Energy sector stock recommendation
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Energy Sector Stock Recommendation. March 2, 2010 Eric DeWees Honglei Gong Charles Hathaway Danqing Zhou. S & P 500 Sector Weights (as of 2/28/2010). Sector Performance YTD (2/28/2010). Sector Performance YTD. Sector Performance (1 month). Sector Recommendation.

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Energy Sector Stock Recommendation

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Energy sector stock recommendation

Energy Sector Stock Recommendation

March 2, 2010

Eric DeWeesHonglei GongCharles HathawayDanqing Zhou


S p 500 sector weights as of 2 28 2010

S & P 500 Sector Weights (as of 2/28/2010)


Sector performance ytd 2 28 2010

Sector Performance YTD (2/28/2010)


Sector performance ytd

Sector Performance YTD


Sector performance 1 month

Sector Performance (1 month)


Sector recommendation

Sector Recommendation

  • Reduce the Energy Sector to 50 Basis Points Underweight

  • Current holdings are BP, ConocoPhillips, Transocean, National Oilwell Varco

  • We would like to:

    • Sell 100% of BP Plc. (BP)

    • Sell 100% of ConocoPhillips (COP)

    • Buy Noble Energy (NE)


Noble corporation

Noble Corporation

  • Noble Corporation (NE) is a oil drilling company that was spun-off the parent company Noble Energy in 1985.

  • The company, with operations in waters off the coasts of five continents, has a fleet of 63 offshore drilling units: three submersibles, four dynamically positioned drillships, 13 semisubmersibles, and 43 jack-up rigs. Many of its rigs are capable of operating in depths greater than 5,000 feet.

  • The group, which derives most of its revenues from offshore contracts, has positioned itself to ride the global trend toward deepwater exploration. Through acquisitions and equipment upgrading, Noble has been expanding its geographical reach and increasing its ability to drill in deeper off-shore areas.


Noble corporation advantages

Noble CorporationAdvantages

  • Low Taxes

    • Moved from Cayman Islands to Switzerland. Avg Tax Rate (16%)

  • Geographically Dispersed

    • World-wide, primarily in Mexico, Brazil, and Nigeria

  • Long-Term Historical Growth

    • Has experienced over 6% Earnings and Revenue Growth since 2000

    • Baseline has a long-term growth rate of 5%

  • First energy industry to recover

    • Oil & Gas Drilling Services is one of the first industry to recover when oil prices increase.

    • Exploration and Production must first acquire leases on drilling rigs, years and months in advance


Noble corporation advantages1

Noble CorporationAdvantages

  • Maintained high margins despite downturn

    • 44% in 2009, 44% in 2008

    • Utilization went down from 88% to 83%

  • Financially Stable

    • 735 Million Cash on Hand, $2.80 Per Share

    • Low Debt (750 Million), $2.82 Per Share

    • Growth Financed Heavily through Retained Earnings (70% of Total Liabilities and Equity)

  • Noble increased its capital expenditures

    • Building more rigs to sustain growth, don’t build until contracts are made

    • 1.4 Billion in 2009, 1 Billion in 2008. Guidance in 2010 is 1 Billion

    • Oil Majors are increasingly turning to offshore drilling

    • Expecting a slew of contract announcement for 2011 in 1Q and 2Q


Noble corporation baseline filter

Noble CorporationBaseline Filter

  • Energy Sector

  • P/Latest Earnings less than 1.0

  • Market Capitalization: 1 Billion or greater

  • Earnings: 3 Year Historical Growth Rate 6% or Greater

  • Earnings: 5 Year Growth Rate 6% or better

  • Long-Term Future Growth Rate: 4% or greater

  • ROE: 26% or greater

  • Reinvestment Yield: 10.0%

  • Price-Relative Strength to all stocks 70% or better

  • Earnings Momentum Value: 90% or greater

    Noble Corporation (NE) the only energy stock to meet this criteria


Noble corporation risks

Noble CorporationRisks

  • Tax Increase

    • Currently taxes average 16%, there’s some risk that Switzerland, and other countries that Noble does business in will increase taxes

  • Currency Risk

    • Earnings are in Swiss Francs, not dollars. If dollar strengthens significantly, earnings will suffer in dollar terms

  • Huge Capital Investments

    • 79% of assets are in drilling equipment and facilities

    • Utilization dropped from 83% from 88%

  • Oil Prices Decrease Significantly

    • Sustained Oil Prices sinking to the $30-$40 level would reduce the desirability of offshore oil production

    • In the short term, we believe oil prices will be fluctuating between $65 and $85 per barrel


Noble corporation stock repurchases and dividends

Noble CorporationStock Repurchases and Dividends

  • Stock Repurchase

    • Yearly stock repurchase

    • 2009: $204 Million

    • 2008: $314 Million

  • Dividend

    • Current Dividend is 16 cents per share.

    • Current dividend yield is .38%.

    • Talk of Possible Increase at Annual Shareholders Meeting April 30, 2010. Mentioned in 4Q Earnings Call

  • Debt to Total Capital is 10.5%.


Energy industries relative strength

Energy IndustriesRelative Strength


Noble corporation eps surprise history

Noble CorporationEPS Surprise History


Noble corporation earnings growth rates

Noble CorporationEarnings Growth Rates

Noble is trading at one of the lowest Price to Books in years


Noble corporation margins

Noble CorporationMargins

Margins have been increasing since ’05 but are expected to fall back slightly as contracts are renewed in ‘10 and ‘11


Noble corporation valuation analysis

Noble Corporation Valuation Analysis


Noble corporation valuation analysis1

Noble Corporation Valuation Analysis

Current Share Price : $43.24

Implied equity value/share : $62

Upside/(Downside) to Valuation : 43%


Noble corporation discounted free cash flow

Noble CorporationDiscounted Free Cash Flow

Terminal Growth Rate: 5% Discount Rate: 12% Implied Value: $60.34 Upside: 39.5%


Noble corporation target price

Noble CorporationTarget Price

Sensitivity Matrix

Target Price for Noble Corporation: $60

Current Price: $43.24 DCF: $60.38

Valuation: $61

Upside Potential: 39%


Noble corporation performance year to date

Noble Corporation Performance Year to Date

  • Noble Corporation has consistently outperformed the S&P since it was spun off.

  • It has significantly outperformed since 2000. This can be attributed to the increase in oil prices and world demand


Noble corporation performance 1 year

Noble Corporation Performance 1 Year


Noble corporation performance 2 year

Noble Corporation Performance 2 Year


Noble corporation performance 5 year

Noble Corporation Performance 5 Year


Noble corporation performance 10 year

Noble Corporation Performance 10 Year


Noble corporation performance 20 year

Noble Corporation Performance 20 Year


Bp plc report

BP Plc. Report

  • Current Price: $53.05

  • Target Price: $60

  • Upside: 14.7%

  • Dividend Yield: 3.36 / 6.28%

  • % of SIM: .97%

  • Recommendation: Sell 100%


Bp plc valuation

BP Plc.Valuation


Bp plc discounted free cash flow

BP Plc. Discounted Free Cash Flow

Implied Value: $60.63 Discount Factor: 12%

Terminal Growth Rate: 3% Upside: 15.9%


Bp plc dcf sensitivity

BP Plc. DCF Sensitivity


Conocophillips report

ConocoPhillips Report

Current Price: $48.91

Target Price: $57.00

Upside: 16.5%

Dividend Yield: 4.17%

% of SIM: 3.18%

Recommendation: Sell 100%


Conocophillips dcf

ConocoPhillips DCF

Implied Value: $ 57.36 Discount Factor: 12%

Terminal Growth Rate: 3% Upside: 17.3%


Cop valuation

COP Valuation


Proposed energy sector holdings

Proposed Energy Sector Holdings

As % of SIM

  • Noble Corporation (NE): 1.68%

  • Transocean (RIG): 4.18%

  • National Oilwell Varco (NOV): 4.78%

    Proposed SIM Weight: 10.64%

    S&P Energy Sector Weight:11.14%

    Current SIM Weight: 11.48%


Energy team

Energy Team

Questions?


Transocean report

Transocean Report

  • Current Price: $80.33

  • Target Price: $110

  • Upside: 36.9%

  • Dividend Yield: No Dividend

  • % SIM: 4.18%

  • Recommendation: No Action


Transocean dcf and valuation

TransoceanDCF and Valuation

Terminal Discount Rate = 11%

Terminal FCF Growth Rate = 3%


National oilwell varco report

National Oilwell Varco Report

  • Current Price: $43.66

  • Target Price: $40.34

  • Downside: 7.6%

  • Dividend Yield: 40 Cents / .92%

  • % SIM: 4.78%

  • Recommendation: No Action


National oilwell varco dcf and valuation

National Oilwell VarcoDCF and Valuation

Terminal Discount Rate = 11%

Terminal FCF Growth Rate = 3%


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