energy sector winter 2010 eric dewees honglei gong charles hathaway danqing zhou

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

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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?