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Energy Sector Winter 2010

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. S&P 500 vs. SIM Sector Weights.

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Energy Sector Winter 2010

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  1. Energy SectorWinter 2010 Eric Dewees Honglei Gong Charles Hathaway Danqing Zhou

  2. Agenda • Sector Analysis • Business & Economic Analysis • Financial Analysis • Valuation Analysis • Recommendations

  3. S&P 500 Components

  4. S&P 500 vs. SIM Sector Weights Energy is overweight the S&P by 51 Basis points

  5. S&P 500 Performance by Sector

  6. Energy Sector • 1.08 Trillion in Market Capitalization • 5th Largest Sector in S&P • 39 Companies • SIM holds 2 S&P Companies • ConocoPhillips • National Oilwell Varco • Non-S&P Holdings • BP Plc. • Transocean

  7. Largest Companies in Energy Sector

  8. S&P Energy Sector

  9. Energy Sector: Industry Returns

  10. SIM Energy Holdings

  11. Energy Vs. S&P Energy has been lagging the S&P over the past year. What’s to blame? Oil prices and oil demand

  12. Business & Economic Analysis

  13. 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

  14. Life Cycle • Low Margins • Industry Maturation • Growth Rates Low • Consolidation

  15. Key Drivers to Energy Prices • Consumption / Demand • Production Capacity • Distributional Bottlenecks • OPEC Supply Response • Geopolitics • Weather • Reserves

  16. Who’s Consuming?

  17. Oil Futures 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

  18. Oil Price Projections EIA Report We expect prices to trend along the reference line

  19. Inventories

  20. Oil Demand Forecast 1Q 2010 • In 2010, oil demand is expected to average 86.3 million barrels a day. EIA Report

  21. Oil Supply Forecast 1Q 2010 • In 2010, oil supply is expected to average 85.62 million barrels a day. EIA Report

  22. Long Term Oil Demand Demand over the next 2 years is expected to rise marginally.

  23. Long Term Oil Supply No dramatic growth in production between now and 2011

  24. Dollar vs. Oil • USD has been gaining on the Euro • during the past 3 months • As the dollar strengthens • Oil prices go down

  25. Dollar vs. Energy

  26. Oil vs. Energy Sector Oil prices are highly correlated with the Energy sector performance

  27. Financial / Valuation Analysis

  28. Revenue Growth

  29. EPS Growth

  30. Sector Margins

  31. Refining Industry Net Margins • Sector margins have fallen below the mean • - Excess Capacity in Refining • - Less Production

  32. Sector Valuation

  33. Industry Valuation

  34. Industry Valuation

  35. Industry Valuation

  36. Industry Valuation

  37. Recommendations

  38. 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

  39. 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.

  40. Questions?

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