Energy SectorMartina Gutik

Colleen HurleyBen Jekeli

Ben Smalley

Agenda

• Size and Composition• Business and Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation

SIZE AND COMPOSITION

Energy Sector Summary

• Composed of companies involved in the production and sale of energy – Fuel Extraction– Refining– Distribution

• 41 Companies • 1.21 Trillion Market Capitalization

S&P 500 BreakdownAs of 3/31/10

Compared to 9.76% SIM Weight

% SIM Over/Under S&P 500 As of 4/30/10

Recommend increasing sector weight to market level

Industries

• Oil & Gas Drilling

• Oil & Gas Equipment & Services

• Integrated Oil & Gas

• Oil & Gas Exploration & Production

• Oil & Gas Refining & Marketing

• Oil & Gas Storage & Transportation

• Coal & Consumable Fuels

Transocean Ltd.

Noble Corp.

National Oilwell Varco Inc.

Peabody Energy *Not currently owned

SIM Stocks

Top 5 CompaniesAs of 4/29/10

Company YTD Change

Smith International Inc. 75.78%

Pioneer Natural Resources 33.13%

Rowan Companies, Inc. 31.63%

Denbury Resources Inc. 29.39%

Sunoco Inc. 25.59%

CompanyIndex

Weight RankMarket Cap

(billions)

Exxon Mobil 2.97% 1 319.96

Chevron 1.52% 11 163.56

ConocoPhillips 0.81% 26 88.01

Schlumberger 0.80% 27 85.35

Anadarko Petroleum 0.30% 66 30.62

Largest Companies Top Performers

Sector PerformanceAs of 4/30/10

Relative Strength

BUSINESS & ECONOMICANALYSIS

Five Forces Analysis• Threat of Entry

– High costs to enter all industries

• Threat of Rivalry– Slow industry growth rate, pretty much all mature companies– Relatively low industry-to-industry

• Threat of Substitutes– Coal, natural gas, oil, solar, nuclear etc– End consumer has few options

• Threat of Suppliers– OPEC and other strong suppliers

• Threat of Buyers– Currently buyers have very little power

Key Drivers of Energy

• Demand• Oil Prices• Production Capacity• OPEC supply• Inventories• Political Influence

2008 Oil Consumption by Nation(thousand barrels per day)

Total U.S. Energy Consumption

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Liquid fuels

Coal

Natural gas

Nuclear

Renewables

History Projectionsquadrillion Btu

2008 Oil Production by Nation(thousand barrels per day)

Annual Energy Outlook for 2010

0

25

50

75

100

125

150

175

200

225

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Low oil price

High oil price

ProjectionsHistory2008 $/barrel

MonthPrior

Open High Low VolumeSettle

Jun-10 86.19 86.09 86.24 82.86 310,546

Jul-10 89.15 89.02 89.33 86.19 115,454

Aug-10 90.77 90.54 90.9 87.8 43,821

Sep-10 91.67 91.51 91.73 88.75 24,864

Oct-10 92.25 92.12 92.33 89.42 11,178

Nov-10 92.7 92.11 92.17 89.85 7,732

Dec-10 93.06 92.81 93.08 90.2 28,461

Jan-10 93.31 92.3 92.3 90.67 3,366

Feb-11 93.55 91.81 91.82 90.77 1,216

$/Euro versus Crude Oil Price

FINANCIALANALYSIS

Average Annual Revenue Growth

Average Annual EPS Growth

S&P 500 Energy SectorGrowth Q4 2009 – Q1 2010

EPS Revenue

Mean 8.9%Median 11.5%

Mean 3.2%Median 2.6%

Note : Above mean calculated without outlier (950% on far left)

S&P 500 Energy SectorExpected Growth - 2010

EPS Revenue

Mean 48.4%Median 12.2%

Mean 15.9%Median 12.7%

Sector ComparisonProjected EPS Growth - 2010

Net Profit Margin

Relative to S&P 500

VALUATIONANALYSIS

Industry Valuation

Oil Drilling Relative to S&P 500Ratio High Low Median Current

Trailing P/E 5 0.27 1.6 0.54Forward P/E 2.1 0.28 0.92 0.91

P/S 10.5 1.4 3 1.5P/B 1.7 0.2 0.6 0.7P/CF 1.9 0.4 1.1 0.7

Energy Sector Relative to S&P 500Ratio High Low Median Current

Trailing P/E 1.6 0.5 0.8 1.1Forward P/E 1.3 0.57 0.8 0.89

P/S 1 0.6 0.8 0.9P/B 1.4 0.6 0.9 0.9P/CF 0.9 0.5 0.7 0.8

Oil Exploration Relative to S&P 500Ratio High Low Median Current

Trailing P/E 31.5 0.31 0.95 1.3Forward P/E 8.1 0.5 0.8 1.2

P/S 4.2 0.9 1.9 3.1P/B 2.3 0.4 0.8 0.9P/CF 0.8 0.2 0.5 0.7

Oil Integration Relative to S&P 500Ratio High Low Median Current

Trailing P/E 1.4 0.5 0.83 0.96Forward P/E 1.2 0.46 0.74 0.74

P/S 1 0.5 0.7 0.7P/B 1.4 0.6 0.8 0.9P/CF 1 0.5 0.7 0.8

Overvalued by >10%Inline with S&P

Undervalued by >10%

Industry Valuation

Oil Storage Relative to S&P 500Ratio High Low Median Current

Trailing P/E 22 0.21 1 0.95Forward P/E 1.3 0.69 1.1 1

P/S 4.5 0.4 1.2 1.7P/B 1.1 0.6 0.9 0.9P/CF 1.3 0.5 0.7 0.7

Oil Equipment Relative to S&P 500Ratio High Low Median Current

Trailing P/E 4.1 0.58 1.5 1.3Forward P/E 1.7 0.61 1.3 1.5

P/S 2.8 0.6 1.5 1.8P/B 2.8 0.5 1.2 1.3P/CF 1.6 0.5 1.2 1.4

Oil Refining Relative to S&P 500Ratio High Low Median Current

Trailing P/E 7.6 0.23 0.59 nmForward P/E 4.8 0.3 0.55 2.2

P/S 0.5 0.1 0.2 0.1P/B 1.3 0.2 0.5 0.4P/CF 1.3 0.2 0.5 1.3

Overvalued by >10%Inline with S&P

Undervalued by >10%

Coal Relative to S&P 500Ratio High Low Median Current

Trailing P/E 23.3 .32 1.3 1.1Forward P/E 2.1 .39 1 .98

P/S 4.0 .2 1 1.4P/B 2.1 .7 1.5 1.5P/CF 2.1 .5 .8 1.1

Recommendation

• Currently underweight by 143 basis points

• Recommend increasing weight by ≈143 basis points to bring to market weight– Demand for energy will increase with economic

recovery, still relatively cheap

• Possibly look to oil refining industry or coal industry

Questions