Martina GutikColleen Hurley
Ben JekeliBen Smalley
RecommendationWe recommend:
Selling 368 basis points or 100% of TransoceanBuying 418 basis points of Chevron Corp. (CVX)Holding our position in Noble Corp.Holding our position in National Oilwell
AgendaSector Presentation Recap
Transocean Analysis
Chevron Analysis
Recommendation Summary
% SIM Over/Under S&P 500 As of 4/30/10
Voted to increase weight by 50 bp
Current StocksStock Weight Price Target
PriceUpside
BTU 0% $37.29 $43 15.3%
NOV 3.30% $39.16 $45 10.6%
NE 2.78% $31.04 $37 19%
RIG 3.68% $55.38 $64 15.6%
Transocean (RIG) OverviewSector: EnergyIndustry: Oil and Gas DrillingPrice: $55.38Target: $64.00Upside: 15.6%SELL 368 basis points
RIG – Business OverviewWorld’s largest offshore drilling contractor
Owns and operates 139 rigs (including 45 high-specification floaters)
Industry leader in deepwater and harsh environment drilling
RIG - Rig Locations
NotableFar East : 25 unitsU.K. North Sea : 16 unitsMiddle East : 16 unitsU.S. Gulf of Mexico : 15 units
RIG - Initial UpsideRecovering economies
increase in oil demand, priceObama proposed increased offshore drilling
Low utilizationIndustry leader
Oil PricesCurrent oil price : $70 / barrelEuropean economyContango
Has been narrowingProjection : $78 / barrelFriday, oil dropped as much as 4.75% to $66
Slower demand this yearIEA cut projected demand by 220,000 barrels / day
(5/12/2010)
Oil Prices (2001 – Present)
RIG Stock Price (2001 – Present)
Transocean - Regression
Price of Oil and RIG Stock Line Fit Plot
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RIG
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RIG Stock Price
Predicted RIG Stock Price
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.920519R Square 0.847355Adjusted R Square 0.846083Standard Error 13.39675Observations 122
RIG - Deepwater HorizonOn April 20th, the Deepwater Horizon (owned and
operated by Transocean) exploded.Lapses in safety caused blast
Investigators told hydraulic leak found in BOPDead battery in control podMemo from Transocean, citing 260 failure modes in
blowout preventerSignificantly slower/delayed operations
PoliticsMinerals Management Service
Financial Impact10-Q : “We expect to incur significant legal fees and
costs”.LitigationEnvironmental damage and personal injuriesClass action lawsuit – violation of federal securities laws
Contract backlog : $590 M declineLoss of revenues amount to 3-4% decline in earnings
RIG - Revenues
Operating Revenues (in $ millions) 2009 2008 2007U.S. $2,239 $2,578 $1,259U.K. 1563 2012 848India 1084 890 761Other countries 6670 7194 3509Total $11,556 $12,674 $6,377
Years ended December 31
RIG – Revenue and EPSRevenue
2010 : 10852 M (-6%)2011 : 11705 M (8%)2012 : 11667 M (0%)
EPS 2010 : 8.87 (-22%)2011 : 10.23 (15%)2012 : 10.25 (0%)
RIG - Valuation
Absolute
High Low Median Current Target Multiple Target E, S, B /share Target Price
Forward P/E 88.0 3.1 21.8 6.1 7 8.87 62.09
P/S 14.3 .3 3.3 1.6 2 33.81 67.61
P/B 4.7 0.6 1.6 0.8 1 69.22 69.22
P/CF 49.3 2.8 11.2 3.7 4 14.97 59.88
P/EBITDA 56.3 1.8 10.6 3.0 3.5 18.46 64.61
Average Target 64.68
Current Price 55.38 Upside 16.8%
Transocean - DCFTransocean (RIG)
Current Price (Input below) 55.38$
Analyst: Ben Jekeli Terminal Discount Rate = 17.0% 170 Implied equity value/share 63.04$
4/14/2010 Terminal FCF Growth = 3.0% 30 Upside/(Downside) to DCF 13.8%
(In $ millions)Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 10,763 11,656 11,667 12,017 12,377 12,749 13,131 13,525 13,931 14,349 14,779 % Grow th 8.3% 0.1% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Operating Income 3,875 4,371 4,433 4,446 4,580 4,717 4,858 5,004 5,154 5,309 5,468 Operating Margin 36.0% 37.5% 38.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
Other Inc. (Expense), net (387.47) (419.61) (420.00) (601) (619) (637) (657) (676) (697) (717) (739) Interest % of Sales -3.6% -3.6% -3.6% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0%
Taxes 697 790 803 1,009 1,040 1,071 1,103 1,136 1,170 1,205 1,241 Tax Rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Net Income 2,790 3,161 3,211 4,038 4,159 4,284 4,412 4,544 4,681 4,821 4,966 % Grow th 13.3% 1.6% 25.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Add Depreciation/Amort 1,399 1,399 1,458 1,502 1,547 1,594 1,641 1,691 1,741 1,794 1,847 % of Sales 13.0% 12.0% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
Plus/(minus) Changes WC 206 (116) (1) (36) (37) (38) (39) (41) (42) (43) (44) % of Sales 1.9% -1.0% 0.0% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%
Subtract Cap Ex 2,583 2,797 2,800 2,884 2,971 3,060 3,020 2,705 2,368 2,081 1,847 Capex % of sales 24.0% 24.0% 24.0% 24.0% 24.0% 24.0% 23.0% 20.0% 17.0% 14.5% 12.5%
Free Cash Flow 1,812 1,646 1,868 2,620 2,698 2,779 2,994 3,489 4,012 4,491 4,921 % Grow th -9.1% 13.4% 40.3% 3.0% 3.0% 7.7% 16.6% 15.0% 11.9% 9.6%
Transocean - SummarySell all of Transocean (368 basis points)Loss of upside
Volatility in economic recovery Oil prices
European debt crisis Strong dollar
Aftermath of Deepwater Horizon incident
Chevron Corp. OverviewSector: Energy
Industry: Oil and Gas Integrated
Price: $72.57
Target: $97
Upside: 33%
Dividend Yield: 3.90%
BUY 418 basis points
Chevron Corp.Founded in 1879 based in San Ramon, CAAmong largest U.S. integrated oil companies
Exxon and ConocoPhillips
Owns or has stake in 9,600 gas stations in the U.S. under Chevron and Texaco
Owns or has stakes in 12,400 outside the U.S.
Advantages of CVX11th largest company in S&P 500 by market capitalization
Moves fairly inline with index
3.9% dividend yield
Increased dividend payout 22 consecutive years
Geographically diversified:
Worldwide with key operations in Kazakhstan, Thailand, Indonesia, Saudi Arabia, Brazil, Venezuela, Africa, United Kingdom, and California
Advantages cont.Diversified Business:
Exploration and production of natural gas and crude oil
Seven refineries in Singapore, Thailand, South Korea, and Richmond and El Segundo, CA manufacture products for countries in the Pacific Basin. Pascagoula, MI and Pembroke, Wales, United Kingdom, supply countries primarily in the Atlantic basin.
Transportation and Storage via oil tankers and pipelines
Other areas of business: Trading, mining, and chemicals
Risks to CVXDecrease in Oil Prices
Stock price is highly correlated with oil prices r =.89 Profit margins are already low Crack Spread – Currently $11.39 (1 month) typically ≈$20
Currency Risk The strengthening of U.S. dollar Repatriated profits are going to decrease Oil is more expensive, demand falls
Government regulations Restrictions on offshore drilling
Economic Recovery EU concerns and the possible double dip recession
Stock Performance vs. S&P 5002-year
Stock Performance vs. S&P 5005-year
Revenue
Absolute
High Low Median Current Target Multiple Target E, S, B /share Target Price
Forward P/E 30.5 5.6 14.4 8.3 11 8.72 95.92
P/S 1.3 0.4 0.9 0.8 0.9 106.86 96.17
P/B 4.6 1.4 2.5 1.6 2 48.03 96.06
P/CF 11.6 3.8 7.2 6.1 7.2 12.60 90.71
P/EBITDA 8.42 2.37 5.06 4.44 5.06 17.31 87.58
Average Target 93.29
Current Price 72.57 Upside 28.6%
Relative to Industry
Hgih Low Median Current
Forward P/E 1.6 0.59 0.9 0.82
P/S 1.1 0.8 1 1
P/B 1.3 0.8 0.9 0.9
P/CF 1.3 0.5 1 0.8
P/EBITDA 1.81 0.71 0.87 0.84
Recommendation SummaryNo action on NOV and NE
SELL 368 basis points of Transocean
Expected losses impacting offshore drilling
BUY 418 basis points of Chevron Corp.
Diversified business
Questions?