1) Natural Gas and Oil derivation2) Aluminum Extraction and Production

Finance & Investment ClubMaterials SectorSummer 2012

Stafani Wan

INDUSTRY DEFINITIONS

 

2

Industry Definition – Natural Gas and Oil Derivation

Firms in this industry engaged in development and harvesting of natural gas and natural gas liquids (NGLs) in fields and basins found mainly in North America

These companies derive revenue through servicing mid stream companies, utility companies and industrial users; and NGLs to natural gas processors both domestically and abroad

Concho Resources, Inc.(NYSE: CXO) Pioneer Natural Resources Corporation

(NYSE: PXD)

Noble Energy, Inc.(NYSE: NBL)

SM Energy Company(NYSE: SM)

Range Resources Corporation(NYSE: RRC)

Continental Resources, Inc.(NYSE: CLR)

 

3

Revenue Generation Flow

Acquire Land

• Geophysical & Geological Evaluation• Exploratory Drilling

Obtain Crude Oil

Harvest Natural Gas

Exploration

Hydraulic Fracturing

End Customers

• Transport Crude Oil

• Gather Natural Gas

Pipelines, Trucks & Rail

Processing Plants

e.g. ConocoPhillips,Suncor Energy, Dow Chemical Co

 

4

2011 Revenue Generation By Operating Segments

76%

17%

51%

32%

18%

63%

31%

6%

83%

11%

6%

16%

81%

4%

45%

39%

17%

Oil

Gas

Other Services

 

5

Industry Summary

14%

22%

29%

13%

10%

13%

CXO PXD NBL CLR RRC SM

Materials$205563.5B

(100%)

Oil & Gas$132450B

(64.43%)

Oil & Gas Exploration and Production

$63.9B(0.0311%)

Sub-Sector Breakdown By 2011 Revenue ($mm)

Industry Breakdown by Market Capital ($B)

CXO 1,739,967,000PXD 2,786,600,000NBL 3,763,000,000

CLR 1,649,789,000RRC 1,218,656,000SM 1,603,318,000

 

6

Trend II: Increasing exploration expense and total proved reserves

2009 2010 2011 2012E 2013E0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Exploration Expense

SMRangeContinentalNoblePioneerConcho

2009 2010 2011 2012E 2013E0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Natural Gas Proved Reserves

ConchoPioneerNobleContinentalRangeSMAverage

Prov

ed R

eser

ves

in M

mcf

• Increasing exploration expense indicate more resource allocated in area

• Exploration expense increasing with average CAGR of 31.81%

• Resulting in proved reserves increasing with average CAGR of 38.85%

• Increased reserves are part of future production volumes, shows positivity

CAGR: 31.81%

CAGR: 38.85%

 

7

Trend II: Decrease in prices leads to increase domestic demand especially in electric power

2006 2007 2008 2009 2010 2011 2012E 2013E0

2

4

6

8

10

Natural Gas Priceswellhead

industrial

Electric power

Dolla

rs p

er M

cf

2006 2007 2008 2009 2010 2011 2012E 2013E0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Consumption of Natural Gas by types of users

Residential

Commercial

Industrial

Electric Power

• According to the Energy Information Administration(EIA), natural gas prices is decreasing with an average CAGR of 6.2%

• Natural gas consumption data published by EIA shows overall increase with CAGR of 2.1%

• Largest increase in consumption came from electric power generation, with CAGR of 4.1%

• Increases reflected in industry revenue growth, shows CAGR of 13.9%

CAGR: 6.18%

 

8

Trend III: Technological advancements with horizontal drilling allows greater productivity by unlocking new areas

• On land, reduces area damaged by drilling operations; On sea, allows multiple wells to be drilled from single platform

• Areas previously inaccessible by vertical drilling e.g. below buildings, under roads, now accessible

• Costs can total to about 2.5 -3 times that of vertical well1

• Under conditions of low matrix permeability in rocks or obstruction by water aquifers, horizontal drilling capable of producing 2.5 – 7 times rate of vertical wells

1 Study results reported by North Dakota Department for mineral resource, under the state government

 

9

Risks

Increased government regulations• Require extensive efforts to ensure compliance and incremental compliance costs• Additional regulatory review results in longer development cycle time

Extreme Weather Conditions• Hurricanes, tropical storms, extreme winters may affect harvesting of gas

Transportation Availability and Infrastructure• marketability gas production depends on the availability, proximity and capacity of pipeline

Price and availability of alternative fuel sources• Natural gas serves as a close substitute for many other energy sources, such as coal• Increase in supply and decrease in price of energy substitutes will erode competitive edge

 

10

Valuations

High 15.63 97.36 5.29 4.15 2.82 24.4 76.09 $38,073.79

Low 3.08 47.23 0.36 -1.53 0.97 2.51 58.44 $10,187.54

Median 11.29 80.98 2.95 2.67 1.23 16.56 63.03 $17,912.10

Mean 10.67 76.91 3.46 2.35 1.48 14.48 66.27 $22,332.25

SymbolMarket Cap (B)

Stock Price (31/8/11) EPS P/E

Net Debt/ EBITDA

Return on Equity

EBITDA Margin

Operating Income /Mboe

SM 3.08 $47.23 3.36% 3.13 1.00x 16.07% 62.50 $12,467.22

CXO 9.36 $89.74 5.29% 2.21 1.60x 20.44% 76.09 $38,073.79

RRC 10.59 $65.19 0.36% -1.53 2.82x 2.51% 58.44 $10,187.54

PXD 11.98 $97.36 6.85% 5.14 1.31x 17.05% 61.93 $19,187.63

CLR 13.4 $74.06 2.37% 1.00 0.97x 24.40% 75.11 $37,440.74

NBL 15.63 $87.90 2.54% 4.15 1.15x 6.42% 63.55 $16,636.56

 

11

Cross-Sectional Analysis

20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Cross-Sectional Analysis

LTM EBITDA Growth

EV/E

BIT

DA

 

12

Conclusion and Recommendation

Within the subsector, trends reflect that:1. Increased reserves indicate positive future production outlook2. Low prices spurs demand and increases popularity of natural gas as an energy substitute

The oil production and exploration industry must however reduce the risk of:3. Depending on third party companies for supporting infrastructure4. Increasing production time to comply with new regulations

Continental Resources is set to outperform its sub-sector because:5. Low Net Debt EBITDA: 0.97x (Median 1.23x , Mean 1.48x)6. High Operating Income/Mboe: 38,073.79 (Median $17,912.10, Mean $22,332.25)7. Development of Eco-Pad Drilling Technology, equipped to increase production in response to

demand

Continental Resources, Inc.(NYSE: CLR)

 

13

2006 2007 2008 2009 2010 20110

500000

1000000

1500000

2000000

2500000

Net Generation of Electricity

Natural GasCoal

Thou

sand

meg

awat

ts/h

our

Back-up slide

• Decrease in amounts of electric power being generated by coal is responded with increasing amounts of that generated by gas

• Gas set to replaced coal not only in generation of electricity but as an energy source because of low prices and abundance