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Energy Sector Company Presentation

Nick Eyer Julie Heigel

Renae Schlosser May 29, 2012

Agenda

• Overview

• Schlumberger

• Nabors

• Halliburton

• ConocoPhillips

• Chevron

• EOG Resources

• Final Recommendations

11.22

10.85

11.22

14.68 11.39

10.51

20.29

3.45 2.91

3.5

0 0

S&P 500 Weight by Sector Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Cash

Dividend Receivables

10.04

10.95

10.42

13.36

13.61

7.37

21.91

3.93 1.02 3.47 3.83 0.08

SIM Weight by Sector

Overview as of 4/30/2012

Energy will remain approx. 80 bps underweight

Final Recommendations

Company Price Target

(USD) Current Weight Change

Recommended Weight

Potential Upside

Schlumberger 72.21 174 bps Sell 75 bps 99 bps 7.3%

Nabors 26.82 199 bps Buy 75 bps 274 bps 88.1%

Halliburton 38.37 0 bps Hold 0 bps 22.3%

ConocoPhillips 64.71 290 bps Sell 290 bps 0 bps 24.2%

Chevron 125.47 379 bps Buy 80 bps 459bps 26.8%

EOG Resources 133.11 0 bps Buy 210 bps 210 bps 30.8%

Final recommendations based on analysis included and goal to maintain same exposure to specific energy industries

Schlumberger Limited

• One of worlds largest oilfield service companies

• Full range of services: – Seismic surveys – Formation evaluation – Cementing – Well construction and

completion – Project management

• Acquisition of Smith International – 2010 – $11 B deal – Drilling services and equipment

• 113,000 employees in 85 countries

Stock Data Ticker: SLB

Current Weight: 174 bps

52 Week Range: 54.79 – 95.53

Market Capitalization: 88.12 B

Diluted Shares Outstanding: 1.33 B

Dividend Yield: 1.7%

Historic Beta: 1.2

Industry: Oil & Gas Equipment Services

Schlumberger Limited

• Worthy to Note – $4.02 B capex in 2011,

increase of 38% YOY

– Invests more in R&D every year than all other oilfield services companies combined • 25 R&D centers around the

world

• HiWAY Fracturing Technique

– In June 2012, secured first 3 year contract to drill at Badra oil project in Iraq

– Geographical and product diversification

HiWAY fracturing incorporates proprietary fibers that ensure flow-channel stability

Competition Oil Field Service Companies by Market Cap

Company Market

Capitalization ($B) (as May 21)

Number of Employees

2011 Annual Sales ($B)

Schlumberger Ltd. (SLB) 89.03 113,000 39.67

Halliburton Co. (HAL) 28.77 68,000 24.83

National Oilwell Varco Inc. (NOV)

28.63 49,975 14.66

Baker Hughes Inc. (BHI) 18.41 57,700 19.83

Weatherford International Ltd. (WFT)

9.8 61,000 12.99

Competition 2011 Profitability Ratios

0

0.05

0.1

0.15

0.2

0.25

0.3

Gross Profit Margin Net Profit Margin ROE ROA Return on Invested Cap

Schlumberger

Baker Hughes

Halliburton

Weatherford International

Industry Median

Schlumberger Limited Performance Measures

2006 2007 2008 2009 2010 2011 TTM

Profitability

Net Margin (%) 19.3 22.2 19.7 13.5 14.7 12.6 12.9

Operating

ROA (%) 18.1 20.4 18.2 9.6 10.0 9.3 9.8

ROE (%) 41.2 40.9 34.3 17.4 16.9 16.0 16.8

Liquidity

Debt/Equity 0.45 0.26 0.20 0.23 0.18 0.27 0.26

ROE vs. S&P 500 ROE vs. Industry

Schlumberger Limited 12 Month Stock Performance

Schlumberger Limited QTD Stock Performance

Analyst: Nick Eyer Terminal Discount Rate = 11.25%

Date: 5/23/2012 Terminal FCF Growth = 3.0%

Year 2011E* 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenue 39,669 45,619 51,094 56,203 61,823 67,387 72,778 78,601 84,103 89,990 95,389

% Grow th 15.0% 12.0% 10.0% 10.0% 9.0% 8.0% 8.0% 7.0% 7.0% 6.0%

Operating Income 6,636 9,489 10,679 11,746 12,365 12,804 13,828 14,148 14,297 14,398 15,262

Operating Margin 16.7% 20.8% 20.9% 20.9% 20.0% 19.0% 19.0% 18.0% 17.0% 16.0% 16.0%

Interest and Other (298) (342) (383) (422) (464) (505) (546) (590) (631) (675) (715)

Interest % of Sales -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8% -0.8%

Taxes 1,545 1,921 2,162 2,378 2,499 2,583 2,789 2,847 2,870 2,882 3,055

Tax Rate 24.4% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%

Income Attributable to Noncontrolling Interests16 5 5 5 5 5 5 5 5 5 5

% Grow th -68.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Net Income 5,013 7,221 8,128 8,942 9,407 9,721 10,498 10,716 10,802 10,847 11,497

% Grow th 44.0% 12.6% 10.0% 5.2% 3.3% 8.0% 2.1% 0.8% 0.4% 6.0%

Add Depreciation/Amort 3,281 3,878 4,343 4,777 5,255 5,728 6,186 6,681 7,149 7,649 8,108

% of Sales 8.3% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%

Plus/(minus) Changes WC (1,027) 234 (766) (715) (309) (303) (291) (314) (294) (315) (286)

% of Sales -2.6% 0.5% -1.5% -1.3% -0.5% -0.5% -0.4% -0.4% -0.4% -0.4% -0.3%

Subtract Cap Ex 4,016 5,474 6,131 6,744 7,419 7,413 7,278 7,860 7,569 7,649 8,108

Capex % of sales 10.1% 12.0% 12.0% 12.0% 12.0% 11.0% 10.0% 10.0% 9.0% 8.5% 8.5%

Free Cash Flow 3,568 6,104 6,034 6,742 7,379 8,090 9,364 9,492 10,215 10,588 11,262

% Grow th 71.1% -1.2% 11.7% 9.4% 9.6% 15.7% 1.4% 7.6% 3.6% 6.4%

Schlumberger Limited DCF Analysis

Schlumberger Limited Sensitivity Analysis – Implied Equity Value/Share

NPV of Cash Flows 46,551 49%

NPV of terminal value 48,419 51%

Projected Equity Value 94,969 100%

Free Cash Flow Yield 4.32%

Current P/E 16.5 11.4 10.2

Projected P/E 18.9 13.2 11.7

Current EV/EBITDA 9.2 6.8 6.0

Projected EV/EBITDA 10.4 7.7 6.9

Shares Outstanding 1,263

Current Price 65.33$

Implied equity value/share 75.19$

Upside/(Downside) to DCF 15.1%

Terminal Value 140,609

Free Cash Yield 8.01%

Terminal P/E 12.2

Terminal EV/EBITDA 6.4

10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00%

1.50% 75.25 72.99 70.85 68.82 66.90 65.08 63.34

2.00% 77.62 75.19 72.89 70.72 68.66 66.72 64.87

2.50% 80.29 77.65 75.17 72.83 70.62 68.54 66.56

3.00% 83.32 80.43 77.73 75.19 72.81 70.56 68.45

3.50% 86.77 83.60 80.63 77.86 75.27 72.84 70.55

4.00% 90.76 87.23 83.95 80.90 78.06 75.40 72.91

4.50% 95.42 91.45 87.78 84.39 81.25 78.32 75.59

Term

inal

FC

F

Gro

wth

Rate

Terminal Discout Rate

Schlumberger Limited Valuation Analysis

Relative to Industry High Low Median Current

P/Trailing E 1.4 1.0 1.2 1.2

P/Forward E 1.4 .98 1.1 1.2

P/B 1.8 1.0 1.4 1.3

P/S 1.8 1.3 1.6 1.3

P/CF 1.5 .9 1.2 1.1

Relative to S&P500 High Low Median Current

P/Trailing E 2.1 .75 1.4 1.3

P/Forward E 1.8 .82 1.3 1.2

P/B 3.9 1.2 1.8 1.3

P/S 4.2 1.8 2.8 1.8

P/CF 2.2 .8 1.5 1.2

Absolute Valuation High Low Median Current Target Multiple Target E, S, B

/Share Target Price

P/Forward E 24.3 10.2 19.2 14.9 16.95 4.32 73.22

P/S 5.7 1.7 3.3 2.1 2.9 32.29 93.63

P/B 11.9 2.5 3.8 2.7 3.5 24.26 84.30

P/EBITDA 18.47 4.87 11.50 8.45 9.8 6.7 66.10

P/CF 24 5.9 13.2 10.4 11.3 7.85 89.31

Recommendation: SELL 75 bps

Price Target: $72.21

Current Price (May 25): $67.19

Upside Potential: 7.3%

Value Drivers Risks

•Absolute competitive R&D edge

•Geopolitical risk especially in Russia

•Comprehensive offering of products

•Sustained fall in natural gas price

•Strong relationship with the largest integrated oil and gas companies

•Environmental regulation

•Industry leader in Russia

Schlumberger Limited Price Target Calculation

DCF .65(75.19) 48.87

P/Forward E .07(73.22) 5.13

P/S .07(93.63) 6.55

P/B .07(84.30) 5.90

P/EBITDA .07(66.10) 4.63

P/CF .07(89.31) 6.25

Total $72.21

Nabors Industries Ltd.

Stock Data Ticker: NBR


52 Week Range: 11.05 – 28.50


Diluted Shares Outstanding: 290.3 M

Dividend Yield: N/A

Historic Beta: 2.3

Industry: Oil & Gas Drilling

• World’s largest land drilling contractor • 501 land-drilling rigs • 743 land workover and servicing

wells • Offshore operations

• 39 platform rigs • 12 jack ups • 4 barge drilling rigs

• Provides hydraulic fracturing, cementing and pressure pumping services

• Manufactures top drives and drilling instrumentation systems

• Oilfield services • Hauling, engineering, facilities

maintenance

Nabors Industries Ltd.

• Worthy to Note – New CEO Anthony

Petrello’s commitment to streamline operations • Drilling and rig services

• Completion and production services

– Asset disposition from oil & gas operations estimated near $800M

– Actively switching over from gas to oil rigs • Extremely expensive

lowers productivity

October, 2011

Nabors Industries Ltd. Performance Measures

2006 2007 2008 2009 2010 2011 TTM

Profitability

Net Margin (%) 20.7 18.8 10.4 -2.4 2.2 4.0 4.5

Operating

ROA (%) 12.5 9.7 5.4 -0.8 0.8 2.0 2.4

ROE (%) 28 23.1 12 -1.7 1.8 4.5 5.2

Liquidity *as of 3/2012

Debt/Equity 1.13 0.73 0.83 0.76 0.58 0.78 0.77*



-0.1

0

0.1

0.2

0.3

0.4

0.5

Gross Profit Margin

Net Profit Margin ROE ROA Return on Invested Cap

Nabors Industries

Helmerich & Payne

Paterson-UTI Energy

Industry Median

Nabors Industries Ltd. 12 Month Stock Performance

Nabors Industries Ltd. QTD Stock Performance

Analyst: Julie Heigel Terminal Discount Rate = 11.50%


Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenue 6,883,308 7,824,271 8,922,670 9,636,484 10,214,673 10,725,407 11,100,796 11,433,820 11,719,665 12,012,657 12,312,973

% Grow th 13.67% 14.04% 8.00% 6.00% 5.00% 3.50% 3.00% 2.50% 2.50% 2.50%

Operating Income 1,269,354 1,409,156 1,616,879 1,734,567 1,736,494 1,769,692 1,831,631 1,886,580 1,933,745 1,982,088 2,031,641


Interest and Other (292,541) (332,532) (379,213) (409,551) (434,124) (455,830) (471,784) (485,937) (498,086) (510,538) (523,301)

Interest % of Sales -4.3% -4.3% -4.3% -4.3% -4.3% -4.3% -4.3% -4.3% -4.3% -4.3% -4.3%

Taxes 312,580 344,520 396,053 424,005 416,759 420,436 435,151 448,206 459,411 470,896 482,669

Tax Rate 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%

Net Income 664,233 732,105 841,612 901,011 885,612 893,426 924,696 952,437 976,248 1,000,654 1,025,671

% Grow th 10.2% 15.0% 7.1% -1.7% 0.9% 3.5% 3.0% 2.5% 2.5% 2.5%

Add Depreciation/Amort 1,001,521 1,138,431 1,298,249 1,011,831 1,072,541 1,072,541 1,054,576 1,029,044 937,573 900,949 738,778

% of Sales 14.6% 14.6% 14.6% 10.5% 10.5% 10.0% 9.5% 9.0% 8.0% 7.5% 6.0%

Plus/(minus) Changes WC (259) (145,849) (170,252) (182,708) (145,253) (127,096) (92,081) (81,294) (69,439) (71,175) (72,954)

% of Sales 0.0% -1.9% -1.9% -1.9% -1.4% -1.2% -0.8% -0.7% -0.6% -0.6% -0.6%

Subtract Cap Ex 1,514,328 1,721,340 1,962,988 1,782,750 1,634,348 1,555,184 1,443,103 1,029,044 996,172 840,886 738,778

Capex % of sales 22.0% 22.0% 22.0% 18.5% 16.0% 14.5% 13.0% 9.0% 8.5% 7.0% 6.0%

Free Cash Flow 334,896 264,314 305,630 288,877 431,749 502,034 616,193 900,254 894,061 993,522 978,841

% Grow th -21.1% 15.6% -5.5% 49.5% 16.3% 22.7% 46.1% -0.7% 11.1% -1.5%

Nabors Industries Ltd. (NBR)

Nabors Industries Ltd. DCF Analysis

Nabors Industries Ltd. Sensitivity Analysis – Implied Equity Value/Share

NPV of Cash Flows 3,079,632 45%

NPV of terminal value 3,753,573 55%

Projected Equity Value 6,833,205 100%

Free Cash Flow Yield 8.18%

Current P/E 6.2 5.6 4.9

Projected P/E 10.3 9.3 8.1

Current EV/EBITDA 3.6 3.2 2.8






Terminal Value 11,147,913

Free Cash Yield 8.78%

Terminal P/E 10.9

Terminal EV/EBITDA 5.5

10.50% 11.00% 11.50% 12.00% 12.50%

1.25% 24.67 23.12 21.72 20.47 19.33

1.75% 25.52 23.84 22.35 21.01 19.8

2.25% 26.45 24.65 23.05 21.61 20.33

2.75% 27.52 25.55 23.82 22.28 20.91

3.25% 28.73 26.57 24.69 23.03 21.55


Term

inal

FC

F G

row

th

Rate

Nabors Industries Ltd. Valuation Analysis


P/Trailing E 3.1 0.47 0.89 0.61

P/Forward E 2.3 0.58 0.89 0.66

P/B 2.2 0.4 0.8 0.7

P/S 1.2 0.3 0.7 0.4

P/CF 1.6 0.5 0.9 0.5


P/Trailing E 3.7 .28 1.1 0.59

P/Forward E 2.2 0.36 0.99 0.52

P/B 1.3 0.3 0.8 0.4

P/S 3.3 0.5 1.6 0.5

P/CF 2.1 0.2 0.8 0.3

Absolute Valuation High Low Median Current Target Multiple Target E, S, B

/Share Target Price

P/Forward E 37.6 4.8 14.9 6.3 12.4 2.28 28.18

P/S 4.9 0.5 2.1 0.6 1.7 23.6 40.11

P/B 3.7 0.6 2.4 0.8 1.95 17.72 34.55

P/EBITDA 15.98 1.81 7.41 2.11 6.0 4.35 26.15

P/CF 21.6 1.8 8.1 2.8 6.5 5.7 37.15

Nabors Industries Ltd. Value Drivers Risks

•CEO Anthony Petrello refocus

•Geopolitical risk especially in Middle East markets

•Young rig fleet higher daily rates

•North America, Nabors’ largest market, is extremely saturated

•Positioned well for success in Middle East

•Sustained fall in prices of natural gas

•Improving international margins

•High switching costs in North America

Price Target Calculation

DCF .65(23.36) 1.97

P/Forward E .07(28.18) 2.81

P/S .07(40.11) 2.42

P/B .07(34.55) 1.83

P/EBITDA .07(26.15) 2.61

P/CF .07(37.15) 15.18

Total $26.82

Recommendation: BUY 75 bps




Halliburton Company (HAL) Oil & Gas Equipment & Services

• Oil field service company

• Operates in two segments: • Drilling and evaluation

• Completion and production

• Worthy to Note – $2.95B in capex in 2011, a

43% YOY

– Signed strategic agreement early 2012 with Russian gas company Gazprom

– Young workforce relative to industry average

– Innovation initiatives

Stock Data Ticker: HAL


52 Week Range: 27.21 – 57.77


Diluted Shares Outstanding: 922 M


Historic Beta: 1.7

Industry: Oil & Gas Equipment Services

Halliburton Company (HAL) Performance Measures

2006 2007 2008 2009 2010 2011 TTM

Profitability

Net Margin (%) 10.4 22.9 8.4 7.8 10.2 11.4 11.2

Operating

ROA (%) 14.8 23.4 11.2 7.4 10.5 13.5 13.5

ROE (%) 34.2 49.1 21.1 13.9 19.2 24.1 23.9

Liquidity *As of 3/2012

Debt/Equity .38 .38 .33 .44 .37 .37 .35


Halliburton Company (HAL) DCF Analysis

Halliburton Company (HAL) Sensitivity Analysis – Implied Equity Value/Share

Halliburton Company (HAL) Valuation Analysis


P/Trailing E 1.1 .45 .83 .63

P/Forward E 1.2 .49 .82 .72

P/B 1.3 .5 1.0 1.0

P/S .9 .4 .6 .7

P/CF 1.5 0.5 1.0 .7


P/Trailing E 1.8 .46 1.3 .65

P/Forward E 1.6 .56 1.0 .73

P/B 2.8 .4 1.5 1.0

P/S 2.4 .3 1.1 .9

P/CF 2.4 .5 1.3 .7

Absolute

Valuation

High Low Median Current Target

Multiple

Target E, S, B

/Share

Target

Price

P/Forward E 25.3 6.3 16.6 8.8 14 3.64 51

P/S 3 .4 1.4 1.1 1.15 28.56 32.84

P/B 7.7 1.2 4.1 2.1 3.37 11.80 39.83

P/EBITDA 29.97 3.37 9.76 4.29 8.16 5.72 46.62

P/CF 25.9 4.1 12.5 5.9 10.4 2.65 27.56

Halliburton Company (HAL) Value Drivers Risks

•Well diversified – fully integrated product offering

•Geopolitical risk – especially Russia

•Strategic relationships in Russia

•Sustained fall in prices of natural gas

•Lawsuits filed by BP for negligence in Deepwater Horizon incident

Price Target Calculation

DCF .65(37.73) 24.52

P/Forward E .07(52.02) 3.57

P/S .07(32.84) 2.29

P/B .07(39.83) 2.78

P/EBITDA .07(46.62) 3.26

P/CF .07(27.56) 1.92

Total $38.37

Recommendation: HOLD




ConocoPhillips & Phillips 66

Stock Data Ticker: COP


Market Capitalization: $86.7B

Diluted Shares Outstanding: 1.92B


Historic Beta: 1.08

Industry: Oil & Gas Integrated

History: • Conoco founded in 1875 & Phillips

founded in 1905 • Two Companies merged in 2001 to form

3rd largest U.S. integrated oil company 12 Years later: COP split into 2 publicly traded companies (on May 1, 2012)

• ConocoPhillips – Exploration & Production

• Phillips66 – Refining & Marketing, Midstream, Chemicals, & Emerging Businesses

2 for 1 stock split: • Shareholders in COP gained an extra

stock in Phillip66 for every 2 stocks owned

• Now: 5000 shares of COP & 2500 of PSX

Historical Data on Separate Companies NOT fully available (NWC, Debt, CapEx, Taxes)

• DCF not accurate for valuation • Sum of Parts Analysis Instead

ConocoPhillips: Independent E&P

Stock Data Ticker: COP


Adjusted 52 Week Range: 46.49- 59.63

Market Capitalization: $66.7B



Historic Beta: 1.08

Industry: Oil Exploration & Production

Split makes COP one of the largest independent E&P firms in the world • E&P segment has high Operating

Margins • Split enables more Available Cash

to Invest in Exploration • Potential to further grow Proved

Reserves 8.4 billion BOE in Proved Reserves • EV/Proved Reserves = $10.71

Adjusted Stock History (76% of previous stock prices accounting for split)

ConocoPhillips: Independent E&P Valuation Analysis


P/Trailing E 0.59 0.32 0.45 0.46

P/Forward E 0.75 0.30 0.44 0.75

P/B 0.9 0.4 0.5 0.7

P/S 0.2 0.1 0.1 0.1

P/CF 0.7 0.4 0.6 0.6


P/Trailing E 0.67 0.24 0.47 0.45

P/Forward E 0.71 0.28 0.45 0.69

P/B 0.6 0.4 0.5 0.5

P/S 0.5 0.2 0.3 0.2

P/CF 0.5 0.2 0.4 0.4

Absolute Valuation High Low Median Current Target Multiple

P/Trailing E 10.7 2.7 6.9 5.8 6.9

P/Forward E 8.8 4.0 6.6 8.4 6.6

P/S 0.6 0.2 0.4 0.3 0.4

P/B 1.4 .7 1.1 1.0 1.1

P/EBITDA 9.74 2.0 2.91 2.23 2.91

P/CF 5.1 1.7 3.9 3.5 3.9


• Compared to Other E&P firms?

EV Market

Cap Trailing

P/E Ratio Forward P/E

Ratio EPS

Proven Reserves mmBOE EV/ EBITDA

EV/Proven Reserves

EBITDA Margin P/S P/B

Apache 40,500 31,660 6.8 6.6 12.11 2990 3.2 $ 13.55 73.40% 1.8 1.1

Chesapeake 26200 10,474 7.1 19.7 2.24 3300 5.9 $ 7.94 35.60% 0.8 0.6

Devon Energy 28000 24,254 10.3 10.9 5.85 3010 3.8 $ 9.30 62.20% 2.05 1.1

EOG Resources 32,100 27,379 23.9 20.1 4.26 2054 6.8 $ 15.63 42.60% 2.5 2.1

Forest Oil 2,800 992 9.7 14.5 0.87 NA 4.7 NA 79.60% 1.33 0.8

Murphy Oil 8,400 9,242 7.3 8 6.49 NA 2.3 NA 12.40% 0.3 1

Newfield 7,100 4,114 7.9 10.3 3.91 NA 4 NA 66.10% 1.58 1

Pioneer 14,500 12,228 22.1 16.5 4.48 1063 8.9 $ 13.64 57.80% 4.3 2.2

Plains E&P 7,700 4,674 20.0 11.0 1.82 2200 6.1 $ 3.50 60.10% 2.2 1.4

Southwestern 11,500 10,042 16.5 23.7 1.74 NA 6.5 NA 60.30% 3.4 2.4

Talisman 14,900 10,802 18.4 13.7 0.57 1382 13.1 $ 10.78 13.70% 1.3 1.1

Noble Energy 18,300 14,852 15.0 12.3 5.61 1200 7.2 $ 15.25 62.90% 3.7 2.0

ConocoPhillips 90,000 66,684 5.8 8.4 8.97 8400 3.0 $ 10.71 12.00% 0.3 1.0 Peer Group Average 23,230 17,492 13.14 13.52 4.53 2,844 5.81 11.14 49.13% 1.97 1.37

Sum of Parts Analysis

Segment

E/S/B Multiple Target Market

Cap # Diluted

Shares Target Price

Current Stock Price

% return to target

Trailing P/E Ratio 8,242.00 13.14 108,287.20 1,279,693,000 84.62 52.11 62%

Forward P/E Ratio 8,242.00 13.52 111,393.80 1,279,693,000 87.05 52.11 67%

P/S 49,453.00 1.97 97,194.17 1,279,693,000 75.95 52.11 46%

Weighted Average Price

Trailing P/E .2(75.95) 16.92

Forward P/E .2(87.05) 17.41

P/S .6(75.95) 30.38

Total Price Target 64.71

Current Price 52.11

Upside 24.2%


• Price multiples (Forward & Trailing P/E, P/S, P/B, P/CF) are way below comparative firms as well as industry

• Much lower EV/Proved Reserves than competitor average


• Conclusion

– New COP is very large & inefficient compared to other smaller independent firms

– Still suffering from structural inefficiencies (bureaucracy of large firm)

– Examine Other Exploration & Production Firms replace COP in portfolio

Phillips 66: Downstream Firm

• Includes:

– Refining & Marketing

– Chemicals

– Emerging Businesses

– Midstream

• Strategy: Build up Chemicals & Midstream segments to support low performing R&M

Phillips 66 Stock History (since May 1st)

Phillips 66: Downstream Firm Comparable Firms Analysis

EV

Closing Stock Price

Shares Outstanding

Market Cap

Trailing P/E Ratio

Forward P/E Ratio EPS

EV/ EBITDA

EBITDA Margin P/S P/B

Adams Resources & Energy 121 37.18 4218000 156.83 7.5 16.4 4.99 2.5 1.50% 0.04 1.6

CVR Energy 2700 26.65 86808000 2313.43 6.4 5.4 4.15 3.6 12.70% 0.4 1.9

Marathon Petroleum 13700 36.88 347614000 12820.00 5.3 5.7 NA 3 5.80% 0.2 1.4

Sunoco 5600 47.29 106817000 5051.38 89.2 38.4 0.53 8.1 1.40% 0.1 7

Targa Resources 3200 44.13 42442000 1872.97 34.2 36.6 1.29 8.2 5.60% 0.27 12.2

Tesoro 4300 23.76 139014000 3302.97 6.6 5.3 3.58 3.1 4.40% 0.1 0.9

Valero Energy 18400 22.34 555069000 12400.24 6.4 5.4 3.51 3.4 4.10% 0.09 0.8

Western Refining 2300 19.76 90815000 1794.50 5.5 4.8 3.6 3.1 7.90% 0.19 2

Phillips66 25700 31.3 639847000 20027.21 0 0 0 0 0 0 0

Phillips 66: Downstream Firm

• Notable: – R&M firms perform very poorly in general – Poor margins, low growth – Price-takers from the Market & Low Buyer Bargaining Power – Susceptible to Significant fines & taxes for Environmental

Regulations

• Chemical Segment is currently through a 50% joint venture with Chevron – Since we already own chevron and will be exposed to this

segment, do not want to have double “risk” – Most of Phillips66 profits will be dependent on this Chemical

segment going forward

• Conclusion: Sell Phillips66 stocks (2500 shares)

ConocoPhillips & Phillips 66

• COP is relatively unprofitable compared to other E&P’s

• Phillips 66 highest performing segment (Chemicals) is already owned by Chevron

• Decision:

– Sell 290 bp’s & examine other higher performing E&P firm

Stock Data Ticker: CVX


52 Week Range: 86.68 – 112.28

Market Capitalization: 196.4B



Historic Beta: 0.97

Industry: Oil & Gas Integrated

• Second largest integrated energy company in the United States • 61,000+ employees worldwide

• Engages in petroleum, chemicals, mining, power generation and energy operations worldwide

• Upstream activities include: • Exploration • Development • Production • Liquefaction • Regasification

• Downstream activities include: • Refining • Transporting • Manufacturing • Marketing

• Capital and exploratory expenditures • Invested $29.1B in 2011 • Projected $32.7B in 2012

Chevron Corporation

Competition Oil & Gas Integrated Companies by Market Cap

Company Market

Capitalization ($B) (as of May 21)

Number of Employees

2011 Annual Sales ($B)

Exxon Mobil (XOM) 383.6 82,100 496.5

PetroChina Co Ltd (PTR) 238.5 552,810 2083.5

Royal Dutch Shell (RSD.A) 200.9 90,000 493.4

Chevron (CVX) 196.4 61,000 254.1

Petro Brasileiro SA (PBR) 128.3 82,000 150.7

Chevron Performance Measures

2006 2007 2008 2009 2010 2011 TTM

Profitability

Net Margin (%) 8.2 8.5 8.8 6.1 9.3 10.6 10.7

Operating

ROA (%) 13.3 13.3 15.4 6.4 10.9 13.6 13.3

ROE (%) 26.0 25.6 29.2 11.7 19.3 23.8 23.0


Debt/Equity 1.11 1.08 1.07 1.11 1.11 1.08 1.07*



0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Gross Profit Margin

Net Profit Margin

ROE ROA Return on Invested Cap

Chevron

Exxon Mobil

RDS

BP

Total SA

Industry Median

Chevron 12 Month Stock Performance

Chevron YTD Stock Performance

Chevron DCF Analysis



Year 2011E* 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenue 253,706 270,619 277,583 284,872 294,273 303,984 314,015 324,378 334,758 345,470 355,834

% Grow th 6.7% 2.6% 2.6% 3.3% 3.3% 3.3% 3.3% 3.2% 3.2% 3.0%



Interest and Other - (135) (139) (142) (147) (152) (157) (162) (167) (173) (178)

Interest % of Sales 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%

Taxes 20,626 19,606 20,111 20,639 20,949 21,641 22,355 22,411 23,128 23,578 23,837

Tax Rate 43.3% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0%

Income Attributable to Noncontrolling Interests113 124 128 132 136 140 144 148 153 157 162

% Grow th 10.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Net Income 27,008 27,075 27,772 28,501 29,066 30,025 31,015 31,097 32,092 32,718 33,080

% Grow th 0.2% 2.6% 2.6% 2.0% 3.3% 3.3% 0.3% 3.2% 2.0% 1.1%


% of Sales 5.1% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Plus/(minus) Changes WC 1,804 (2,659) (202) (211) (486) (502) (518) (535) (536) (553) (534)

% of Sales 0.7% -1.0% -0.1% -0.1% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2%

Subtract Cap Ex 29,066 27,062 27,758 28,487 27,956 27,359 26,691 25,950 25,107 24,183 21,350

Capex % of sales 11.5% 10.0% 10.0% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.0%

Free Cash Flow 13,356 14,248 17,017 17,460 18,806 20,872 23,054 24,416 26,806 28,906 32,573

% Grow th 6.7% 19.4% 2.6% 7.7% 11.0% 10.5% 5.9% 9.8% 7.8% 12.7%

Chevron Sensitivity Analysis – Implied Equity Value/Share


NPV of terminal value 140,035 54% Terminal Value 406,664


Free Cash Flow Yield 6.72% Free Cash Yield 8.01%

Current P/E 7.4 7.3 7.2 Terminal P/E 12.3

Projected P/E 9.7 9.6 9.4

Current EV/EBITDA 3.2 3.1 3.0 Terminal EV/EBITDA 5.1






Terminal Discount Rate

10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00%

1.50% 130.09 126.05 122.22 118.60 115.17 111.92 108.82

2.00% 134.41 130.05 125.94 122.05 118.38 114.90 111.61

2.50% 139.27 134.54 130.08 125.89 121.94 118.22 114.69

3.00% 144.78 139.60 134.75 130.20 125.93 121.91 118.11

3.50% 151.08 145.36 140.04 135.06 130.41 126.04 121.94

4.00% 158.34 151.98 146.08 140.60 135.49 130.71 126.24

4.50% 166.81 159.65 153.06 146.95 141.29 136.03 131.12

Term

inal

FC

F

Gro

wth

Rate

Chevron Valuation Analysis


P/Trailing E 0.99 0.82 0.89 0.84

P/Forward E 1.2 0.77 0.89 0.85

P/B 0.9 0.7 0.9 0.9

P/S 1.1 0.8 1.0 1.0

P/CF 1.2 0.5 0.9 0.9


P/Trailing E 0.91 0.47 0.66 0.56

P/Forward E 1.1 0.4 0.64 0.61

P/B 1.3 0.7 0.8 0.7

P/S 0.8 0.5 0.7 0.6

P/CF 0.9 0.4 0.6 0.6

Absolute Valuation High Low Median Current Target Multiple Target E, S, B/

Share Target Price

P/Forward E 14.3 5.6 9.1 7.4 9.0 13.50 121.50

P/S 1.1 0.4 0.9 0.8 0.9 135.58 122.02

P/B 2.9 1.4 1.7 1.6 1.7 60.26 102.44

P/EBITDA 5.4 2.4 4.5 3.2 4.0 30.22 120.88

P/CF 8.2 3.8 5.8 4.9 5.8 20.09 116.52





Value Drivers Risks

•Heavy CAPEX investments

•Geopolitical risk, specifically Brazil and Ecuador

•Introducing dual gradient drilling

•Strong position in natural gas

•“New” earnings potential in Europe

•Relatively weak short-term demand for natural gas

•Strong position in natural gas and strong relations with Australia and Japan

Chevron Price Target Calculation

DCF .65(130.20) 84.63

P/Forward E .07(121.50) 8.51

P/S .07(122.02) 8.54

P/B .07(102.44) 7.17

P/EBITDA .07(120.88) 8.46

P/CF .07(116.52) 8.16

Total $125.47

Stock Data Ticker: EOG

Current Weight: n/a

52 Week Range: 66.81 – 119.97

Market Capitalization: 27.43B

Diluted Shares Outstanding: 266M


Historic Beta: 1.18

Industry: Oil & Gas Expl/Prod

EOG Resources

• Explores for, develops, produces and markets natural gas and crude oil

• Operates primarily in the US, Canada, Trinidad, the UK North Sea and China

• After increasing liquids production by 50%, Q12012 profit increased by more than 100% • Liquids production accounts for

85% of production revenue • Capital and exploratory expenditures

have averaged 67% of sales during previous seven year period

• Recent news: • Upgraded to Stable by Moody’s

(April 2012) • Upgraded to Outperform by

Wells Fargo among others (May 2012)

• Currently trading above 200 day SMA, indicating bullish stock

EOG Resources Performance Measures

2006 2007 2008 2009 2010 2011 TTM

Profitability

Net Margin (%) 33.0 26.8 38.2 11.4 2.6 10.8 11.6

Operating

ROA (%) 15.0 10.0 17.4 3.2 0.8 4.7 5.2

ROE (%) 26.4 17.2 30.5 5.8 1.6 9.5 10.34


Debt/Equity 0.13 0.17 0.21 0.28 0.49 0.40 0.39


EOG Resources 12 Month Stock Performance

EOG Resources YTD Stock Performance

EOG Resources DCF Analysis



Year 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenue 10,126 12,658 16,075 20,898 25,077 29,591 33,734 37,444 40,440 42,462 43,736

% Grow th 25.0% 27.0% 30.0% 20.0% 18.0% 14.0% 11.0% 8.0% 5.0% 3.0%



Interest and Other (210) 127 161 209 251 296 337 374 404 425 437

Interest % of Sales -2.1% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Taxes 819 1,481 1,881 2,445 2,508 2,722 2,901 3,040 3,106 3,125 3,149

Tax Rate 42.9% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

Net Income 1,090 2,221 2,821 3,668 3,762 4,084 4,352 4,561 4,659 4,688 4,723

% Grow th 103.8% 27.0% 30.0% 2.6% 8.6% 6.6% 4.8% 2.1% 0.6% 0.8%


% of Sales 24.8% 25.0% 25.0% 25.0% 27.0% 25.0% 23.0% 21.0% 19.0% 18.0% 17.0%

Plus/(minus) Changes WC (144) (359) (99) (140) (251) (266) (236) (206) (162) (106) (66)

% of Sales -1.4% -2.8% -0.6% -0.7% -1.0% -0.9% -0.7% -0.6% -0.4% -0.3% -0.2%

Subtract Cap Ex 5,519 6,329 8,038 10,449 10,783 10,357 9,445 8,987 8,492 8,068 7,435

Capex % of sales 54.5% 50.0% 50.0% 50.0% 43.0% 35.0% 28.0% 24.0% 21.0% 19.0% 17.0%

Free Cash Flow (512) 428 725 937 1,592 2,442 3,373 3,884 4,165 4,418 4,690

% Grow th 69.4% 29.2% 69.8% 53.4% 38.1% 15.2% 7.2% 6.1% 6.2%

EOG Resources (EOG)

EOG Resources Sensitivity Analysis – Implied Equity Value/Share


NPV of terminal value 20,163 61% Terminal Value 58,555


Free Cash Flow Yield -1.98% Free Cash Yield 8.01%

Current P/E 23.8 11.7 9.2 Terminal P/E 12.4

Projected P/E 30.3 14.9 11.7

Current EV/EBITDA 8.1 5.6 4.4 Terminal EV/EBITDA 4.7


Shares Outstanding 255




10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00%

1.50% 129.27 124.76 120.49 116.46 112.65 109.03 105.59

2.00% 134.17 129.30 124.71 120.38 116.29 112.42 108.76

2.50% 139.69 134.39 129.42 124.74 120.33 116.18 112.26

3.00% 145.94 140.14 134.71 129.63 124.86 120.37 116.14

3.50% 153.09 146.68 140.72 135.15 129.94 125.07 120.49

4.00% 161.33 154.19 147.58 141.43 135.71 130.37 125.37

4.50% 170.95 162.91 155.49 148.65 142.30 136.40 130.91


Term

inal

FC

F

Gro

wth

Rate

EOG Resources Valuation Analysis


P/Trailing E 4.4 1.1 1.5 1.9

P/Forward E 2.4 0.9 1.4 1.8

P/B 1.9 0.9 1.5 1.4

P/S 2.3 0.9 1.5 1.2

P/CF 2.4 1.0 1.5 1.3


P/Trailing E 6.6 0.6 1.1 1.8

P/Forward E 3.0 0.6 1.0 1.7

P/B 2.1 0.8 1.1 1.0

P/S 5.9 1.9 3.0 2.1

P/CF 1.5 0.5 0.9 0.8

Absolute Valuation High Low Median Current Target Multiple Target E, S, B/

Share Target Price

P/Forward E 42.3 9.3 16.4 20.1 16.4 8.2 134.48

P/S 8.7 1.9 4.4 2.5 4.0 40.7 162.80

P/B 6.3 1.4 3.0 2.1 3.0 49.6 148.80

P/EBITDA 12.1 2.4 7.2 5.8 7.0 17.54 122.78

P/CF 16.4 3.9 9.0 7.1 9.0 14.33 128.97





Value Drivers Risks

•CEO Mark Papa •High debt levels and negative cash flows

•Heavy CAPEX investments => future growth


•2012 production expected to increase from 140K/barrels/day to 200K/barrels/day

•Geopolitical risk


EOG Resources Price Target Calculation

DCF .65(129.63) 84.26

P/Forward E .07(134.48) 9.41

P/S .07(162.80) 11.40

P/B .07(148.80) 10.42

P/EBITDA .07(122.78) 8.59

P/CF .07(128.97) 9.03

Total $133.11

Final Recommendations

Company Price Target

(USD) Current Weight Change

Recommended Weight

Potential Upside

Schlumberger 72.21 174 bps Sell 75 bps 99 bps 7.3%

Nabors 26.82 199 bps Buy 75 bps 274 bps 88.1%

Halliburton 38.37 0 bps Hold 0 bps 22.3%

ConocoPhillips 64.71 290 bps Sell 290 bps 0 bps 24.2%

Chevron 125.47 379 bps Buy 80 bps 459bps 26.8%

EOG Resources 133.11 0 bps Buy 210 bps 210 bps 30.8%

Final recommendations based on analysis included and goal to maintain same exposure to specific energy industries

energy sector company presentation sp12.pdf · energy sector company presentation nick eyer julie...

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