Energy Sector Stock Recommendation
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Transcript of Energy Sector Stock Recommendation
Energy Sector Stock Recommendation
March 2, 2010
Eric DeWeesHonglei Gong
Charles HathawayDanqing Zhou
S & P 500 Sector Weights (as of 2/28/2010)
0. 00%
2. 00%
4. 00%
6. 00%
8. 00%
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12. 00%
14. 00%
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18. 00%
20. 00%
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Sector Performance YTD (2/28/2010)
-12.00%
-10.00%
-8.00%
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-2.00%
0.00%
2.00%
4.00%
Price Return
Sector
Sector Performance
YTD
Sector Performance YTD
Sector Performance (1 month)
Sector Recommendation
• Reduce the Energy Sector to 50 Basis Points Underweight
• Current holdings are BP, ConocoPhillips, Transocean, National Oilwell Varco
• We would like to:– Sell 100% of BP Plc. (BP)– Sell 100% of ConocoPhillips (COP)– Buy Noble Energy (NE)
Noble Corporation
• Noble Corporation (NE) is a oil drilling company that was spun-off the parent company Noble Energy in 1985.
• The company, with operations in waters off the coasts of five continents, has a fleet of 63 offshore drilling units: three submersibles, four dynamically positioned drillships, 13 semisubmersibles, and 43 jack-up rigs. Many of its rigs are capable of operating in depths greater than 5,000 feet.
• The group, which derives most of its revenues from offshore contracts, has positioned itself to ride the global trend toward deepwater exploration. Through acquisitions and equipment upgrading, Noble has been expanding its geographical reach and increasing its ability to drill in deeper off-shore areas.
Noble CorporationAdvantages
• Low Taxes– Moved from Cayman Islands to Switzerland. Avg Tax Rate (16%)
• Geographically Dispersed– World-wide, primarily in Mexico, Brazil, and Nigeria
• Long-Term Historical Growth– Has experienced over 6% Earnings and Revenue Growth since
2000– Baseline has a long-term growth rate of 5%
• First energy industry to recover– Oil & Gas Drilling Services is one of the first industry to recover when oil
prices increase. – Exploration and Production must first acquire leases on drilling rigs, years
and months in advance
Noble CorporationAdvantages
• Maintained high margins despite downturn
– 44% in 2009, 44% in 2008
– Utilization went down from 88% to 83%
• Financially Stable
– 735 Million Cash on Hand, $2.80 Per Share
– Low Debt (750 Million), $2.82 Per Share
– Growth Financed Heavily through Retained Earnings (70% of Total Liabilities and Equity)
• Noble increased its capital expenditures – Building more rigs to sustain growth, don’t build until contracts are made– 1.4 Billion in 2009, 1 Billion in 2008. Guidance in 2010 is 1 Billion– Oil Majors are increasingly turning to offshore drilling– Expecting a slew of contract announcement for 2011 in 1Q and 2Q
Noble CorporationBaseline Filter• Energy Sector• P/Latest Earnings less than 1.0• Market Capitalization: 1 Billion or greater• Earnings: 3 Year Historical Growth Rate 6% or Greater• Earnings: 5 Year Growth Rate 6% or better• Long-Term Future Growth Rate: 4% or greater• ROE: 26% or greater• Reinvestment Yield: 10.0%• Price-Relative Strength to all stocks 70% or better• Earnings Momentum Value: 90% or greater
Noble Corporation (NE) the only energy stock to meet this criteria
Noble CorporationRisks
• Tax Increase– Currently taxes average 16%, there’s some risk that Switzerland,
and other countries that Noble does business in will increase taxes
• Currency Risk– Earnings are in Swiss Francs, not dollars. If dollar strengthens
significantly, earnings will suffer in dollar terms
• Huge Capital Investments– 79% of assets are in drilling equipment and facilities– Utilization dropped from 83% from 88%
• Oil Prices Decrease Significantly– Sustained Oil Prices sinking to the $30-$40 level would reduce the
desirability of offshore oil production– In the short term, we believe oil prices will be fluctuating between
$65 and $85 per barrel
Noble CorporationStock Repurchases and Dividends
• Stock Repurchase– Yearly stock repurchase– 2009: $204 Million– 2008: $314 Million
• Dividend– Current Dividend is 16 cents per share.– Current dividend yield is .38%.– Talk of Possible Increase at Annual Shareholders Meeting April
30, 2010. Mentioned in 4Q Earnings Call
• Debt to Total Capital is 10.5%.
Energy IndustriesRelative Strength
Noble CorporationEPS Surprise History
Noble CorporationEarnings Growth Rates
Noble is trading at one of the lowest Price to Books in years
Noble CorporationMargins
Margins have been increasing since ’05 but are expected to fall back slightly as contracts are renewed in ‘10 and ‘11
Noble Corporation Valuation Analysis Relative to Industry High Low Median Current
P/Trailing E 1.3 .63 .95 .65
P/Forward E 1.1 .52 .90 .60
P/B 1.5 .8 1.1 1.1
P/S 1.7 1.1 1.3 1.6
P/CF 1.5 .8 1.1 1.0
Relative to S&P 500 High Low Median CurrentP/Trailing E 2.9 .32 .84 .39
P/Forward E 1.5 .25 .59 .53
P/B 1.5 .6 1.1 .8
P/S 5.5 2.1 3.6 2.6
P/CF 2.4 .4 1.0 .5
Noble Corporation Valuation Analysis Absolute Valuation
High Low Median Current Target Multiple
Target E,S,B/Share
Target Price
P/Forward E 50.5 4.0 13.9 6.6 9 6.43 57.87
P/S 25.7 3.3 9.0 7.8 9 5.538 50.00
P/B 4.1 1.1 3.2 1.7 2.5 25.29 63.24
P/EBITDA 23.85 2.58 9.51 4.57 7 9.45 66.17
P/CF 26.8 3.1 10.4 5.3 7.5 8.15 61.13
Current Share Price : $43.24Implied equity value/share : $62Upside/(Downside) to Valuation : 43%
Noble CorporationDiscounted Free Cash Flow
Terminal Growth Rate: 5% Discount Rate: 12% Implied Value: $60.34 Upside: 39.5%
Noble CorporationTarget Price
Sensitivity Matrix
Target Price for Noble Corporation: $60
Current Price: $43.24 DCF: $60.38 Valuation: $61
Upside Potential: 39%
Noble Corporation Performance Year to Date
• Noble Corporation has consistently outperformed the S&P since it was spun off.
• It has significantly outperformed since 2000. This can be attributed to the increase in oil prices and world demand
Noble Corporation Performance 1 Year
Noble Corporation Performance 2 Year
Noble Corporation Performance 5 Year
Noble Corporation Performance 10 Year
Noble Corporation Performance 20 Year
BP Plc. Report
• Current Price: $53.05
• Target Price: $60
• Upside: 14.7%
• Dividend Yield: 3.36 / 6.28%
• % of SIM: .97%
• Recommendation: Sell 100%
BP Plc.Valuation
BP Plc. Discounted Free Cash Flow
Implied Value: $60.63 Discount Factor: 12% Terminal Growth Rate: 3% Upside: 15.9%
BP Plc. DCF Sensitivity
ConocoPhillips Report
• Current Price: $48.91
• Target Price: $57.00
• Upside: 16.5%
• Dividend Yield: 4.17%
• % of SIM: 3.18%
• Recommendation: Sell 100%
ConocoPhillips DCF
Implied Value: $ 57.36 Discount Factor: 12% Terminal Growth Rate: 3% Upside: 17.3%
COP Valuation
Absolute Valuation
High Low Median Current Target Multiple
Target E,S,B/Share
Target Price
P/Forward E 18.6 5.3 8.8 8.0 8.8 7.8 68.64
P/S 1.2 .2 .60 .50 .60 131.53 78.92
P/B 3.5 .80 1.5 1.2 1.5 41.46 62.19
P/EBITDA 12.44 2.53 3.97 4.86 3.97 12.73 50.54
P/CF 11.0 2.3 5.5 4.9 5.5 13.00 71.52
Proposed Energy Sector Holdings
As % of SIM
• Noble Corporation (NE): 1.68%
• Transocean (RIG): 4.18%
• National Oilwell Varco (NOV): 4.78%
Proposed SIM Weight: 10.64%
S&P Energy Sector Weight:11.14%
Current SIM Weight: 11.48%
Energy Team
Questions?
Transocean Report
• Current Price: $80.33
• Target Price: $110
• Upside: 36.9%
• Dividend Yield: No Dividend
• % SIM: 4.18%
• Recommendation: No Action
TransoceanDCF and Valuation
Terminal Discount Rate = 11%Terminal FCF Growth Rate = 3%
National Oilwell Varco Report
• Current Price: $43.66
• Target Price: $40.34
• Downside: 7.6%
• Dividend Yield: 40 Cents / .92%
• % SIM: 4.78%
• Recommendation: No Action
National Oilwell VarcoDCF and Valuation
Terminal Discount Rate = 11%Terminal FCF Growth Rate = 3%