1. Stock Presentation: Energy
Isabel Collins, Ke Chen

2. Overview

3. 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.

4. 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

5. 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.

6. 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

8. Valuation Sensitivity: KMI

9. 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.

10. 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

11. Valuation Sensitivity: HAL

12. 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

13. 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

14. Valuation Sensitivity: SLB

15. 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 , 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
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
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

16. 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%

17. Valuation Sensitivity: RDS.A

18. Recommendation

19. Questions

20. KMI ROE

21. KMI DCF

22. KMI DCF

23. 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 Presently, Kinder Morgan alone accounts for 76% of 2016 U.S. total natural gas exports to Mexico.

24. HAL ROE

25. HAL DCF

26. HAL DCF

27. SLB DCF

28. RDS.A DCF