1. Energy Sector Analysis Brian R. Boulter Fisher College of Business 2/13/07

2. S&P 500 Sector Allocation

3. SIM Relative to S&P 500

4. Energy Sector Composition Coal & Consumable Fuels - 1.38% Peabody Energy, Consol Energy Inc. Integrated Oil & Gas - 63.76% Exxon Mobile, Chevron, ConocoPhillips, Marathon Oil, etc. Oil & Gas Drilling – 4.21% Transocean Inc., Noble Corp., ENSCO Int’l, etc. Oil & Gas Equipment & Services – 13.39% Baker Hughes, Schlumberger Ltd., Halliburton, Smith Int’l, etc. Oil & Gas Exploration & Production – 9.61% Anadarko Petroleum, Apache Corp., Devon Energy Corp., etc. Oil & Gas Refining & Marketing – 3.30% Sonoco Inc., Valero Energy Oil & Gas Storage & Transportation – 4.34% Kinder Morgan, El Paso Corp., Spectra Energy Corp., etc.

5. Recent Performance

6. Oil & The Energy Sector Energy Sector revenues are driven by global oil prices –Impact current and future levels of exploration, drilling and refining expenditures S&P 500 sector index is heavily weighted with Integrated Oil & Gas companies –Earnings almost perfectly correlated with crude oil spot prices

7. Oil & The Energy Sector

8. *R^2 = 0.93 **93% of the change in the Energy Sector’s quarterly earnings is explained by the corresponding increase/decrease in the spot price for crude oil ***Based on 10-Q’s and average quarterly spot prices 1993-2007

9. World Oil Market Overview Long-Term oil prices are relatively stable –Driven by global supply and demand Abundance of proven oil reserves makes extraction cheaper and prices lower Short-Term prices are more volatile –Impacted by political, economic and environmental shifts War, recession, weather, etc. The long cycle of the petroleum industry has been a recurrent pattern for more than 140 years

10. Commodity Cycles Are Long- Term Business Cycles Source: Hess Energy Trading Company, LLC (Soft Landing)

11. Energy Cycles 1876-2005 Source: Hess Energy Trading Company, LLC Historically, energy cycles last +/- 20-30 years from peak to peak. Last peak was reached in 1981… 2006 marks 25 years exactly!

12. Global Oil Consumption

14. Global Oil Supply

15. Middle Eastern Oil Supply

16. Global Oil Reserves Among the top 20 oil reserve holders, 8 are OPEC member countries that together account for 65 percent of the worlds total reserves.

17. What’s Happening to Oil? Natural petroleum resources are not projected to be a key constraint on world demand through 2030 Forecasted oil price paths reflect alternate assessments of oil-rich countries’ willingness to expand production capacity as much as previously indicated –Also reflects expected costs of extraction

18. $34 $57 $96

19. The High’s and Low’s The high price case assumes that the worldwide crude oil resource is 15 percent smaller and is more costly to produce than assumed in the reference case. The low price case assumes that the worldwide resource is 15 percent more plentiful and is cheaper to produce than assumed in the reference case.

20. The Bottom Line Long-term supply vs. demand will be most heavily impacted by the politically and economically motivated production decisions of oil-rich countries –OPEC Nations, Middle-East, etc. OPEC has declared that current oil prices are acceptable at $50-$60 –No significant production cuts are scheduled in the short-run Global reserves have increased significantly since 2002 –May be used strategically to mitigate severe supply/demand imbalances and stabilize prices

21. Absolute Valuations

22. Relative Valuations

23. Energy Sector Valuation Absolute Sector Valuation –Trading below 10 year average: Cheap Relative Sector Valuation –Selling at a discount to the market Some measures indicate that energy is cheap Overall: in-line historically relative to the market Sector earnings/stock prices driven by oil: –Oil likely to hover between $45 & $60 per barrel in the short-term –Energy stocks Likely to decline further for 6-8 months and begin to trade sideways once oil prices level off

24. Sector Recommendation Energy sector stock prices are still adjusting to reflect the recent decline in future forecasts for oil prices –5-6 month delay Recommend to decrease current SIM portfolio weighting to 7.00% –Sell 73 basis points to reach 269 basis points below S&P 500 weighting Look to move towards equal weighting after 12- 14 months