Energy Sector Stock Recommendation

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Energy Sector Stock Recommendation

• March 2, 2010
• Eric DeWeesHonglei GongCharles HathawayDanqing
  Zhou

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S P 500 Sector Weights (as of 2/28/2010)
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Sector Performance YTD (2/28/2010)
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Sector Performance YTD
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Sector Performance (1 month)
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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)

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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.

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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

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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, dont 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

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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

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Noble CorporationRisks

• Tax Increase
• Currently taxes average 16, theres 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

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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.

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Energy IndustriesRelative Strength
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Noble CorporationEPS Surprise History
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Noble CorporationEarnings Growth Rates
Noble is trading at one of the lowest Price to
Books in years
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Noble CorporationMargins
Margins have been increasing since 05 but are
expected to fall back slightly as contracts are
renewed in 10 and 11
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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 SP 500 High Low Median Current
P/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
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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 43.24 Implied equity
value/share 62 Upside/(Downside) to Valuation
43
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Noble Corporation Discounted Free Cash Flow
Terminal Growth Rate 5 Discount Rate
12 Implied Value 60.34 Upside 39.5

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Noble CorporationTarget Price
Sensitivity Matrix
Target Price for Noble Corporation 60
Current Price 43.24 DCF 60.38
Valuation 61
Upside Potential 39
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Noble Corporation Performance Year to Date

• Noble Corporation has consistently outperformed
  the SP since it was spun off.
• It has significantly outperformed since 2000.
  This can be attributed to the increase in oil
  prices and world demand

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Noble Corporation Performance 1 Year
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Noble Corporation Performance 2 Year
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Noble Corporation Performance 5 Year
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Noble Corporation Performance 10 Year
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Noble Corporation Performance 20 Year
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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

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BP Plc.Valuation
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BP Plc. Discounted Free Cash Flow
Implied Value 60.63
Discount Factor 12 Terminal Growth Rate 3
Upside 15.9
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BP Plc. DCF Sensitivity
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ConocoPhillips Report

• Current Price 48.91
• Target Price 57.00
• Upside 16.5
• Dividend Yield 4.17
• of SIM 3.18
• Recommendation Sell 100

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ConocoPhillips DCF
Implied Value 57.36
Discount Factor 12 Terminal Growth Rate 3
Upside 17.3
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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
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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
• SP Energy Sector Weight 11.14
• Current SIM Weight 11.48

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Energy Team

• Questions?

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Transocean Report

• Current Price 80.33
• Target Price 110
• Upside 36.9
• Dividend Yield No Dividend
• SIM 4.18
• Recommendation No Action

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TransoceanDCF and Valuation
Terminal Discount Rate 11 Terminal FCF Growth
Rate 3
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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

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National Oilwell VarcoDCF and Valuation
Terminal Discount Rate 11 Terminal FCF Growth
Rate 3