Unit Three • Oil Companies • XOM, RD, BP • Earnings analysis • Valuation – Integrated Oil Companies • Valuation – Independent, or Exploration & Production Companies
Oil Companies • ExxonMobil • Royal Dutch Shell • BP plc • XTO Energy, Inc
National Oil Companies • Saudi Aramco • National Iranian Oil Company • Gasprom - Russia • Qatar • PDVSA – Venezuela • Kuwait Petroleum Company • ADNOC – UAE • NNPC – Nigeria • Sonatrach – Algeria • NOC Libya • Rosneft– Russia • Petrobras – Brazil
BEYOND THE BOTTOM LINE The Outlook: Oil companies are expected to report big 2007 profits, but investors will look at other measures. • The Trend: Most oil companies aren't replacing reserves and are returning more cash to shareholders, reducing their heft in the oil patch. • The Price: The companies say they won't spend money on projects at the expense of profitability.
ExxonMobil • Founded 1865 as Standard Oil • Standard Oil was broken up by Supreme Court in 1909 • The largest piece became Standard Oil of New Jersey • Changed name to Exxon in 1971 • Merged with Mobil in 1998 • Further mergers unlikely
ExxonMobil • Operations are world wide • Earnings breakdown in 2007: • Upstream 65% US 18% • Downstream 24% US 43% • Chemicals 11% US 26%
ExxonMobil • Reserves: OilGas • US 18.6% 15.5% • Canada 13.3% 2.3% • Europe 6.4% 28.6% • Africa 19.4% 1.5% • Asia/Middle East 23.6% 48.3% • Russia/Caspian 15.1% 3.2% • Other 3.6% 0.7%
Exxon Q1 2008 Refined Product Profit • Daily product production = 6,821 kb/d • Quarterly production = 6,821 x 91 = 621M b • R&M profit = $1,166M • $1,166M / 621M b = $1.87 / b or $04.4 / gal. • Total profit = $10,890 • $10,890 / 621M b = $17.53 / b or $.42 / gal
Issues Facing Exxon • Production growth • How much additional capital can XOM profitably deploy? • Access to prospective acreage • Political attacks • Is XOM doing anything wrong? • Long-term strategy • Should XOM diversify away from hydrocarbons?
Royal Dutch Shell • Royal Dutch founded in 1890 • Shell founded in 1897 • Merged in 1907 • Moved to single capital structure in 2004
Issues facing Royal Dutch Shell • Production growth • Reserve reporting scandal of 2003 • Nigeria • Russia – Sakhalin Island ownership • Management • Recently combined the two companies • Downstream profitability, especially US
BP plc • Incorporated in 1909 as Anglo Persian Oil Company • British government held 51% interest • 1954 became British Petroleum Company • 1975 acquired Standard Oil – Ohio • 1984-87 UK government sold stake • 1998 acquired Amoco • 2000 acquired Arco • 2003 TNK-BP joint venture formed
Issues Facing BP • Safety • Refinery accidents • Pipeline leaks • Management • John Brown may have grown the company too fast without regard to long-term consequences • Too many acquisitions too quickly • Russia • Forced to sell portion of Kovykta gas field to Gasprom • Relations with TNK partners, Russian government
Valuing Integrated Oil Companies • Earnings driven by oil and gas prices, refining margins, chemical margins, production volumes (growth is slow) • Earnings less volatile than energy companies that rely solely on production and commodity prices • Dividend yield offers some support • Dividend Discount models, Discounted Cash Flow models, PE’s work reasonably well • Rapid increase in oil prices has made valuation much more difficult
XTO Energy, Inc • 1986 Cross Timbers Oil Company formed as a partnership • 1990 incorporated • 1993 went public • 2001 changed name to XTO Energy, Inc. • Focus on natural gas (78% of production) and small to medium sized acquisitions from large companies where operations can be improved. North America based. • Model not too different from other E&P companies
XTO Energy, Inc • “The XTO approach follows a disciplined and time-tested philosophy. We hand-pick complex producing properties that are embedded with more hydrocarbons to discover and produce. We then employ geoscientists to develop the hidden upsides. Our teams use the newest technology, and innovate solutions in the field to maximize operational performance. The goal is for production, reserves and value to grow.”
What goes into understanding E&P companies and determining Fair Market Value? • Macro Trends, oil & gas prices • Forecasting Production and Reserves • Valuation Methodology Net Asset Value Calculation • Financial Statement Analysis and Oil & Gas Accounting
NAV Is Simmons Preferred Approach • “We believe every stock’s intrinsic worth is the present value of all future earnings, E&P companies are no different” • “We build DCF models for each E&P company we cover • Cash flows driven by oil & gas sales volumes (hard to do) and prices (even harder to do) • Sales controlled by production rate & prices • Production characteristics of underlying assets control rate of production • Therefore we attempt to understand the underlying assets to improve our ability to model NAV”
Advantages of Simmons DCF NAV Approach • Able to run different commodity price decks (we use NYMEX futures strip pricing) • Effective tool for bracketing down-side risk and up-side potential • Addresses differences in future capex needs to produce undeveloped reserves • Production scheduling and discounting mechanism normalizes for reserve life differences
Reserve Estimates: Limitations & Assumptions • Oil & Gas reserves – “invisible assets” • Reserve assets are contained in subsurface reservoirs • Exact measurement of volumes is impossible • Only a small fraction of the total reservoir system can be measured directly • Bottom Line: the “science” of reserves engineering involves a unique and significant level of measurement uncertainty and, as a result, is guided by regulatory standards and analytical methods that are both necessarily broad and subject to wide range of interpretive outcomes.
SEC Proved Reserves • Proved Reserves: the estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs, as of the date the estimate is made. • Proved Developed Producing (PDP) - reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. • Proved Undeveloped Reserves (PUD) - reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which a relatively major expenditure is required for recompletion.
Unproved Reserves • Unproved Reserves (SPE/WPC): reserves are based on geologic and/or engineering data similar to that used in estimates of proved reserves; but technical, contractual, economic or regulatory uncertainties preclude such reserves being classified as proved • Probable Reserves - more likely than not to be recoverable (>50% chance) • Possible Reserves - less likely to be recoverable than probable reserves (<50% chance)
Reserves: Understanding Uncertainties Reserve Adjustment Factors Used for AcquisitionsUsed for Loans AverageMedianAverageMedian Proved Producing 96.7 100.0 97.7 100.0 Proved Shut In 83.3 85.0 78.2 77.5 Proved Behind Pipe 74.1 75.0 73.9 75.0 Proved Undeveloped 56.0 50.0 48.9 50.0 Probable Producing 33.2 34.0 1.7 0.0 Probable Behind Pipe 29.1 25.0 1.4 0.0 Probable Undeveloped 21.4 20.0 0.9 0.0 Possible Producing 11.5 3.0 0.0 0.0 Possible Behind Pipe 7.2 0.0 0.0 0.0 Possible Undeveloped 5.3 0.0 0.0 0.0 • Reserve adjustment factors taken from the SPEE “Survey of Economic Parameters Used in Property Evaluation” for June 2003
Net Asset Value (NAV) Components Present Value of Proved Reserves (+) Present Value of Unproved Reserves (+) Market Value of Other Long-Term Assets (Land, Plants, etc.) (+) Present Value of Hedges (+) Working Capital (-) Long-term Debt (-) Preferred Stock (-) Present Value of Other Long-term Liabilities ______________________________________________________________________ (=) Net Asset Value ($) (÷) Shares Outstanding (=) Net Asset Value ($/shr)
Historical Stock Price Performance vs. NAV Company XYZ vs. SCI NAV XYZ Sources: Bloomberg and Simmons & Company International
Oil Service CompaniesGreatest Beneficiaries of Oil Company Spending • Schlumberger • Halliburton • Baker Hughes • Transocean • Global Santa Fe • Nabors