1 / 29

S&P 500 Energy Sector

S&P 500 Energy Sector. Luke DiTomas Alex Foisel Ian McLeod. February 10, 2009. Agenda. Size and Composition Industry Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation. Size and Composition. Portfolio Weights.

tea
Télécharger la présentation

S&P 500 Energy Sector

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. S&P 500 Energy Sector Luke DiTomas Alex Foisel Ian McLeod February 10, 2009

  2. Agenda • Size and Composition • Industry Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation

  3. Size and Composition Portfolio Weights • The energy sector in the SIM portfolio is currently underweight when compared to the S&P 500 by 6.04% S&P 500 Weight SIM Weight

  4. S&P 500 and Sector Performance The energy sector: Contains 39 stocks 3rd largest market cap* 4th best YTD return: (3.16%)* 6th best YTD return in 2008: (36.74%) Size and Composition *As of January 30, 2009

  5. Top Stocks Top 10 energy stocks based on S&P 500 Index Weight† ConocoPhillips is currently held in the SIM portfolio* BP is currently the only other energy stock in the SIM portfolio Size and Composition † As of February 6, 2009

  6. Size and Composition Sector Composition • Natural gas transmission & distribution • This industry classification includes establishments engaged in both the transmission and distribution of natural gas, but not in distribution to end users • Pipe lines, except natural gas • This industry classification includes establishments engaged in the gathering system and transportation via pipeline of refined and semi-refined products • Oil & gas field machinery & equipment • This category covers establishments primarily engaged in the manufacturing of machinery and equipment for use in oil and gas fields • Petroleum (Integrated) • This category covers establishments primarily engaged in the exploration, production, refinement, transportation and sale of crude oil and natural gas • Petroleum (Producing) • This industry classification includes establishments engaged in the exploration, developing and producing natural gas, crude oil and natural gas liquids • Coal • This industry includes establishments primarily engaged in mining operations producing bituminous coal, anthracite, and lignites

  7. Size and Composition Energy Stocks • BP- Petroleum (Integrated) • Engages in the exploration, production, transportation, and sale of crude oil and natural gas • ConocoPhillips- Petroleum (Integrated) • Operates as an integrated energy company which explores, produces and markets crude oil, natural gas and natural gas liquids • Pengrowth Energy Trust- Petroleum (Producing) • Engages in the acquisition, ownership and management of working interests and royalty interests in oil and natural gas properties • Stock price quotes and market caps as of February 9, 2009

  8. Industry Industry Analysis • Mature phase of life cycle • Global economy influence • Foreign & domestic economies • Global recession • Credit crisis • OPEC • Controls 40% of world’s crude oil • Government factors • Volume controls • Price regulation • Imposition of taxes and subsidies • External factors • Threat to entry • Intensity of rivalry • Supplier bargaining power • Buyer bargaining power • Substitutes • Inputs: crude oil, labor, equipment / outputs: fuels, plastics Source: EIA

  9. Industry Industry Analysis Cont. • Threat to entry (Low) • High start-up costs • Economies of scale • Multiple permits and licenses needed for exploration of oil • Oil exploration requires large amounts of cash reinvested in the business each year • Intensity of rivalry (High) • Heightened government control has restricted access to new upstream resources • Oil and gas are facing growing competition from other fuel sources • Increasing difficulties in extracting the remainder of the world’s oil will lead companies to strive for greater efficiencies - hence increasing rivalry • Increasing security of supply and transport costs has pushed companies to build plants closer to major demand centers

  10. Industry Industry Analysis Cont. • Supplier bargaining power (Moderate) • Foreign governments require permits and licenses in order to conduct drilling/extraction • Facilities need specialized parts and equipment to ensure proper functioning • Vertical integration has reduced the reliance of input suppliers • Buyer bargaining power (Low) • Commodity traders effect oil prices, shifting price power away from buyers • Demand by foreign countries is expected to increase • Substitutes (Moderate) • Although there is movement towards alternative energies, there hasn’t been a sustainable energy source which could be a true substitute for oil • Oil is one of the main commodities that drives the US/global economy

  11. Industry Business Segmentation • Exploration & Development • Hydrocarbon Production • Shipping • Refining & Blending • Storage • Distribution • Market Value Chain Exploration & Development Hydrocarbon Production Shipping Refining & Blending Storage Exploration & Development Distribution Hydrocarbon Production Market Shipping Source: UTC Energy Investment Refining & Blending Storage Distribution Market

  12. Industry Rise in Future Crude Oil Prices • Subsiding global recession • Rise in crude oil prices and demand • Turnaround in company earnings and job numbers • The dollar’s rally ends • Demand in China and India • Growing rapidly from continued industrialization • Factories expected to pump up crude oil demand • OPEC crude oil pricing goals • OPEC countries need $60 to $80 per barrel • To balance budgets and invest in social programs • Further supply cuts

  13. Industry Rise in Crude Oil Prices Cont. • Crude oil producers • Crude oil is becoming scarcer • Price of crude oil too low to support the income needs of producing countries • Alternative energy • Start-up phase • High costs • Hard to access more capital • Expensive to implement • Lack of demand given lower crude oil prices • Traditional energy has more benefits • Cheaper source • Fossil fuels readily available • Easy to use • Easily transportable

  14. Industry Alternative Energy • Solar • Advantages: • Always there with no pollution being created • Disadvantages: • Low efficiency (15%) which can only be compensated for by large collecting areas • Very high initial costs • Lack of adequate storage materials (batteries) • High cost to the consumer • Wind • Advantages: • None on large scale; supplemental power in windy areas • Disadvantages: • Relatively low efficiency (30%) • Disruption of migratory birds (note this is what killed the recently proposed Columbia River Gorge wind turbine project) • Unreliable and its strength depends on local weather patterns, temperature, time of year and location • Equipment is very expensive compared to other energy sources and initial expense is high

  15. Industry Alternative Energy Cont. • Biomass • Advantages: • Theoretically inexhaustible fuel source • Alcohols and other fuels produced by biomass are efficient, viable, and relatively clean-burning • Disadvantages: • Could contribute a great deal to global warming and create pollution if directly burned • Still an expensive source, both in terms of producing the biomass and converting it to alcohols • On a small scale there is most likely a net loss of energy

  16. Economic Crude Oil Prices vs. Energy Sector Crude Oil Prices

  17. Economic Regression: Crude Oil Prices and Energy Sector

  18. Economic Yen/Euro Cross vs. Crude Oil Prices Yen/Euro Cross Crude Oil Prices

  19. Economic Regression: Yen/Euro Cross and Crude Oil Prices • Correlation: 0.7919 • R-square: 0.6272

  20. Financial EPS Growth Rates • All growth rates represent a 3, 5, or 10-year trailing average

  21. Financial 10-Year EPS Growth Rate

  22. Financial Revenue Growth Rates • All growth rates represent a 3, 5, or 10-year trailing average

  23. Financial Pre-Tax Margins • All margins represent a 5-year trailing average

  24. Financial Energy Sector Free Cash Flow • All cash flows represent 12-month calendar years

  25. Valuation Sector Segmentation • Segmented the sector based on SIC code • Established in 1937 , The Standard Industrial Classification (abbreviated SIC) is a United States Government system for classifying industries by a four-digit code • Segmented sector by SIC code: • Natural gas Transmission &Distribution- 7 stocks • Pipe Lines, Except Natural Gas- 2 stocks • Oil & Gas Field Machinery & Equipment- 12 stocks • Petroleum (Integrated)- 12 stocks • Petroleum (Producing)- 10 stocks • *Petroleum stocks make up over 56% of sector • Coal- 3 stocks Sector Weight by SIC Code

  26. Valuation Valuation Analysis • Price/Earnings Ratio • Energy sector mean: 12.3 • S&P 500 mean: 18.2 • Earnings are very correlated to oil prices • Gasoline sold for 37% less in Q408 than Q407 • OPEC production cuts • Met apx. 67% of the total 4.2 million barrel-per-day-cut • Additional exploration costs • Real GDP explains about 93% of the demand for petroleum products • Price/Earnings/Growth Ratio • Energy sector mean: 1.4 • S&P 500 mean: 1.3 • Additional OPEC production cuts • Analyst/U.S. Government oil price predictions • Consensus 2009 price per barrel- apx. $60 • Optimistic analysts- $100 per barrel Price/Earnings Ratio Price/Earnings/Growth Ratio

  27. Valuation Valuation Analysis Cont. • Price/EBITDA • Energy sector mean: 5.8x • S&P 500 mean: 8.5x • Decrease in EBITDA margins • Return on Equity • Energy sector mean: 22.1% • S&P 500 mean: 17.0% • Increased revenue arising from higher petroleum product prices flowed through to profit • 10-year revenue growth rate for 6 largest oil refiners- 17.99% Price/EBITDA Return on Equity

  28. Valuation Technical Analysis • Period of consolidation • Lower volumes • Wedge formation • Upside breakout imminent • Constant highs, higher lows • 20 & 50-day moving averages • Broken to the upside • Creation of new support levels • Relative strength index (RSI) • Upward trend developing • Moving average convergence divergence (MACD) • Narrow gap • ADX directional movement index • Crossover signals a buy Source: Stockcharts.com

  29. Recommendation Recommendation • 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

More Related