Stock Presentation: Energy Isabel Collins, Ke Chen

Overview

Reccomendation We recommend that the Energy sector be trimmed to S&P 500 weight of 6.5% by reducing our position in Royal Dutch Shell by 40 BPS.

Recommendation: Trim Weight Oil prices still struggling to recover Excess supply/falling demand High P/E throughout the sector Expected recovery overstated into stock prices High Volatility Uncertainty with OPEC Uncertainty surrounding Trump/international politics Outperformance in late phase Historically energy outperforms in late phase of the business cycle. Slow recovery, but oil prices expected to continue to improve for long term horizon

Kinder Morgan: KMI Industry Growth Opportunities & Risks Drivers Risks Energy infrastructure company - midstream - oil & gas Transports: natural gas, refined petroleum, crude oil, CO2 etc Cyclical but is contract fee based less affected by commodity prices Growth Opportunities & Risks Drivers Deregulation, larger territory M&A If Oil prices increase in short term; more contracts Outperforms in Mid to Late expansion Risks Political environment in Canada and oil production countries Changes in business environment Sharp decline in crude oil price Supply disruption Higher development cost Kinder Morgan, Inc. is a pipeline transportation and energy storage company. It owns and operates pipelines that transport natural gas, gasoline, crude oil, carbon dioxide, and other products, and terminals that store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. Natural Gas Pipelines is its most important business.

Kinder Morgan Valuation DCF Targeted price of $19.51 Downside of 9% ROE ROE in decline from 2014 to 2016, recently increases, but still at its historical low P/B, P/S P/B, P/S relative to sector are lower than their historical median - cheap P/B is at its historical low - cheap, undervalued; P/E is high – may show risk of overvaluation

Valuation Sensitivity: KMI

Halliburton: HAL Growth Opportunities & Risks Industry Oil & Gas Equipment & services industry - provides services & products to the upstream oil and natural gas industry Completion and production services - bonding the well & well casing. Completion tools Oilfield production and completion chemicals Cyclical and is hugely affected by commodity prices Growth Opportunities & Risks Drivers Regulatory ease, larger territory Oil price increase in short term, more contracts Business Cycle: from mid to late expansion Risks Fluctuation in oil price - unstable Kinder Morgan, Inc. is a pipeline transportation and energy storage company. It owns and operates pipelines that transport natural gas, gasoline, crude oil, carbon dioxide, and other products, and terminals that store petroleum products and chemicals and handle bulk materials like coal and petroleum coke. Natural Gas Pipelines is its most important business.

Halliburton Valuation DCF Targeted price of $42.12 Downside of 13.8% ROE ROE in decline from 2014 to 2016, recently increases, but still at its historical low from 2007 P/B, P/S P/B, P/S relative to sector are much higher than their historical median - expensive P/B - much higher than the sector - expensive P/S is higher than the sector - expensive

Valuation Sensitivity: HAL    

Schlumberger: SLB Growth Opportunities & Risks Industry Oil Field Service Provider Reservoir Characterization, Drilling & Production Compensated for contracts through profit sharing Heavily affected by weak oil prices/falling demand Growth Opportunities & Risks M&A strategy has allowed them to expand offerings to a complete integrated “pore-to-pipeline” experience Continue to expand: through JV GOLAR LNG: Liquefied Natural Gas Helps monetize stranded gas (estimated to be 40% of worlds gas reserves) Slower recovery in international energy markets 75% of contracts based overseas Continued Strong Dollar Exchange rate exposure ADD BLURB ABOUT GOLAR

Schlumberger Valuation DCF Resulted in an implied price of $65.19 Downside of 16.6% Valuation ROE ROE in decline since 2014, 2016: -4.4% P/E Recovery of oil prices overstated into stock price Forward P/E is more than triple the sector median P/CF Lower average P/CF of 16.8 vs. Industry average of 19.8

Valuation Sensitivity: SLB

Royal Dutch Shell Growth Opportunities & Risks Industry Oil and Natural Gas Production Upstream & Downstream Upstream: Exploring & Recovering crude oil and natural gas Downstream: Manufacturing, Distributing & Marketing for oil products and petrochemicals. Growth Opportunities & Risks Drivers Reorganizing both upstream & downstream business segments - Approx $30 B worth of divestments set for 2017-2018, reinvesting in core BG Group acquisition could materialize cost synergies in 2017 Risks High dividend yield may be at risk - Cash Flow issues -Front loaded debt, $5 B current this year, $8 B current in 2018 More volatile than midstream due to low activity in downstream segment, and oil price exposure in upstream Excess supply affecting Petrochemical industry more heavily https://www.google.com/search?q=petrochemicals&ie=utf-8&oe=utf-8#q=petrochemicals+royal+dutch+shell Growth Opportunities & Risks High Dividend has put pressure on Cash flow in the past Yield may be at risk can’t cover capex and dividend with cash flow from operations Front loaded debt Approx. $30 B worth of Divestments set for 2017-2018 Reorganizing both upstream & downstream business segments BG Group Acquisition Finalized in early 2016 Expected to continue synergies and cost reduction throughout 2017 Any cost synergies will be cancelled out in the short term by large debt RDS took on drive up debt reduction & Debt cash maintenance Excess Supply affecting petrochemical industry more heavily More volatile due to low activity in downstream segment Downstream segment offers less exposure to oil prices

Royal Dutch Shell DCF Valuation Resulted in implied price of $37.86 Downside of 28.5% Valuation P/CF increasing faster than peers since 2014 P/B is in line with the sector ROE is 2.56% compared to industry median of 4.06%

Valuation Sensitivity: RDS.A

Recommendation

Questions

KMI ROE

KMI DCF

KMI DCF

KMI M&A, future projects, news Valero Energy (NYSE:VLO) agrees to acquire the remaining 50% membership interest in Parkway Pipeline from Kinder Morgan (NYSE:KMI) for an undisclosed sum. The move gives VLO increased access to the eastern U.S. by connecting the pipeline to the Colonial Pipeline system that runs from Houston to New York Harbor. News: Kinder Morgan currently delivers natural gas to Mexico through 17 interconnections. The pipeline giant expects exports to Mexico to increase by 2.0 Bcf/d to 5.6 Bcf/d by 2021. Presently, Kinder Morgan alone accounts for 76% of 2016 U.S. total natural gas exports to Mexico.

HAL ROE

HAL DCF

HAL DCF

SLB DCF

RDS.A DCF