4 January 2009
Global Oils 2009
The oil cycles boom, and bust;
waiting for $10/bbl consensus
Paul Sankey
Research Analyst
(1) 212 250 6137
paul.sankey@db.com
Ryan Todd
Associate Analyst
(1) 212 250 8529
ryan.todd@db.com
The key drivers for oil in 2009, the same as every year
1) Oil is driven by demand, and demand, and supply. Weak demand matters more
than poor supply + OPEC cuts 2) Oil is a boom and bust business; this is a bust
cycle. 3) The words that matter come from the Saudis, and although they are
targetting $75/bbl long term, they are also expanding capacity to 12mb/d by year
end - limiting the desire to cut more. We remain underweight, SELL COP, MUR;
only BUY is Oxy based its combined hedge vs oil prices spiking and as a CO2
hedge; because Obama’s environmental costs are another negative.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Occidental Petroleum (OXY.N),USD62.16 Buy
Companies featured
ExxonMobil (XOM.N),USD81.64 Hold
2007A 2008E 2009E
EPS (USD) 7.20 8.44 5.93
P/E (x) 11.6 9.7 13.8
EV/EBITDA (x) 6.2 5.2 7.9
Chevron (CVX.N),USD76.52 Hold
2007A 2008E 2009E
EPS (USD) 8.00 10.83 5.70
P/E (x) 10.3 7.1 13.4
EV/EBITDA (x) 4.8 3.5 5.7
ConocoPhillips (COP.N),USD54.85 Sell
2007A 2008E 2009E
EPS (USD) 9.13 10.56 3.62
P/E (x) 8.4 5.2 15.1
EV/EBITDA (x) 5.2 2.8 3.5
Occidental Petroleum (OXY.N),USD62.16 Buy
2007A 2008E 2009E
EPS (USD) 5.30 8.75 3.14
P/E (x) 10.8 7.1 19.8
EV/EBITDA (x) 4.7 3.4 6.8
Marathon Oil (MRO.N),USD28.98 Hold
2007A 2008E 2009E
EPS (USD) 5.51 6.12 2.82
P/E (x) 9.9 4.7 10.3
EV/EBITDA (x) 5.3 2.5 4.4
Hess Corporation (HES.N),USD57.25 Hold
2007A 2008E 2009E
EPS (USD) 6.04 7.86 1.41
P/E (x) 10.2 7.3 40.5
EV/EBITDA (x) 3.7 2.5 4.6
Murphy Oil (MUR.N),USD47.45 Sell
2007A 2008E 2009E
EPS (USD) 3.98 9.38 2.97
P/E (x) 15.5 5.1 16.0
EV/EBITDA (x) 6.7 2.4 5.1
Canadian Natural (CNQ.TO),CAD51.99 Buy
2007A 2008E 2009E
EPS (CAD) 5.05 6.00 4.67
P/E (x) 13.5 8.7 11.1
EV/EBITDA (x) 7.1 5.4 5.3
Suncor Energy (SU.TO),CAD25.83 Sell
2007A 2008E 2009E
EPS (CAD) 2.40 3.04 1.11
P/E (x) 19.4 8.5 23.3
EV/EBITDA (x) 11.7 6.4 11.8
Petro-Canada (PCA.TO),CAD29.10 Hold
2007A 2008E 2009E
EPS (CAD) 5.51 7.89 3.34
P/E (x) 9.3 3.7 8.7
EV/EBITDA (x) 3.9 1.7 2.8
Global Markets Research Company
Oil is driven by demand, demand, and supply
There is some price elasticity of oil demand, but a best guess is that around 80%
of demand is GDP driven, 20% price driven. DB is bearish on the global economy
in 2009 and of particular importance negative on China. We have maintained the
view that global oil demand will fall in 2009 for the first time since the early 1980s.
We continue to see a major problem with long-term oil supply, but the net effect
of major demand falls in late 2008 and 2009; and the chasing OPEC cuts, is that
they have turned the oil market from one with less than one year’s spare capacity
cover of global demand growth (1.5mb/d spare capacity in a market growing at
1.5mb/d per year) to a market with infinite spare capacity, given that demand is
falling and there is over 3mb/d of spare capacity now, and growing with each cut.
In this note we briefly address the issue of whether Cushing oil inventories are full.
Not only does OPEC have to stop stocks rising with 2.5mb/d less oil, it needs to
draw stocks down another 500kb/d+: likely beyond their combined appetite to cut.
Listen to the Saudis, what little control there is lies with them alone
At face value, the most important recent Saudi statement was the King’s setting of
$75/bbl oil as a fair price for both suppliers and consumers. However also note
that the Saudis have said they will continue to supply their customers if they want
to buy oil, and that they will have 12mb/d of capacity by end 2009. Both bearish.
Oil is a boom & bust business; bad news this week: COP, CVX, MRO updates
The cycles to correct over-balance in oil do not align. Most of the demand side is
on an annual GDP + weather cycle, but there is a major secular shift towards more
efficient cars in the US now underway, so demand weakness is now double
aligned. By contrast the majority supply side is on a seven year cycle, with
relatively little short-term price elasticity of supply, further reduced by hedging.
The net effect is that we are just hitting in 2009 a strong year for oil supply growth
from major oil companies, with high levels of profitable hedges from medium and
small cap E&Ps. The different length of cycle between oil demand & supply makes
for excessive cycles, an industry characterized by boom/bust since inception. We
expect 2009 to be a bust cycle that is only just beginning. We expect poor
reserves reports, write-downs, poor earnings, more EPS cuts, & bankruptcies.
Valuation and risk – see more on pages 20 onwards through 34
We value the oils top-down on long-term ROCE/WACC to generate a target
multiple applied to our through-the-cycle EPS to derive our price target. Note our
WACC is a moving target. Cost of both equity and debt is debatable. We cross
check our price targets based on bottom-up NAV analysis. Oil price is main risk.

Table of Contents
Demand, demand and supply........................................................... 3
Listen to the Saudi .......................................................................... 11
Oil is a boom & bust business........................................................ 13
The performance.............................................................................. 17
The deck ........................................................................................... 18
The valuations.................................................................................. 20
Management matters most ............................................................ 22
EV/BOE: Cheapest barrels on Wall Street..................................... 24
Reserves replacement/sustainability ............................................ 25
Volume growth................................................................................ 26
Earnings momentum....................................................................... 27
Oil share in S&P 500 EPS ................................................................ 28
Net income sensitivity .................................................................... 29
Upstream net income per barrel produced................................... 30
Downstream net income per barrel refined.................................. 31
Cash return to shareholders ........................................................... 32
Return on capital employed ........................................................... 33
Valuation and risks.......................................................................... 34