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Energy SectorEnergy SectorWinter 2010Winter 2010
Eric DeweesEric DeweesHonglei GongHonglei Gong
Charles HathawayCharles HathawayDanqing ZhouDanqing Zhou
AgendaAgenda
Sector AnalysisSector Analysis
Business & Economic AnalysisBusiness & Economic Analysis
Financial AnalysisFinancial Analysis
Valuation AnalysisValuation Analysis
RecommendationsRecommendations
S&P 500 ComponentsS&P 500 Components
Largest S&P MembersLargest S&P Members S&P WeightS&P Weight Market Cap (Billions)Market Cap (Billions)
Exxon MobilExxon Mobil 3.24%3.24% 307307
MicrosoftMicrosoft 2.28%2.28% 246246
Procter & GambleProcter & Gamble 1.89%1.89% 179179
Apple Inc.Apple Inc. 1.85%1.85% 177177
Johnson & JohnsonJohnson & Johnson 1.82%1.82% 173173
General ElectricGeneral Electric 1.77%1.77% 168168
International Business MachinesInternational Business Machines 1.71%1.71% 162162
JP Morgan ChaseJP Morgan Chase 1.59%1.59% 151151
AT&TAT&T 1.57%1.57% 149149
Bank of AmericaBank of America 1.57%1.57% 130130
Total S&P Weight in Top 10 HoldingsTotal S&P Weight in Top 10 Holdings 19.29%19.29% 1,841 1,841
S&P 500 vs. SIM S&P 500 vs. SIM Sector WeightsSector Weights
Sector Weights
0.00%2.00%4.00%6.00%8.00%
10.00%12.00%14.00%16.00%18.00%20.00%
S&P 500 Weight
SIM Weight
Energy is overweight the S&P by 51 Basis points
S&P 500 Performance S&P 500 Performance by Sectorby Sector
Sector Quarter ReturnsEnergy -6%Materials -9%Industrials -3%Consumer Discretionary -4%Consumer Staples -2%Healthcare -2%Financials -5%Information Technology -8%Telecom Services -11%Utilities -8%
Energy SectorEnergy Sector
1.08 Trillion in Market Capitalization1.08 Trillion in Market Capitalization 55thth Largest Sector in S&P Largest Sector in S&P 39 Companies39 Companies SIM holds 2 S&P CompaniesSIM holds 2 S&P Companies
• ConocoPhillipsConocoPhillips• National Oilwell VarcoNational Oilwell Varco
Non-S&P HoldingsNon-S&P Holdings• BP Plc.BP Plc.• TransoceanTransocean
Largest Companies in Largest Companies in Energy SectorEnergy Sector
Top 10 S&P Energy Top 10 S&P Energy ComponentsComponents SymbolSymbol
Market Cap Market Cap (Billions)(Billions) IndustryIndustry
Exxon MobilExxon Mobil XOMXOM 307307 Oil & Gas IntegratedOil & Gas Integrated
ChevronChevron CVXCVX 142142 Oil & Gas IntegratedOil & Gas Integrated
SchlumbergerSchlumbergerSLBSLB 7575
Oil & Gas Oil & Gas Equipment/ServicesEquipment/Services
ConocoPhillipsConocoPhillips COPCOP 7272 Oil & Gas IntegratedOil & Gas Integrated
Occidental PetroleumOccidental Petroleum OXYOXY 6363 Oil & Gas IntegratedOil & Gas Integrated
ApacheApacheAPAAPA 3333
Oil & Gas Oil & Gas Exploration/ProductionExploration/Production
Anadarko PetroleumAnadarko PetroleumAPCAPC 3131
Oil & Gas Oil & Gas Exploration/ProductionExploration/Production
Devon EnergyDevon EnergyDVNDVN 3030
Oil & Gas Oil & Gas Exploration/ProductionExploration/Production
XTO EnergyXTO EnergyXTOXTO 2626
Oil & Gas Oil & Gas Exploration/ProductionExploration/Production
EOG ResourcesEOG ResourcesEOGEOG 2424
Oil & Gas Oil & Gas Exploration/ProductionExploration/Production
S&P Energy SectorS&P Energy SectorSectorSector Industry Industry
GroupGroupIndustryIndustry Sub-IndustrySub-Industry
Energy Energy (39)(39) Energy (39)Energy (39)
Energy Equipment Energy Equipment & Services (11)& Services (11)
Oil & Gas Drilling (3)Oil & Gas Drilling (3)
Oil & Gas Equipment & Oil & Gas Equipment & Services (8)Services (8)
National Oilwell VarcoNational Oilwell Varco
Oil, Gas & Oil, Gas & Consumable Fuels Consumable Fuels
(28)(28)
Integrated Oil & Gas (7)Integrated Oil & Gas (7)
ConocoPhillipsConocoPhillips
Oil & Gas Exploration & Oil & Gas Exploration & Production (12)Production (12)
Oil & Gas Refining & Oil & Gas Refining & Marketing (3)Marketing (3)
Oil & Gas Storage & Oil & Gas Storage & Transportation (3)Transportation (3)
Coal & Consumable Fuels Coal & Consumable Fuels (3)(3)
Energy Sector: Energy Sector: Industry ReturnsIndustry Returns
Relative Strength to S&PRelative Strength to S&P
IndustryIndustry Baseline Baseline SymbolSymbol Since Jan 1Since Jan 1 1 Year1 Year 10 Year10 Year
Oil & Gas Oil & Gas Refining/MarketingRefining/Marketing OGREFOGREF 8%8% -58%-58% 120%120%
Oil & Gas StorageOil & Gas Storage OGSTOOGSTO 7%7% 7%7% -17%-17%Oil & Gas Oil & Gas
Equipment/ServicesEquipment/Services OGEQPOGEQP 1%1% 22%22% 104%104%
Oil & Gas DrillingOil & Gas Drilling OGDRLOGDRL 0%0% 20%20% 118%118%Oil & Gas Oil & Gas
Exploration/ProductionExploration/Production OGEXPOGEXP -1%-1% 4%4% 377%377%
Oil & Gas IntegratedOil & Gas Integrated OGINTOGINT -2%-2% -34%-34% 101%101%Coal & Consumable Coal & Consumable
FuelsFuels COCOFCOCOF -3%-3% 42%42% 578%578%
SIM Energy HoldingsSIM Energy Holdings
Energy Energy HoldingsHoldings SymbolSymbol
MarketMarket ValueValue
% % of Fundof Fund
S&P S&P WeightWeight
AnnualAnnual ReturnReturn
(Ex. Dividends)(Ex. Dividends)
ConocoPhillipsConocoPhillips COPCOP $ 590,400 $ 590,400 3.11%3.11% 0.75%0.75% 0.95%0.95%
TransoceanTransocean RIGRIG $ 864,348 $ 864,348 4.55%4.55% Not in S&PNot in S&P 53.77%53.77%
National Oilwell National Oilwell VarcoVarco NOVNOV $ 613,500 $ 613,500 3.23%3.23% 0.19%0.19% 59.98%59.98%
BP Plc. - ADRBP Plc. - ADR BPBP $ 190,808 $ 190,808 1.00%1.00% Not in S&PNot in S&P 25.22%25.22%
SIM Energy PortfolioSIM Energy Portfolio $ 2,259,056 $ 2,259,056 11.89%11.89%
Energy Vs. S&PEnergy Vs. S&P
Energy has been lagging the S&P over the past year.
What’s to blame? Oil prices and oil demand
Business & Economic Business & Economic AnalysisAnalysis
Porter’s 5 ForcesPorter’s 5 ForcesThreat of New EntrantsThreat of New Entrants CostlyCostly Require highly specialized professionalsRequire highly specialized professionals
Power of SuppliersPower of Suppliers Small handful of powerful companies Small handful of powerful companies Power of buyersPower of buyers Lack of product differentiationLack of product differentiation
Substitutes. Substitutes. Coal, gas, solar power, wind power, hydroelectricity and nuclear Coal, gas, solar power, wind power, hydroelectricity and nuclear
energy. energy.
Competitive Rivalry. Competitive Rivalry. Slow industry growth rates Slow industry growth rates High exit barriersHigh exit barriers
Life CycleLife Cycle
Low Margins Low Margins Industry MaturationIndustry Maturation
• Growth Rates LowGrowth Rates Low• ConsolidationConsolidation
Key Drivers to Energy PricesKey Drivers to Energy Prices
Consumption / DemandConsumption / Demand Production CapacityProduction Capacity Distributional BottlenecksDistributional Bottlenecks OPEC Supply ResponseOPEC Supply Response GeopoliticsGeopolitics WeatherWeather ReservesReserves
Who’s Consuming?Who’s Consuming?
Oil FuturesOil Futures
Oil is currently in Contango, the future price is Spot Price + Carry Cost
Contango has been narrowing, indicating lower prices in future
Geometric Mean is 3.29% annual increase
Oil Price ProjectionsOil Price Projections
We expect prices to trend along the reference line
Price Scenarios
0.0
50.0
100.0
150.0
200.0
250.0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
Reference
Low Price
High Price
EIA Report
InventoriesInventories
Oil Demand Forecast Oil Demand Forecast 1Q 20101Q 2010
In 2010, oil demand is expected to In 2010, oil demand is expected to average 86.3 million barrels a day.average 86.3 million barrels a day.
EIA Report
Oil Supply Forecast Oil Supply Forecast 1Q 20101Q 2010
In 2010, oil supply is expected to In 2010, oil supply is expected to average 85.62 million barrels a day.average 85.62 million barrels a day.
EIA Report
Long Term Oil DemandLong Term Oil Demand
Demand over the next 2 years is expected to rise marginally.
Long Term Oil SupplyLong Term Oil Supply
No dramatic growth in production between now and 2011
Dollar vs. OilDollar vs. Oil
• As the dollar strengthensOil prices go down
• USD has been gaining on the Euroduring the past 3 months
Dollar vs. EnergyDollar vs. Energy
Oil vs. Energy SectorOil vs. Energy Sector
Oil prices are highly correlated with theEnergy sector performance
Financial / Valuation Financial / Valuation AnalysisAnalysis
Revenue GrowthRevenue Growth
EPS Growth
Sector Margins Sector Margins
Refining Industry Refining Industry Net MarginsNet Margins
• Sector margins have fallen below the mean- Excess Capacity in Refining- Less Production
Sector ValuationSector Valuation
Industry ValuationIndustry Valuation
Industry ValuationIndustry Valuation
Industry ValuationIndustry Valuation
Industry ValuationIndustry Valuation
RecommendationsRecommendations
RecommendationsRecommendations Drop 101 Basis Points to bring us to 50 Drop 101 Basis Points to bring us to 50
basis points under weight from 51 basis basis points under weight from 51 basis points overweight.points overweight.
Based on Based on • Oil prices aren’t going anywhereOil prices aren’t going anywhere• Dollar strengtheningDollar strengthening• Demand not picking up in next 3 MonthsDemand not picking up in next 3 Months• Refining Margins down from excess capacityRefining Margins down from excess capacity• Oil inventories have been increasing in the Oil inventories have been increasing in the
past couple monthspast couple months• Industry Ratios show we are overvalued Industry Ratios show we are overvalued
relative to S&Prelative to S&P
RecommendationsRecommendations
We would like to underweight We would like to underweight • Oil & Gas Refining Oil & Gas Refining • Oil and Gas IntegratedOil and Gas Integrated
Because of the excess capacity in refining.Because of the excess capacity in refining.
We would hold onto Exploration and Production We would hold onto Exploration and Production as that’s our hedge to higher oil prices.as that’s our hedge to higher oil prices.
Questions?Questions?