1. S&P 500 Sector Analysis: Energy
Bryan Dritschel, Max Elsass, Megan Hoppe

2. Table of Contents Sector Overview Business Analysis Economic Analysis
Financial Analysis
Valuation
Recommendation

3. Sector Overview

4. S&P 500 Sector Weights $1.451 Trillion Energy is 6.3% of the S&P 500
*As of 5/31/18, Source: Bloomberg

5. Sector Breakdown Energy Sector Oil, Gas, and Consumable Fuels
Energy Equipment and Services
Integrated Oil and Gas
Oil and Gas Exploration and Production
Oil and Gas Refining and Marketing
Oil and Gas Storage and Transportation
Oil and Gas Drilling
Oil and Gas Equipment and Services

6. Industries Breakdown Source: Bloomberg Source: Bloomberg

7. Top Companies
Source: Bloomberg

8. Historical Sector Performance
Source: Bloomberg

9. TTM Total Return
Source: Bloomberg

10. YTD Total Return
Source: Bloomberg

11. Business Analysis

12. Overview The sector is cyclical
Supply is heavily controlled
OPEC can stabilize prices
Demand is extremely cyclical
High during economic booms
Low during recessions
Health is tied to oil prices, which are difficult to predict

13. Petroleum Supply
Source:

14. Petroleum Demand
Source:

15. Current State
Source:

16. Current State Continued
Currently the market appears to be balanced
A supply or demand shock could have drastic impacts
Iran has reduced production as a result of the pending sanctions and the US pulling out of Iran nuclear deal which could drive prices up
Venezuela’s current economic troubles have resulted in reduced production which could drive prices up
Russia and Saudi Arabia’s increased production could drive prices down

17. External Factors Geopolitical State of Economy Environmental
Administrative Policy Risk
Regulations, Tariffs ect.
State of Economy
Oil Prices
Environmental
Policy, Regulations, Tariffs ect.
Accidents (ex. Texas City, BP Oil Spill)
Alternative Energy Pressure
Most citizens of the world are impacted by oil prices in some direct or indirect fashion because crude oil is the input to several products including but not limited to gasoline, plastics, jet fuel, diesel, and many other products
Any geopolitical change, the general state of the economy, and environmental policy and regulations can have drastic impacts on oil prices

18. Porter’s Five Forces
Source:

19. Porter’s Five Forces Continued
Supplier Power
High
If they participate in drilling activities, oil companies supply themselves
If not, suppliers are other oil companies
New Entrants
High
Large capital expenditures required to compete and gain significant market share
Regulations are abundant
Industry Rivalry
Medium
Several well-established competitors already entrenched in industry
Is Cooperation between companies
Buyer Power
Low
Product is commodity so consumers demand will still exist even if prices high
Almost everyone worldwide is a consumer
Substitutes
Medium
Alternative energy sources (wind, solar, biofuels) available
High switching costs for many substitutes

20. Economic Analysis

21. Energy (S5ENRS) v. S&P 500 Price of Energy Sector v. Price of S&P 500
Price of each moves in a similar direction minus February and March of 2018
Source: Bloomberg

22. Regression: Energy (S5ENRS) v. S&P 500
Source: Bloomberg

23. Regression: Energy (S5ENRS) v. Crude Oil
Source: Bloomberg

24. Regression: Oil, Gas, and Consumable Fuels (S5OILG) v. Crude Oil
Source: Bloomberg

25. Regression: Energy Equipment and Services (S5ENRE) v. Crude Oil
Source: Bloomberg

26. Key Takeaways The sector is highly correlated to the overall market
Has deviated slightly as of late
The sector is only slightly correlated to the price of crude oil
The energy equipment and services industry has a stronger correlation than the oil, gas, and consumer fuels

27. Financial Analysis

28. Sales Comparison Sales EBIT / EBITDA EPS Currently positive growth
CAGR of -7.62% over the past 5.5 years
CAGR of SPX 2.33% in same time frame
EBIT / EBITDA
Declined from 2013 levels
Increasing since in 2017
EPS
Negative growth until 2017
Positive thus far this year
Growth below SPX with the exception of and 2018
Source: Bloomberg
The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year.
Source: Bloomberg

29. Margin Comparison Gross / Operating / Profit Margin Return On Assets
Declined from 2013
Increasing since 2017
OM and PM negative in 2015 and 2016
Return On Assets
Recovering from negatives in 2015 and 2016
Comparable to SPX in 2017 and 2018
Currently better than SPX in 2018
Return On Equity
Recovering form negatives in 2015 and 2016
Significantly trails SPX since 2014
Source: Bloomberg
Source: Bloomberg

30. Cash Flows Comparison Cash from Operations Free Cash Flows Dividends
Declined from 2013 levels
S5ENRS: 42.18%
SPX: 2.59%
Trending upward since 2016
Free Cash Flows
Higher than 2013 levels
Due to lower CapEx and investing spending
Strong recovery from very low years in
Dividends
Increasing since 2016
Only around 3.5% of the SPX dividends
Source: Bloomberg
Source: Bloomberg

31. Valuation

32. Valuation on an Absolute Basis
Source: Bloomberg

33. Valuation on an Absolute Basis Continued
Source: Bloomberg
P/E
Overvalued
Current P/E is significantly larger than the median ratio by 47.2%
P/B
Undervalued
Current P/B is modestly lower than the median ratio by 12.6%
P/S
Undervalued
Current P/S is modestly lower than the median ratio by 12.7%
P/EBITDA
Overvalued
Current P/EBITDA is modestly larger than the median ratio by 10.9%

34. Valuation Relative to SPX
Source: Bloomberg

35. Valuation Relative to SPX Continued
Valuations appear to be mixed across the board with no conclusive measure on a relative basis
Currently, value is being added across the board
 Increased oil prices
Successful consolidation
Valuation expansion and contraction is highly volatile
influenced significantly by the price of oil
Believe oil prices will stabilize in near term
High probabilities of negative externalities
Source: Bloomberg
Valuations appear to be mixed across the board with no conclusive measure on a relative basis
Currently, value is being added across the board for oil industry.  This is primarily due to the increased oil price and successful consolidation after the relatively recent lows.
Valuation expansion and contraction is highly volatile as it will be influenced significantly by the price of oil which is subject to economic and political factors
It is our belief that oil prices are to stabilize in the near term and therefore valuations will remain stagnant or decrease slightly due to high probabilities of negative externalities.
Source: Bloomberg
Source: Bloomberg

36. Recommendation

37. Recommendation
There are significant risks associated with the energy industry
Political risks
There is concern with the economic and political condition of Venezuela as well as sanctions against Iran
Economic risks
Global trade is trending towards protectionism and could lead to trade wars and drag on future growth
China and other countries are actively seeking to limit their future dependence on oil and could worsen the value of the commodity in the long term
The biggest positive for the industry is the prospect of increased prices in the future
Supply and demand are the key drivers and small shocks could lead to large increases in the price of oil
It is our recommendation that the sector be neutral to the market in terms of weight given the high level of volatility, uncertainty and a high likelihood of negative shocks to the sector

38. Questions?