1) natural gas and oil derivation 2) aluminum extraction and production finance & investment...
TRANSCRIPT
1) Natural Gas and Oil derivation2) Aluminum Extraction and Production
Finance & Investment ClubMaterials SectorSummer 2012
Stafani Wan
INDUSTRY DEFINITIONS
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Industry Definition – Natural Gas and Oil Derivation
Firms in this industry engaged in development and harvesting of natural gas and natural gas liquids (NGLs) in fields and basins found mainly in North America
These companies derive revenue through servicing mid stream companies, utility companies and industrial users; and NGLs to natural gas processors both domestically and abroad
Concho Resources, Inc.(NYSE: CXO) Pioneer Natural Resources Corporation
(NYSE: PXD)
Noble Energy, Inc.(NYSE: NBL)
SM Energy Company(NYSE: SM)
Range Resources Corporation(NYSE: RRC)
Continental Resources, Inc.(NYSE: CLR)
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Revenue Generation Flow
Acquire Land
• Geophysical & Geological Evaluation• Exploratory Drilling
Obtain Crude Oil
Harvest Natural Gas
Exploration
Hydraulic Fracturing
End Customers
• Transport Crude Oil
• Gather Natural Gas
Pipelines, Trucks & Rail
Processing Plants
e.g. ConocoPhillips,Suncor Energy, Dow Chemical Co
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2011 Revenue Generation By Operating Segments
76%
17%
51%
32%
18%
63%
31%
6%
83%
11%
6%
16%
81%
4%
45%
39%
17%
Oil
Gas
Other Services
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Industry Summary
14%
22%
29%
13%
10%
13%
CXO PXD NBL CLR RRC SM
Materials$205563.5B
(100%)
Oil & Gas$132450B
(64.43%)
Oil & Gas Exploration and Production
$63.9B(0.0311%)
Sub-Sector Breakdown By 2011 Revenue ($mm)
Industry Breakdown by Market Capital ($B)
CXO 1,739,967,000PXD 2,786,600,000NBL 3,763,000,000
CLR 1,649,789,000RRC 1,218,656,000SM 1,603,318,000
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Trend II: Increasing exploration expense and total proved reserves
2009 2010 2011 2012E 2013E0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Exploration Expense
SMRangeContinentalNoblePioneerConcho
2009 2010 2011 2012E 2013E0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
Natural Gas Proved Reserves
ConchoPioneerNobleContinentalRangeSMAverage
Prov
ed R
eser
ves
in M
mcf
• Increasing exploration expense indicate more resource allocated in area
• Exploration expense increasing with average CAGR of 31.81%
• Resulting in proved reserves increasing with average CAGR of 38.85%
• Increased reserves are part of future production volumes, shows positivity
CAGR: 31.81%
CAGR: 38.85%
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Trend II: Decrease in prices leads to increase domestic demand especially in electric power
2006 2007 2008 2009 2010 2011 2012E 2013E0
2
4
6
8
10
Natural Gas Priceswellhead
industrial
Electric power
Dolla
rs p
er M
cf
2006 2007 2008 2009 2010 2011 2012E 2013E0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
Consumption of Natural Gas by types of users
Residential
Commercial
Industrial
Electric Power
• According to the Energy Information Administration(EIA), natural gas prices is decreasing with an average CAGR of 6.2%
• Natural gas consumption data published by EIA shows overall increase with CAGR of 2.1%
• Largest increase in consumption came from electric power generation, with CAGR of 4.1%
• Increases reflected in industry revenue growth, shows CAGR of 13.9%
CAGR: 6.18%
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Trend III: Technological advancements with horizontal drilling allows greater productivity by unlocking new areas
• On land, reduces area damaged by drilling operations; On sea, allows multiple wells to be drilled from single platform
• Areas previously inaccessible by vertical drilling e.g. below buildings, under roads, now accessible
• Costs can total to about 2.5 -3 times that of vertical well1
• Under conditions of low matrix permeability in rocks or obstruction by water aquifers, horizontal drilling capable of producing 2.5 – 7 times rate of vertical wells
1 Study results reported by North Dakota Department for mineral resource, under the state government
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Risks
Increased government regulations• Require extensive efforts to ensure compliance and incremental compliance costs• Additional regulatory review results in longer development cycle time
Extreme Weather Conditions• Hurricanes, tropical storms, extreme winters may affect harvesting of gas
Transportation Availability and Infrastructure• marketability gas production depends on the availability, proximity and capacity of pipeline
Price and availability of alternative fuel sources• Natural gas serves as a close substitute for many other energy sources, such as coal• Increase in supply and decrease in price of energy substitutes will erode competitive edge
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Valuations
High 15.63 97.36 5.29 4.15 2.82 24.4 76.09 $38,073.79
Low 3.08 47.23 0.36 -1.53 0.97 2.51 58.44 $10,187.54
Median 11.29 80.98 2.95 2.67 1.23 16.56 63.03 $17,912.10
Mean 10.67 76.91 3.46 2.35 1.48 14.48 66.27 $22,332.25
SymbolMarket Cap (B)
Stock Price (31/8/11) EPS P/E
Net Debt/ EBITDA
Return on Equity
EBITDA Margin
Operating Income /Mboe
SM 3.08 $47.23 3.36% 3.13 1.00x 16.07% 62.50 $12,467.22
CXO 9.36 $89.74 5.29% 2.21 1.60x 20.44% 76.09 $38,073.79
RRC 10.59 $65.19 0.36% -1.53 2.82x 2.51% 58.44 $10,187.54
PXD 11.98 $97.36 6.85% 5.14 1.31x 17.05% 61.93 $19,187.63
CLR 13.4 $74.06 2.37% 1.00 0.97x 24.40% 75.11 $37,440.74
NBL 15.63 $87.90 2.54% 4.15 1.15x 6.42% 63.55 $16,636.56
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Cross-Sectional Analysis
20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Cross-Sectional Analysis
LTM EBITDA Growth
EV/E
BIT
DA
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Conclusion and Recommendation
Within the subsector, trends reflect that:1. Increased reserves indicate positive future production outlook2. Low prices spurs demand and increases popularity of natural gas as an energy substitute
The oil production and exploration industry must however reduce the risk of:3. Depending on third party companies for supporting infrastructure4. Increasing production time to comply with new regulations
Continental Resources is set to outperform its sub-sector because:5. Low Net Debt EBITDA: 0.97x (Median 1.23x , Mean 1.48x)6. High Operating Income/Mboe: 38,073.79 (Median $17,912.10, Mean $22,332.25)7. Development of Eco-Pad Drilling Technology, equipped to increase production in response to
demand
Continental Resources, Inc.(NYSE: CLR)
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2006 2007 2008 2009 2010 20110
500000
1000000
1500000
2000000
2500000
Net Generation of Electricity
Natural GasCoal
Thou
sand
meg
awat
ts/h
our
Back-up slide
• Decrease in amounts of electric power being generated by coal is responded with increasing amounts of that generated by gas
• Gas set to replaced coal not only in generation of electricity but as an energy source because of low prices and abundance