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Barc Int Oil 20100528

Barc Int Oil 20100528

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Published by: ducksman11 on May 29, 2010
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EQUITY RESEARCH
28 May 2010
 
AMERICAS INTEGRATED OILERRATUM: Major Oils Asset Value, 2010
ERRATUM: This note replaces an earlier published note which erroneously reported theNAV sensitivity table in Figures 3 and 13. We apologize for any confusion this may havecaused.
We are publishing the fifth edition of our Major Oils Asset Value report. We estimatethat the U.S. integrated oil sector is currently trading at around a 24% discount to itsnet asset value (NAV) using our long-term oil price assumption of $80/barrel. Afterthe recent selloff, we estimate that the group may now be reflecting a long-term oilprice assumption of $60-$65/bl. We believe the sector offers an attractiverisk/reward ratio and recommend that investors overweight the group. We raise ourrating on Murphy Oil to 1-OW from 2-EW while reducing our rating on SuncorEnergy to 2-EW from 1-OW. Based on our study, we think that Hess Corp. andMurphy Oil currently offer the best asset values within our coverage universe, whileSuncor Energy and Marathon Oil rank as the least attractive on this metric.We upgrade MUR to 1-Overweight from 2-Equal Weight and raise our 12-monthprice target to $74/share from $65/share,
reflecting our NAV analysis. Specifically,we think that the company’s substantial Eagle Ford acreage alone could be valued atapproximately $7-10/share while its syncrude interest could easily fetch another $10-13/share. Our upgrade also reflects the company’s expected strong production profileover the next several years. We estimate MUR will grow production at 8.5% p.a.between 2009 and 2014.
We downgrade SU to 2-Equal weight from 1-Overweight and lower our 12-monthprice target to C$37/share from C$42/share.
Our new price target assumes a 20%premium to our NAV estimate. Our lower NAV estimate partially reflects the strengthof the Canadian dollar versus the US dollar in recent years as well as the lower-than-expected PV 10 estimate for the company’s latest year-end filing.
Over the last four years, NAV has proven to be an effective tool for stock selection –
For three of the four years, the two most attractively ranked stocks significantlyoutperformed the two least attractive on a 12-month forward price performance basis.On average, the two most attractively ranked stocks have outperformed the two leastattractively ranked stocks by more than 10%.
In 2010, HES and MUR are the most attractively ranked on NAV and MRO and SU arethe least attractively ranked on NAV.
For a pair trade, we would recommend that investors
long MUR and HES and short SUand MRO
based on NAV. However, we maintain a fundamental 2-Equal Weight ratingon MRO and SU.
Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE33.PRICE TARGET CHANGEAmericas Integrated Oil
1-POSITIVE
UnchangedFor a full list of our ratings, price target andearnings changes in this report, please seetable on page 2.
Americas Integrated OilPaul Y. Cheng, CFA
1.212.526.1884paul.cheng@barcap.comBCI, New YorkChristina Cheng1.212.526.5580christina.cheng@barcap.comBCI, New YorkDanielle Diamond1.212.526.4060danielle.diamond@barcap.comBCI, New York
 
Barclays Capital | Americas Integrated Oil
28 May 2010
 
2
 
Summary of our Rating, Price Target and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)Old New 26-May-10 Old New %ChgOldNew %Chg Old New %ChgAmericas Integrated Oil
1-Pos 1-PosChevron Corporation (CVX)1-OW 1-OW71.55 105.00105.00- 9.00 9.00 - 10.5010.50-ConocoPhillips (COP)2-EW 2-EW 49.57 60.00
63.00
5 5.95 5.95 - 7.35 7.35 -Exxon Mobil Corp. (XOM)1-OW 1-OW59.31 88.00
86.00
-2 5.70 5.70 - 7.00 7.00 -Hess Corp. (HES)1-OW 1-OW51.62 73.00
74.00
1 4.60 4.60 - 5.75 5.75 -Marathon Oil Corp. (MRO)2-EW 2-EW 30.37 34.00 34.00 - 3.10 3.10 - 4.30 4.30 -Murphy Oil (MUR)2-EW
1-OW
51.04 65.00
74.00
14 5.15 5.15 - 6.60 6.60 -Petroleo Brasileiro S.A. (PBR)2-EW 2-EW 33.56 47.00
44.00
-6 4.25 4.25 - 4.85 4.85 -Petroleo Brasileiro S.A. (PBR/A / PBRA)1-OW 1-OW29.10 46.00
43.00
-7 4.25 4.25 - 4.85 4.85 -Suncor Energy (SU)1-OW
2-EW
30.69 42.00
37.00
-12 1.70 1.70 - 3.10 3.10 -
Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
 
FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.
 
Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating SuspendedSector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative
 
Barclays Capital | Americas Integrated Oil
28 May 2010
 
3
 
CONTENTS
What Is the Intrinsic Value of an Integrated Oil Company?..............................................................5
 
Net Asset Value Ranking..........................................................................................................................7
 
 
 
Rating and Price Target Changes.........................................................................................................11
 
 
Suncor (SU): Downgrade to 2-Equal Weight; Modestly Lower Price Target toC$37/share.......................................................................................................................................11
 
Price Target Changes:.......................................................................................................................12
 
We Remain Bullish on the Medium-Term Commodity....................................................................13
 
Net Asset Value Methodology...............................................................................................................14
 
Upstream:.............................................................................................................................................14
 
Probable, Possible& Contingency Resources:..............................................................................15
 
Downstream and Chemicals:..........................................................................................................16
 
Gas & Power:.......................................................................................................................................16
 
Other Business Segments:...............................................................................................................16
 
Balance Sheet Liabilities:...................................................................................................................17
 
Limitations of our Analysis..............................................................................................................18
 
Management Premium:....................................................................................................................18
 
Discount Rate:.....................................................................................................................................18
 
Assumed Cost Inflation:....................................................................................................................18
 
Commodity Price Assumptions:.....................................................................................................18
 
 
SEC Changes to Oil and Gas Reserve Calculations:....................................................................21
 
Commodity Prices Used to Calculate Reserves Value................................................................21
 
 
Other Changes:...................................................................................................................................21
 
Company Analysis....................................................................................................................................22
 
ConocoPhillips (COP): Reiterate 2-Equal Weight........................................................................22
 
Chevron (CVX): Reiterate 1-Overweight Rating:.........................................................................22
 
Hess (HES): Reiterate 1-Overweight Rating.................................................................................23
 
Marathon (MRO): Reiterate 2-Equal Weight...............................................................................25
 
 
 
Suncor (SU): Downgrade to 2-Equal Weight...............................................................................30
 
ExxonMobil (XOM): Reiterate 1-Overweight Rating..................................................................30
 

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