John Goik

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John Goik John Glankler Christian Töpfner von
Schütz
Energy Sector Stock Recommendation
John Goik John Glankler Christian Töpfner von
Schütz
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Agenda

• Energy Sector Review and Proposal
• BP ConocoPhillips
• Transocean Ltd. (RIG)
• Summary

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Energy Sector - Review

• Industry to overweight
• Oil Gas Drilling
• Integrated Oil Gas
• Industry to underweight
• Oil Gas Storage Transportation
• Refining Manufacturing

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Energy Sector - Review
Sector SP 500 Weight SIM Weight /-
Consumer Discretionary 9.11 7.19 -1.92
Consumer Staples 11.81 11.65 -0.16
Energy 12.04 10.74 -1.31
Financials 13.86 8.93 -4.93
Health Care 13.73 13.30 -0.43
Industrials 9.98 12.37 2.39
Information Technology 18.72 20.41 1.69
Materials 3.40 4.98 1.58
Telecommunication Services 3.41 3.39 -0.02
Utilities 3.94 3.61 -0.34
Cash 0.00 3.38 3.38
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Energy Sector - Review

• Short Term
• High Inventories
• Demand down by 3.2 mb/d 2Q 2009
• Demand down by 2.2 mb/d 3Q 2009
• Demand expected to rise again by 1.4 mb/d 1Q
  2010 to 85.9 mb/d
• Strong oil price reaction to signs of economic
  recovery
• Long Term
• Structural capacity issues
• Production capacity likely to decline (weak
  price environment)
• Utilization at 100 by 2013
• Demand limited by flat supply capacity
• Morgan Stanley oil price predictions 85 for
  2010, 95 for 2011

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Energy Sector - Review

• Increase weight of Energy sector by 131 basis
  points
• to par with SP 500
• Sector is undervalued and has mid to long-term
  growth potential
• Current weakness should be used to add stock in
  this sector
• Waiting until the next SIM trading window in
  Nov/Dec 09 could be too long since stocks will
  most likely move quickly on positive news
• Positives
• Economic recovery (especially in China and India)
• Expected rise in oil prices (mid to long-term)
• Structural problems on the supply side (mid to
  long-term)
• Risks
• High inventory/low demand in short term
• Overall uncertainty in oil price predictions

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Energy Sector - Proposal
Security Current Weight Buy Sell New Weight
BP plc 4.09 0.31 0.00 4.40
ConocoPhillips 3.11 0.00 0.00 3.11
Transocean Ltd 3.54 1.00 0.00 4.54
Hess 0.00 0.00 0.00 0.00
Total 10.74 1.31 0.00 12.05
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Agenda

• Energy Sector Review and Proposal
• BP ConocoPhillips
• Transocean Ltd. (RIG)
• Summary

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BP DCF Valuation
DCF Valuation
4/24/2009
BP Terminal Discount Rate Terminal Discount Rate 12.0
John Glankler Terminal FCF Growth Terminal FCF Growth 3.0
 
  Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
Year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Revenue 385,405 404,675 424,909 437,656 450,786 464,309 478,238 492,585 507,363 522,584 538,261
Growth 5.00 5.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Operating Income 75,291 87,996 102,846 56,895 58,602 60,360 62,171 64,036 65,957 67,936 69,974
Operating Margin 19.54 21.74 24.20 13.00 13.00 13.00 13.00 13.00 13.00 13.00 13.00


Taxes 14,966 17,753 21,058 11,478 11,823 12,177 12,543 12,919 13,307 13,706 14,117
Tax Rate 19.6 19.9 20.2 20.2 20.2 20.2 20.2 20.2 20.2 20.2 20.2
Minority Interest - - - - - - - - - - -

Net Income 60,325 70,244 81,788 45,417 46,779 48,183 49,628 51,117 52,651 54,230 55,857
Growth 16 16 -44 3 3 3 3 3 3 3

Add Depreciation/Amort 10,985 11,534 12,111 12,474 12,849 13,234 13,631 14,040 14,461 14,895 15,342
of Sales 2.85 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9
CapEx 30832 32374 33993 35012 36063 37145 38259 39407 40589 41807 43061
Free Cash Flow 40,477 49,404 59,906 22,879 23,565 24,272 25,000 25,750 26,523 27,318 28,138
YOY growth 22 21 -62 3 3 3 3 3 3 3
Current Price 51.20
Implied equity value/share 94.40
Upside to DCF 84.40
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BP Multiples Valuation

• Average Target Price for Multiples Valuation
• 74.94
• Final Average Target Price for BP
• 80 DCF weight and 20 Multiples 91.51
• 76.78 Upside
• Correlation to oil price r 0.70

Absolute Valuation High Low Median Current Your Target Multiple Your Target E, S, B, etc/Share Your Target Price (F x G)
P/Forward E 14.4 4.7 10.3 10.3 8.0 9.19 73.52
P/S 1.1 0.0 0.8 0.6 0.6 117.65 70.59
P/B 3.3 1.4 2.7 1.7 2.0 59.67 119.34
P/EBITDA 8.12 2.86 5.71 4.01 4.1 9.27 38.01
P/CF 9.7 3.3 7.6 5.7 6.0 12.21 73.26
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ConocoPhillips DCF Valuation
DCF Valuation
7/13/2009
Ticker COP Terminal Discount Rate Terminal Discount Rate 11.5
John Glankler Terminal FCF Growth Terminal FCF Growth 4.0
In Millions()
  Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
Year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Revenue 180,632 180,632 198,695 214,590 231,757 250,298 270,322 291,948 315,303 340,528 367,770
Growth 0.00 10.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00

Operating Income 6,851 8,658 10,020 12,875 13,905 15,018 16,219 17,517 18,918 20,432 22,066
Operating Margin 3.79 4.79 5.04 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

Interest and Other- net 5,740 5,603 5,470 4,292 4,635 5,006 5,406 5,839 6,306 6,811 7,355
Interest of Sales 3.18 3.10 2.75 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00

Taxes 5,334 4,827 4,170 5,810 6,275 6,777 7,319 7,905 8,537 9,220 9,958
Tax Rate 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8
Minority Interest - - - - - - - - - - -

Net Income 8,151 9,434 10,426 11,357 12,265 13,247 14,306 15,451 16,687 18,022 19,464
Growth 16 11 9 8 8 8 8 8 8 8

Add Depreciation/Amort 6,759 6,759 7,435 8,030 8,672 9,366 10,115 10,924 11,798 12,742 13,761
of Sales 3.74 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7
Plus/(minus) Changes WC 1,538 0 (2,954) (2,682) (2,897) (3,129) (3,379) (3,649) (3,941) (4,257) (4,597)
of Sales 0.85 0.00 -1.49 -1.25 -1.25 -1.25 -1.25 -1.25 -1.25 -1.25 -1.25
Subtract Cap Ex 13,084 13,084 14,393 10,730 11,588 12,515 13,516 14,597 15,765 17,026 18,388
Capex of sales 7.24 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
                     
Free Cash Flow 3,364 3,109 514 5,975 6,453 6,969 7,526 8,129 8,779 9,481 10,240
YOY growth -8 -83 1063 8 8 8 8 8 8 8
Current Price 44.22
Implied equity value/share 48.20
Upside to DCF 9.00
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ConocoPhillips Multiples Valuation

• Average Target Price for Multiples Valuation
• 52.21
• Final Average Target Price for COP
• 80 DCF weight and 20 Multiples 49.00
• 10.81 Upside
• Correlation to oil price r 0.94

Absolute Valuation High Low Median Current Your Target Multiple Your Target E, S, B, etc/Share Your Target Price (F x G)
P/Forward E 11.3 5.3 8.0 9.7 9.0 3.75 33.75
P/S 0.9 0.2 0.6 0.3 0.7 106.25 74.38
P/B 2.3 .8 1.5 1.1 1.4 37.19 52.07
P/EBITDA 12.44 2.58 3.91 3.98 5 7.25 36.25
P/CF 8.2 2.3 5.4 2.9 5.4 11.96 64.58
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COP - Recommendation

• Hold
• Some upside potential, but not enough to add to
  current position
• Should profit from increasing oil price
• Review position next quarter and potentially
  replace if upside potential has been exhausted

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Agenda

• Energy Sector Review and Proposal
• BP ConocoPhillips
• Transocean Ltd. (RIG)
• Summary

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Transocean (RIG)

• Industry Oil Gas Drilling and Exploration
• Company Provides offshore contract drilling
  services for oil and gas wells worldwide
• Market Cap 24.07 Billion (08/09/2009)
• Makes up 33 of SIM Energy Sector and 3.54 of
  Total Assets in the SIM portfolio
• 7,670 shares
• Cost Basis 71.50
• Current Price 75.06 (08/09/2009)

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RIG Business Analysis
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RIG Business Analysis

• Competition
• High cost, small number of similar companies
• Diversity of Location
• China, India
• Strong Ultra Deepwater Market
• Deep water is where major new oil finds are most
  likely
• Contract with Petrobras (Brazil)

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RIG Financial Analysis

• SP projects earnings of Oil and Gas Drillers to
  grow at 22 annually over the next 5 years
• Strong contract backlog of 33.7B

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RIG Financial Analysis

• 900M in cash
• Buyback shares or pay down debt
• 2Q 2009 EPS 2.79 below analyst estimates of
  3.02
• Operational Incident - 30M
• Swap of Legend and Sedco 703 rigs - 22m
• 4 drop in stock price
• Market overreaction?

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RIG DCF Valuation
Current Price 75.06
Implied equity value/share 103.52
Upside to DCF 37.92
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RIG DCF Valuation

• Average Operating Margin is 41.30
• Too High?
• Average Target Price for DCF Valuation
• 30 Weighting towards low end margin
• 60 Weighting towards middle margin
• 10 Weighting towards continuing trend on high
  end
• Result Average Price 110.69

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RIG Multiples Valuation
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RIG Multiples Valuation
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RIG Multiples Valuation

• Average Target Price for Multiples Valuation
• 156.87
• Final Average Target Price for RIG
• 80 DCF weight and 20 Multiples 119.93
• 59.78 Upside
• Correlation to oil price r 0.93

Absolute Valuation High Low Median Current Target Multiple Target E, S, B, etc/Share Target Price
P/Forward E 49.0 3.1 12.3 6.3 9.3 12.88 119.78
P/S 9.4 1.3 6.8 1.9 4.5 37.51 168.80
P/B 4.7 0.9 2.8 1.3 2.0 57.74 115.48
P/EBITDA 22.29 2.44 15.32 3.73 10.0 20.12 201.20
P/CF 33.8 2.8 17.6 4.7 11.1 15.97 177.27
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RIG - Recommendation

• Buy 100 bps of RIG
• Strong business position
• Favorable valuations
• Increase in price of oil
• Weakening value of dollar
• Risks
• Decline in oil price
• Stronger dollar

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Agenda

• Energy Sector Review and Proposal
• BP ConocoPhillips
• Transocean Ltd. (RIG)
• Summary

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Energy Sector - Summary
Security Current Weight Buy Sell New Weight
BP plc 4.09 0.31 0.00 4.40
ConocoPhillips 3.11 0.00 0.00 3.11
Transocean Ltd 3.54 1.00 0.00 4.54
Hess 0.00 0.00 0.00 0.00
Total 10.74 1.31 0.00 12.05
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Energy Sector - Stock Recommendation
What Questions Do You Have?
What Questions Do You Have?