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S&P 500 Energy Sector

S&P 500 Energy Sector. Luke DiTomas Alex Foisel Ian McLeod. March 3, 2009. Agenda. Review of Sector Presentation Proposal BP Pengrowth Energy Trust Transocean Technical Analysis Summary. Review. Sector Presentation Review. Current SIM Weight: 8.05% Current S&P 500 Weight: 14.09%

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S&P 500 Energy Sector

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  1. S&P 500 Energy Sector Luke DiTomas Alex Foisel Ian McLeod March 3, 2009

  2. Agenda • Review of Sector Presentation • Proposal • BP • Pengrowth Energy Trust • Transocean • Technical Analysis • Summary

  3. Review Sector Presentation Review • Current SIM Weight: 8.05% • Current S&P 500 Weight: 14.09% • Currently underweight 604 basis points • Underweight the sector by 209 basis points relative to the S&P 500 • An increase in current SIM Weight of 3.95% • Why not underweight more? • Energy prices near bottom • Valuation looks very cheap • Increase in global energy demand • Why not overweight? • Short-term demand for oil could further contract • Recession could extend longer than expected

  4. Review Current Energy Holdings • Class voted to increase energy sector portfolio weight by 395 bp

  5. Review Regression: Crude Oil Prices and Energy Sector

  6. Proposal Proposal

  7. BP British Petroleum- BP • BP plc, also known as British Petroleum, is the second largest publicly traded oil company and fourth largest U.S. refiner. Headquartered in London, England, they operate in three different business segments: • Exploration and Production • Upstream Activities: Include oil and natural gas exploration and field development and production • Midstream Activities: Include the management of crude oil and natural gas pipelines, processing and export terminals and LNG processing facilities • Refining and Marketing • Responsible for the supply and trading, refining, marketing and transportation of crude oil and petroleum products to wholesale and retail customers • BP markets its products in more than 100 countries • Other • BP Alternative Energy: Segment has already had substantial businesses in solar photovoltaic, wind and gas-fired power and is developing projects in advanced biofuels and carbon capture and storage as well as new areas such as concentrated solar thermal power

  8. BP Business Analysis: BP • Upsides • Dividend yield- 8.78%- $3.36 per share • Intends to distribute more money to shareholders through dividends rather than share repurchases • Slight GDP growth means an increase in demand for petroleum based products • .93 correlation between GDP growth and demand for petroleum based products • BP is expected to intensify its reserve acquisitions because of depressed asset values and tight credit • Balance sheet is very strong and can support growth through acquisitions • BP’s balance sheet is strong enough to withstand oil at $40-$50/bbl oil for 2-3 years • Reserve replenishment ratio- 15th straight year the ratio was >100% • When oil prices are low, supply begins to contract, mature projects loose marginal CAPEX meaning new growth is postponed, and EOR investments are cut • Year-end reserves were: 18.2 billion barrels and a resource base of 43.4 billion barrels • BP’s combined reserved and non-proved resources were sufficient for 43 years of production at the same rates as last year

  9. BP Business Analysis: BP Cont. • Upsides Cont. • US auto industry is bailed out or nationalized • Low crude oil prices provide an opportunity to launch another wave of cost cutting and trim CAPEX- potential margin expansion in 2009 & 2010 • Downsides • Russia is currently experiencing policy change by the government and may cause production to fall up to 10% or 1MBD • BP’s joint venture, TNK-BP may see production fall • Revenue was just under $35 billion in 2008 • Reserve replacement was 146% for 2008 • Obama administration proposed raising at least $31.5 billion over 10 years from the oil sector as part of a fiscal 2010 budget proposal • Tax benefits may be revoked which gave incentives to US refiners for hiring US workers • Crude oil prices continue to fall to $20-$30/bbl and remain there through 2009 • Given the before mentioned correlation of the energy sector vs. oil prices

  10. BP DuPont Analysis • BP is currently outperforming both the industry and market when examining ROE • Decrease in ROE can be attributed to large-scale projects which are only profitable when oil is above $70/barrel

  11. BP DCF Valuation- V1 • The implied equity value per share is $58.02, an upside of 51.26% *Stock Price as of February 29, 2009 close

  12. BP DCF Valuation- V2 • The implied equity value per share is $50.81, an upside of 32.46% *Stock Price as of February 29, 2009 close

  13. BP Multiples Valuation • The implied equity value per share is $64.67 • Target multiples are 90% of 10-year mean values • When compared to it sector and the market, BP is currently undervalued in nearly all multiple calculations

  14. 12-month price target calculated based on a weighted average of: DCF v1: 20% DCF v2: 20% P/Forward EPS: 20% ROE: 20% BP plans to start at least 29 different projects in 2009, all with different hurdle rates of average crude oil prices P/EBITDA: 20% Both DCF models are trying to find the equity value of BP BP 12-Month Price Target Calculation 12-Month Price Target: $55.82- 45.52% Upside *Upside Calculated Based off February 29, 2009 close

  15. Pengrowth Energy Trust Business Analysis: PGH • One of North America's largest energy royalty trusts that acquires and manages working interests and royalty interests in oil and natural gas properties • The Trust owns all of the royalty units and 91% of the common shares of the Corporation • Employs over 600 people who support its operations and activities • Sector: Energy • Industry: Oil and Gas Equipment and Services • Current Price $4.87 • 52-Week High $21.90 • 52-Week Low $4.87 • Market Cap $1.24B • Beta 1.09 • P/E 6.31 • Average Volume 1,476,130 • Shares Outstanding 254.94M

  16. Pengrowth Energy Trust Business Analysis: PGH • Upsides • Longer term trade • Growth through combination of cheap acquisitions and organic development • Strong track record of meeting guidance estimates • Recorded better than expected EPS numbers for Q408 and Full-Year 2008 • Generates reasonably big monthly payouts to investors • Revenue is easily quantifiable through stable and predictable production levels unlike traditional E&P companies • Expansion of oil exploration and drilling will continue even if the price of oil does not increase further • Not highly correlated with the price of oil • approximately .51 • Downsides • Canadian government proposal to tax energy trusts could hurt future cash flows • Possibly more cuts to their cash distributions (dividend payments) • Recession and cash strapped economy could extend longer than expected • Unattractive technical analysis • Near 52-week low • Broke through key support level

  17. Pengrowth Energy Trust Financial Analysis: PGH • RECOMMENDATION = Buy 75bp • Current Price: $4.87 • Yield: 0.96 (17.00%) • Target Value by DCF: $10.97 • Potential Upside: 125.18%

  18. Pengrowth Energy Trust Valuation Analysis: PGH • The current price related ratios are all below the mean estimates and all have created new lows • Pengrowth GRE: 22.0% • S&P 500 and SP-10 GRE: 10.0%

  19. Pengrowth Energy Trust Valuation Analysis: PGH • Revenues numbers continue to be very strong amidst this economic downturn • ROE hit a bottom in mid-08 and is starting to show strength as it is starting to revert back to its mean

  20. Transocean Transocean (RIG) The world’s largest offshore drilling contractor, provides the most versatile fleet of mobile offshore drilling units to help clients find and develop oil and natural gas reserves Operates 139 rigs with a presence in every major offshore market Planning on building 10 new ultra-deepwater units Employees approximately 21,200 employees with operations around the world Sector: Energy Industry: Oil and Gas Drilling & Exploration Current Price $54.98 52-Week High $163.00 52-Week Low $41.95 Market Cap $17.55B Beta .65 P/E 4.20 Average Volume 10,865,400 Shares Outstanding 319.26M

  21. DCF Valuation • The implied equity value per share is $115.56, an upside of 110%

  22. Multiples Valuation • The implied equity value per share is $139.57 • Target multiples are 90% of 5-year mean values

  23. Transocean Transocean (RIG) Downsides • Price is highly correlated with price of commodities • Success is highly dependent on other integrated oil and gas companies • Political instability can lead to price fluctuations in crude oil and thus in RIG • Weakens with strength in US Dollar Upsides High oil prices support growth opportunities for RIG Substantial financial flexibility from free cash flow backlog Planning a $3+ billion share repurchase program in May 2009 About a 121% larger worldwide rig fleet compared to closest competitor Owns the most modern and versatile fleet of rigs in the industry Majority of high specification fleets contracted into 2011

  24. Transocean Transocean (RIG) • All current values are well below the 5-year mean and very close to 5-year lows • Expect the values to revert back to the mean over time

  25. Technical Analysis Technical Analysis: BP

  26. Technical Analysis Technical Analysis: RIG

  27. Technical Analysis Technical Analysis: PGH

  28. Technical Analysis Technical Analysis: COP

  29. Summary Summary • Buy: • BP- 170 basis points • Transocean- 150 basis points • Pengrowth Energy Trust- 75 basis points • Hold: • ConocoPhillips

  30. Appendix: ConocoPhillips vs. BP

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