide55

Good

Good

Bad

slide56

Bad

Good

ratio comparison

Valuation Ratios

Sempra

Industry

Sector

S&P 500

P/E Ratio (TTM)

11.23

14.70

14.38

23.13

P/E High - Last 5 Yrs.

18.31

29.33

29.52

48.38

P/E Low - Last 5 Yrs.

8.18

10.43

9.24

16.10

Price to Sales (TTM)

0.85

1.51

1.16

3.10

Price to Book (MRQ)

1.92

1.73

1.64

4.34

Price to Tangible Book (MRQ)

1.92

2.39

2.35

7.53

Price to Cash Flow (TTM)

5.22

9.81

7.83

17.20

Price to Free Cash Flow (TTM)

Ratio Comparison

Good

Good

Bad

Good

Good

slide58

Sempra Energy (SRE)Conclusions

  • Recommended action:
  • Hold weight at current 1.08% of SIM
  • Positive Factors:
  • Current valuations seem reasonable
  • Low inventories high demand of electricity and natural gas
  • Future growth into LNP market
fpl analysis

FPL Analysis

Matt Leeth

fpl business analysis
FPL Business Analysis
  • FPL Group, Inc. is a public utility holding company that, through its wholly owned subsidiary, Florida Power & Light Company (FPL) and its wholly owned indirect subsidiary FPL Energy, LLC, is engaged in the generation, transmission, distribution and sale of electric energy. FPL supplies electric service to approximately four million customers throughout most of the east and lower west coasts of Florida
  • New projects expected to be completed in the year 2003 will increase FPL’s total generating capability by 6.2% from its year end amount of nearly 21,000 mega-watts
  • FPL has made considerable improvements in reliability and customer service
    • The average time customers annually go without power has decreased from 137 minutes to 69 minutes over the past five years
    • During service interruptions FPL will call its customers to fill them in on what is happening and what is being done to solve the problem
fpl financial analysis
FPL Financial Analysis
  • EPS, profit margin, and growth rate are all relatively stable
fpl financial analysis62
FPL Financial Analysis
  • Operating Profit Margin has fallen the past couple years but has otherwise been relatively stable and ROE has been consistent
fpl financial analysis63
FPL Financial Analysis
  • Asset Turnover has been extremely consistent and D/E has been relatively stable
fpl valuation
FPL Valuation
  • EPS and Price have steadily increased while P/B and P/S have been stable
valuation
Valuation
  • Relative to the S&P 500, FPL is undervalued. Price and P/E are below 1. EPS is also below 1 but has been rising.
valuation67
Valuation
  • P/B and P/S are undervalued relative to the S&P 500. ROE and Net Profit Margin are valued closer to the S&P.
valuation68
Valuation
  • Dividend Yield is currently more than twice the S&P and Dividends have grown steadily since 1995.
valuation69
Valuation
  • Higher P/S, P/B, and EPS than the industry
valuation70
Valuation
  • ROE and Net Profit Margin are higher relative to the industry. P/C is currently above the industry average but in the long run P/C has been below the industry.
recommendation
Recommendation
  • Relative to the S&P 500, FPL is undervalued and could be a good buy
    • FPL has strong financial statements relative to its industry and sector which makes it positioned well given it is a top-tier utility business
    • Growing dividend yield plus the tax reform are positives
    • New projects which will increase the company’s total generating capacity should help insure future revenue and earnings growth
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