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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

Analysis of:

Business, Financials and Valuation

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


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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).


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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


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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


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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


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SUMMARY OF 2002

  • Continued benefit from merger, cost cutting

  • CAPEX up (negative factor for valuation)

  • Negative financing cash flow (positive factor for valuation)


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ConocoPhillips (COP)Conclusions

Recommended action:

NONE


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ExxonMobil

Analysis of:

Business, Financials and Valuation

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


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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


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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.


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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)


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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


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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


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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)


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Attractive dividend


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Neutral

Good

Good

Bad


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Bad

Neutral

Good


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Neutral

Good


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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


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Entergy

Continue to hold weight at 1.09% of SIM


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Entergy - Business Analysis

  • ETR is in electric production, retail distribution operations, energy marketing and trading and gas transportation.

  • Major business segments


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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


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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


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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


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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


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Sempra Energy

Analysis of:

Business, Financials and Valuation

Recommended action: Hold weight at 1.08% of SIM


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Sempra Energy (SRE)Business Analysis

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


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Sempra Energy (SRE)Business Analysis


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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


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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


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Natural Gas Reserves

  • United States 5%

  • Middle East 35%

  • Former Soviet Union 38%


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Natural Gas Consumption

  • United States 22.9% of world production

  • United States 27.2% of total consumption


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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


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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)


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a

a

b

c

Summary of 2002

  • Large Dividend Yield

  • Estimate EPS increasing


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Neutral

Neutral

Neutral


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Good

Good

Bad


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Bad

Good


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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


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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


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FPL Analysis

Matt Leeth


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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


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FPL Financial Analysis

  • EPS, profit margin, and growth rate are all relatively stable


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FPL Financial Analysis

  • Operating Profit Margin has fallen the past couple years but has otherwise been relatively stable and ROE has been consistent


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FPL Financial Analysis

  • Asset Turnover has been extremely consistent and D/E has been relatively stable



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FPL Valuation

  • EPS and Price have steadily increased while P/B and P/S have been stable


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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.


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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.


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Valuation

  • Dividend Yield is currently more than twice the S&P and Dividends have grown steadily since 1995.


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Valuation

  • Higher P/S, P/B, and EPS than the industry


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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.


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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