September Energy Sector Update

8/11/2019 September Energy Sector Update

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ENERGY SECTOR UPDATE September 10, 2014

W i l l i a m C . D u n k e l b u r g O w l F u n d | T e m p l e U n i v e r s i t y P

Sector Holdings Snapshot

Holding Bought Current Return Target Off-Target Return

Schlumberger Limited (SLB) $92.07 $104.51 +13.5% $133.38 27.6%

ConocoPhillips (COP) $70.67 $78.99 +11.8% $85.00 7.6%Occidental Petroleum (OXY) $97.41 $98.35 +1.0% $108.84 10.7%

Big Picture

The energy sector posted great returns over the

summer session, leading the S&P in overallperformance. However, ongoing geopolitical unrest

in Ukraine resulted in a 3rd round of U.S. and

international sanctions against Russia. These

sanctions are expected to have a negative impact on

EPS for western companies with operations in

Russia, as shipping U.S. equipment is restricted in the

region. Recent uncertainty has contributed to

increased investor concern and profit-taking after avery bullish second quarter.

To show historical performance of the various components of the energy sector, or streams, the chart below shows the following ind iceon a trailing 3-year basis.

S&P 500 Oil & Gas Refinery & Marketing Index, shown in rust

S&P 500 Oil & Gas Exploration & Production Index, shown in beige

S&P 500 Oil & Gas Equipment & Services Index, shown in green

S&P 500 Oil & Gas Drilling Index, shown in sky blue

Refineries have led the sector by far over the past two years, mainly helped by a number of spin-offs from integrated oil companies

Drillers have been the laggards, particularly since the beginning of 2014, as many new contract drilling rigs came online, bloating supply

above and beyond demand growth. As a result, day rates (the rate at which rig operators are paid to drill at per day) fell and are expected to

remain subdued for the next few quarters until the market digests the new supply.

Michael Kollar, Lead Analyst | Nathan Eisenberg, Associate Analyst

Source: S&P Capital IQ



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Commodity Prices

Crude Oil Spot1 year

Oil prices have retreated below the ~$100/barrel price level since August.

Natural Gas Spot1 year

Natural gas prices displayed significant volatility in 1Q2014, trading from ~$4/mmbtu to highs of ~$7.50/mmbtu. Prices have reduced and

stabilized at ~$4.00/mmbtu.

Coal1 year





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News

Rig Count Increasing

Baker Hughes (BHI) reported that U.S. gas rigs increased by two to 340 and oil rigs increased by nine to 1,584.1

Mexico Oil & Gas Monopoly EndsIn August, Mexican President Enrique Pena Nieto signed into law an energy reform bill that ended a 76 year monopoly on the nations oi

and gas industry. Prior to this legislation, foreign companies could only work in the region on a contractual basis with Mexican state oi

company, Pemex. Since the legislation, Pemex was awarded 83% of Mexicos proven reserves, but only 21% of probable reservesles

than it had sought2. This means that foreign companies will have the opportunity to bid on, explore and develop the remaining 79% of oil

& gas reserves that have yet to be produced. This provides a future top line growth catalyst for mega E&P companies such as Exxon

Mobil, Royal Dutch Shell and Lukoil.

BP Ruled as Grossly Negligent

In early September, U.S. District Judge Carl Barbier levied a ruling that BP was grossly negligent leading in its operations leading up to the

tragic Mocando Deepwater Horizon oil spill of 2010. The ruling could result in an additional $18 billion of additional fines and damages

against BP3. Other companies implicated in the ruling were Halliburton (HAL) and Transocean (RIG), which were both found to be

negligent, a less severe ruling. HALs CEO recently stated that the company made a $1.1 billion settlement with the Plaintiffs Steering

Committee and just eliminated the vast majority of the punitive potential claims that would be against us. 4

Keystone XL Decision before Nebraska Supreme Court

The construction of TransCanada Corps.s (TSX, NYSE:TRP) highly

controversial Keystone XL pipeline was delayed due to jurisdiction of Nebraska

state laws earlier this year. The delay postponed the U.S. State Departments

ruling on the matter, which allowed President Obama to avoid taking sides on the

planned $5.4 billion project. Now, Nebraskas Supreme Court will make a ruling

which has two possible outcomes: i) the pipeline will be sent to President Obama

for final approval; or ii) postponed indefinitely.5 If approved, construction will

begin on the last leg of the pipeline and it would transport petroleum rich tar

sands straight from Alberta, Canada to the U.S. Gulf of Mexico for international

export. (Right: Planned pipeline route map)

Third Round of EU Sanctions on Russia

On September 8, 2014, the European Union announced a third round of

sanctions against Russia, in response to its ongoing involvement in the conflict in

Ukraine. The EU sanctions would affect Russia's top oil producers and pipeline

operators Rosneft, Transneft and Gazprom Neft, which would be put on the list

of Russian state-owned firms that will not be allowed to raise capital or borrow

on European markets.6While the sanctions are agreed upon, at the time of this

report, their implementation is still up for discussion. EU envoys were due to

meet again at 6:00 P.M. (4:00 P.M.) in Brussels to decide whether the sanctions -

agreed in principle on Friday - should be first implemented and then suspended if

the cease-fire holds or whether they should not be implemented at all at this

stage.5A cease fire in Eastern Ukraine was reached on September 5, and is a

step in the right direction in the five-month conflict which has left 3,000 dead.7

In response to the threat of new sanctions, Russian Prime Minister Dmitry Medvedev said that Moscow may retaliate asymmetrically by

banning Western airlines from flying in Russian airspace. Diverting airline routes around Russia would have a significant impact on airlines.

Potential Impact on Owl Fund Holdings

Many of our holdings include companies with exposure to Russia in one form or another, even outside of the energy sector. We are

keeping a watchful eye on developments overseas; however, geopolitical risk is also a cost of doing business with large, global companies

Managing a diversified portfolio is the best way to limit exposure to this risk and potential impact on our positions, which the Owl Fund

continues execute per our Investment Policy.

Source: TransCanada


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Occidental Petroleum Corp. (NYSE:OXY)

Domestic Production IncreaseSince purchase of OXY in mid-April, weve seen

multiple expansion driven primarily by an increase

in domestic oil production, stemming largely from

OXYsPermian and California assets. Q2 domestic

production grew 8,000 barrels QoQ, or roughly

3%. The Permian Resources business comprised

much of this growth, experiencing a 21% increase

in production and exhibiting the high-quality

potential of OXY assets. Management is heavily

focused on the Permian segment to catalyze futuregrowth.

Divestment StrategyOXY continues to divest certain assets, such as Hugoton and Dolphin Energy, in order to redirect cash into its premier assets (Permian).

These cash flows have allowed for significant capital expenditure investment to such assets. OXYs spin-off deal to its California business

is still expected to be completed by late 2014 or early 2015. Proceeds from the spinoff will transfer as a tax-free dividend that Management

anticipates will net $6 billion.

Drag FactorsInternational operations core income declined 4% over the first two quarters YoY. This was a result of insurgent activity that negatively

affected OXYs Colombian operations. This caused OXY to miss earnings in Q2, which we believe led to the share price r etreat back

below $100. Management believes normalized operations in Colombia will resume and international production volumes to increase by

10,000 BOE from Q2. Thus, we do not see this as an ongoing concern or risk to the investment thesis.

OutlookOXY is on target to meet our $108.84 target price in the next 9 to 15 months and the investment thesis remains intact.

Bought $97.41Last $98.35

Return 1.0%

Target $108.84

Occidental Petroleum (OXY) Comparables Analysis

($ in millions except per share)

Leverage

Stock Equity Enterprise Gross Operating Net Profit Debt/Price Market Market ROE ROA Margin Margin Margin Equity

Company 9/8/2014 Value Value LTM NFY LTM NFY

EOG US EQUITY 100.75$ 55,534$ 60,213$ 20.50 15.89 7.32 5.61 17.42 7.73 57.35 27.72 15.08 38.35

APC US EQUITY 106.00$ 53,840$ 63,730$ 23.52 18.66 7.47 5.54 11.01 -5.33 47.37 27.00 5.36 62.06

HES US EQUITY 98.93$ 30,536$ 34,505$ 18.02 18.57 7.12 4.93 7.57 8.88 28.02 11.41 22.67 23.45

DVN US EQUITY 70.53$ 28,944$ 44,178$ 32.24 11.21 6.63 5.54 4.33 3.59 30.92 25.59 -0.19 58.65

Mean 23.57 16.08 7.14 5.40 10.08 3.72 40.92 22.93 10.73 45.63

Median 22.01 17.23 7.22 5.54 9.29 5.66 39.15 26.29 10.22 48.50

OXY US EQUITY 98.35$ 76,809$ 81,776$ 14.53 13.40 5.42 5.46 12.73 8.78 45.04 38.94 24.14 16.09

P/E Multiple EV/EBITDA

Capitalization Valuation Multiples Ratios Margins



Source: Bloomberg LP


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ConocoPhillips (NYSE:COP)

OverviewCOP has maintained a significant value proposition

with an expected 3 5% production growth rate, 3

5% margin growth rate, and cash flow from

continuing operations CAGR of 6 -10% from now

until 2017 ($15.8 billion in 2013; $20-23 billion in

2017). These operational goals and a competitive

dividend of 3.7% is evidence of managements

continual focus of maintaining double digitreturnsto shareholders annually.

Low Cost and Targeting Higher MarginsAs an Explorer & Producer (E&P), COP derives most of its revenue from the sale

of oil and is directly impacted by fluctuations in oil prices. With crude prices below

$100, COP shares have come under pressure, along with those of many other

E&Ps. That said, COP is one of the lowest cost producers of oil on the planet. This

provides COPs earnings with significant insulation in a low price oil market

Additionally, COP is still continuing to increase its asset allocation to higher-marginliquids (See left), which now amount to 57% of 2Q2014 production.

The company has been focused on establishing financial strength before increasing developmental spending in 2015. With significan

positions in key acreages across the globe and a planned increase in development program spending of 60% between now and 2017, is it

unlikely the Fund will identify another E&P offering more value and potential upside than COP.

OutlookCOP has been in the portfolio for 8 months and we believe shares are still undervalued. If our target price of $85.00 is reached, we will

reevaluate the opportunity cost of staying invested in this E&P and will most likely put the holding to vote for an increased target price

Bloomberg consensus estimates have an average 12 month target price of $92.42/share, almost 17% higher than their current level.

Bought $70.67

Last $78.99

Return 11.8%

Target $85.00

ConocoPhillips (COP) Comparables Analysis($ in millions except per share)

Leverage

Stock Equity Enterprise Gross EBITDA Net Profit Debt/

Price Market Market ROE ROA ROC Margin Margin Margin Equity

Company 9/8/2014 Value Value LTM NFY LTM NFY NTM NTM NTM LTM LTM LTM MRQ

EOG US EQUITY 101.45$ 55,534$ 60,213$ 20.50 15.89 7.32 5.61 17.42 7.73 N/A 57.35 51.35 15.08 38.35

APC US EQUITY 106.42$ 53,840$ 63,730$ 23.52 18.66 7.47 5.54 11.01 -5.33 N/A 47.37 52.43 5.36 62.06

CNQ US EQUITY 40.74$ 44,534$ 57,103$ 14.63 11.71 6.50 4.74 12.94 6.02 9.27 30.45 51.11 14.06 37.49

MRO US EQUITY 40.06$ 27,000$ 32,261$ 20.12 14.28 5.12 4.72 7.16 7.42 N/A 46.31 47.69 12.09 34.10

Mean 19.69 15.13 6.60 5.15 12.13 3.96 9.27 45.37 50.65 11.65 43.00

Median 20.31 15.09 6.91 5.14 11.98 6.72 9.27 46.84 51.23 13.07 37.92

COP US EQUITY 78.99$ 97,093$ 112,268$ 12.77 12.03 5.91 4.48 14.83 7.69 13.04 25.03 33.85 16.83 41.59

P/E Multiple EV/EBITDA

Capitalization Valuation Multiples Ratios Margins


Source: COP IR Presentation




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Schlumberger Limited (NYSE:SLB)

OverviewSchlumberger Limited (SLB), the largest providerof equipment and services to the energy sector, hasbeen the leading performer for our sector. SLB waspurchased because of its premium operating metricsin margins, solid FCF growth, differentiatedproduct offering and geographic diversity ofoperations.

2Q2014 HighlightsRevenues of $15.1 billion beat expectations by 0.9%Net Income Adj. of $1.8 billion beat expectationsby 1.22% EPS Adj. of $1.37 beat expectations by1.1%

Geographic Breakdown

Revenue in N. America, SLBs largest geographic segment (30.7% of FY2013 revenue) was $3.9 billion, up 5.3% sequentially and15.8% YOY. Pretax profit of $700 million increased 2.5% sequentially and 5.7% YOY.

Europe/CIS/Africa (27.3%) was $3.3 billion, up 13.4% sequentially and 4.2% YOY. Pretax profit of $723 million increased 33.8%sequentially and 12.3% YOY.

Middle East & Asia (23.9%) was $3.0 billion, up 4.3% sequentially and 11.7% YOY. Pretax profit of $826 million increased 10.3%sequentially and 26.3% YOY.

Latin America (17.1%) revenue was $1.9 billion, up 5.3% sequentially, but decreased 3.2% YOY. Pretax profit of $393 millionincreased 5.9% sequentially and unchanged YOY.

Segment Breakdown

Drilling, SLBs largest revenue segment (38.3% of FY2013 revenue) was $4.6 billion, up 7.4% seq. and 9.7% YOY, with Pretax Profitup 11.4% seq. and 22.6% YOY.

Production revenue (35.2%) increased5.5% seq. and increased 10.6 % YOY; with Pretax Profit decreasing 1.6% seq. but increasing16.0% YOY.

Reservoir Characterization revenue (27.1%) increased 8.5% seq. and 0.9% YOY; Pretax Profit increased 17.8% seq. and 0.7% YOY.

OutlookWith SLBs shares breaching all-time highs this past quarter and promising growth in many segments, we are confident this position wilreach our new target price in the next 12 months.

Bought $92.07

Last $104.51

Return 13.5%Target $133.38

Schlumberger Limited (SLB) Comparables Analysis($ in millions except per share)

Leverage

Stock Equity Enterprise Gross EBITDA Net Profit Debt/

Price Market Market ROE ROA ROC Margin Margin Margin Equity

Company 9/8/2014 Value Value LTM NFY LTM NFY NTM NTM NTM LTM LTM LTM MRQ

HAL US EQUITY 66.12$ 56,194$ 61,675$ 19.40 12.41 9.59 6.81 19.68 10.00 14.90 15.27 21.07 7.23 57.55

BHI US EQUITY 67.33$ 29,274$ 32,882$ 21.16 12.02 8.11 5.62 7.94 4.57 N/A 18.07 17.39 4.90 24.73

WFT US EQUITY 23.14$ 17,856$ 26,783$ 34.75 13.06 12.39 6.91 6.29 -1.96 N/A 18.82 14.54 -2.26 106.92

Mean 25.10 12.50 10.03 6.45 11.30 4.20 14.90 17.39 17.67 3.29 63.07

Median 21.16 12.41 9.59 6.81 7.94 4.57 14.90 18.07 17.39 4.90 57.55

SLB US EQUITY 104.51$ 135,542$ 142,254$ 20.07 15.36 11.11 8.88 17.76 10.00 13.47 22.61 27.36 14.87 33.38

Valuation Multiples Ratios MarginsCapitalization

EV/EBITDAP/E Multiple





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Sources

1. Doan, Lynn and Stubbe, Richard. U.S. Rig Count Rises by 11 to 1,925, Baker Hughes Says., 9/5/2014; Accessed 9/9/2014.

http://www.bloomberg.com/news/2014-09-05/u-s-rig-count-rises-by-11-to-1-925-baker-hughes-says.html

2.

Mexico Awards 83% of Oil Reserves to State Firm Pemex.,8/13/2014; Accessed 9/8/2014.http://www.bbc.com/news/business-28776695

3. Kunzelman, Michael and McConnaughey, Janet. Gulf of Mexico Residents Hail Ruling Against BP., 9/5/2014; Accessed 9/8/2014.

http://abcnews.go.com/US/wireStory/judge-bps-reckless-conduct-caused-gulf-oil-spill-25245515

4. Mark. A. McCollum, CEO, Halliburton Company, Barclays CEO Energy-Power Conference. 9/2/2014. Accessed via Bloomberg

LP Database.

5. Jamasmie, Cecilia., Battle Over Keystone XL Lands Before Nebraska Supreme Court. 9/5/2014. Accessed 9/8/2014.

http://oilprice.com/Latest-Energy-News/World-News/Battle-Over-Keystone-XL-Lands-Before-Nebraska-Supreme-Court.html

6. Koerkemeier, Tom and Strupczewski, Jan.EU Adopts New Sanctions Against Russias Top Oil Companies., 9/8/2014; Accessed

9/9/2014.http://www.haaretz.com/news/world/1.614716

7. Jones, Gareth and Vasovic, Aleksandar. Ukraine Death Toll Edges Up Despite Ceasefire, More POWs Freed., 9/9/2014; Accessed

9/9/2014.

http://www.reuters.com/article/2014/09/09/us-ukraine-crisis-idUSKBN0H40M820140909
http://www.bloomberg.com/news/2014-09-05/u-s-rig-count-rises-by-11-to-1-925-baker-hughes-says.htmlhttp://www.bloomberg.com/news/2014-09-05/u-s-rig-count-rises-by-11-to-1-925-baker-hughes-says.htmlhttp://www.bbc.com/news/business-28776695http://www.bbc.com/news/business-28776695http://abcnews.go.com/US/wireStory/judge-bps-reckless-conduct-caused-gulf-oil-spill-25245515http://abcnews.go.com/US/wireStory/judge-bps-reckless-conduct-caused-gulf-oil-spill-25245515http://oilprice.com/Latest-Energy-News/World-News/Battle-Over-Keystone-XL-Lands-Before-Nebraska-Supreme-Court.htmlhttp://www.haaretz.com/news/world/1.614716http://www.haaretz.com/news/world/1.614716http://www.reuters.com/article/2014/09/09/us-ukraine-crisis-idUSKBN0H40M820140909http://www.reuters.com/article/2014/09/09/us-ukraine-crisis-idUSKBN0H40M820140909http://www.reuters.com/article/2014/09/09/us-ukraine-crisis-idUSKBN0H40M820140909http://www.haaretz.com/news/world/1.614716http://oilprice.com/Latest-Energy-News/World-News/Battle-Over-Keystone-XL-Lands-Before-Nebraska-Supreme-Court.htmlhttp://abcnews.go.com/US/wireStory/judge-bps-reckless-conduct-caused-gulf-oil-spill-25245515http://www.bbc.com/news/business-28776695http://www.bloomberg.com/news/2014-09-05/u-s-rig-count-rises-by-11-to-1-925-baker-hughes-says.html

September Energy Sector Update

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