North America United States
Industrials Integrated Oil
9 January 2009
US Integrated Oils
Waiting for the dam to burst -
cutting EPS again
Paul Sankey
Research Analyst
(1) 212 250 6137
paul.sankey@db.com
Ryan Todd
Associate Analyst
(1) 212 250 8529
ryan.todd@db.com
Material EPS cuts on natgas price forecast cut & Q4 guidance - See P 4
In the recent boom, oil companies would beat the Street in their quarterly
earnings, often with a record result - against a backdrop of even higher oil & gas
prices in the then-current quarter. Boom to bust time: we are going into a
fascinating EPS season, a dramatic shift from Q3 oil averaging 118/bbl to Q4
averaging $59/bbl. And, disappointing Q4 results will come against an even
weaker macro backdrop: oil quarter-to-date is averaging $45/bbl & falling. Our only
BUY-rated US oil Oxy has downside to PT. Underweight group, sell COP & MUR.
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
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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.
Forecast change
Top picks
Occidental Petroleum (OXY.N),USD59.00 Buy
Canadian Natural (CNQ.TO),CAD52.08 Buy
Companies featured
ExxonMobil (XOM.N),USD79.09 Hold
2007A 2008E 2009E
EPS (USD) 7.20 8.20 5.17
P/E (x) 11.6 9.6 15.3
EV/EBITDA (x) 6.2 5.2 8.7
Chevron (CVX.N),USD74.24 Hold
2007A 2008E 2009E
EPS (USD) 8.00 11.13 5.17
P/E (x) 10.3 6.7 14.3
EV/EBITDA (x) 4.8 3.3 5.9
ConocoPhillips (COP.N),USD53.99 Sell
2007A 2008E 2009E
EPS (USD) 9.13 10.19 2.28
P/E (x) 8.4 5.3 23.6
EV/EBITDA (x) 5.2 2.9 4.2
Occidental Petroleum (OXY.N),USD59.00 Buy
2007A 2008E 2009E
EPS (USD) 5.30 8.67 2.53
P/E (x) 10.8 6.8 23.3
EV/EBITDA (x) 4.7 3.3 7.5
Marathon Oil (MRO.N),USD29.71 Hold
2007A 2008E 2009E
EPS (USD) 5.51 6.03 2.68
P/E (x) 9.9 4.9 11.1
EV/EBITDA (x) 5.3 2.5 4.6
Hess Corporation (HES.N),USD58.34 Hold
2007A 2008E 2009E
EPS (USD) 6.04 7.72 -0.25
P/E (x) 10.2 7.6 –
EV/EBITDA (x) 3.7 2.6 6.7
Murphy Oil (MUR.N),USD49.57 Sell
2007A 2008E 2009E
EPS (USD) 3.98 9.20 2.43
P/E (x) 15.5 5.4 20.4
EV/EBITDA (x) 6.7 2.6 5.7
Canadian Natural (CNQ.TO),CAD52.08 Buy
2007A 2008E 2009E
EPS (CAD) 5.05 5.96 4.00
P/E (x) 13.5 8.7 13.0
EV/EBITDA (x) 7.1 5.4 5.7
Suncor Energy (SU.TO),CAD28.82 Sell
2007A 2008E 2009E
EPS (CAD) 2.40 3.01 0.44
P/E (x) 19.4 9.6 65.0
EV/EBITDA (x) 11.7 6.9 19.0
Petro-Canada (PCA.TO),CAD30.50 Hold
2007A 2008E 2009E
EPS (CAD) 5.51 7.75 2.37
P/E (x) 9.3 3.9 12.9
EV/EBITDA (x) 3.9 1.8 3.5
Global Markets Research Company
The oils companies are out-performing the oil price
Why is the group holding up so well? Despite a -50% decline in WTI prices over
the past three months, the US integrated group is up 8% led by oil-levered Oxy up
a staggering 21%. We see two key factors at play here: 1) unprecedented
contango in the oil market, with future oil prices hugely higher than near term
prices, the price of oil for December 2009 delivery is now $70/bbl, just 20% lower
than it was in January 2008. This is a function of a) the expectation of aggressively
higher inflation and a weaker dollar on the stimulus/”cut taxes and spend” policies
b) a tighter future market for oil based on OPEC cuts followed by rapid decline
rates especially in Russia c) and the potential for oil demand growth on lower
prices and economic stimulus. Then, from an equity standpoint there has been a
huge rotation into balance sheet quality, with ExxonMobil, and Oxy as top
performers offering low oil price breakevens, high oil and gas reserves exposure,
and super-strong (net cash positive) balance sheets.
The oils companies are out-performing the oil price
That is why we are negative: we believe that both these trends will reverse. First,
as inventories fill to the brim, on weak demand, insufficient OPEC cuts, lower than
expected declines; combined with deflation not inflation, the entire oil curve
should be forced lower, particularly at the back of the curve. Second, as credit
markets open up, witnessed by Weatherford’s recent over-subscribed debt
offering, the premium value of super-strong balance sheets will get eroded,
relative especially to the most leveraged and weakest. It is clear to us that the
former is now over-valued, the latter, under-valued, with ExxonMobil trading on
25x 2009 EPS and Oxy at 25x, and Valero on 6x, the integrateds have multiples
that cannot reasonably get higher in a falling EPS environment; rather share prices
will be forced lower.
Valuation and risk – see more on pages 6 on; all P&Ls, BS & NAV inside
In this note we adjust earnings for a cut in our natgas price forecast for 2009 and a
mark-to-market for Q1 2009 oil prices. We have also spoken to companies and
take Chevron’s trading statement on board. We value the oils top-down on longterm
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 bottomup
NAV analysis. Oil price is main general risk, volatility the big equity risk, and
accidents owing to negligence the big company-specific risk. We BUY rate Oxy as
a hedge on the potential for oil prices to sharply surprise us on the upside. For the
rest of the group we are rated either hold or sell with an under-weight stance.

Table of Contents
EPS changes....................................................................................... 3
The performance................................................................................ 7
The deck ............................................................................................. 8
The valuations.................................................................................. 10
Management value.......................................................................... 12
EV/BOE: Cheapest barrels on Wall Street..................................... 14
Reserves replacement/sustainability ............................................ 15
Volume growth................................................................................ 16
Earnings momentum....................................................................... 17
Oil share in S&P 500 EPS ................................................................ 18
Net income sensitivity .................................................................... 19
Upstream net income per barrel produced................................... 20
Downstream net income per barrel refined.................................. 21
Cash return to shareholders ........................................................... 22
Return on capital employed ........................................................... 23
DCF Implied Discounted Oil Price .................................................. 24
ExxonMobil – NAV, P&L, Cashflow................................................ 25
Chevron – NAV, P&L, Cashflow...................................................... 27
ConocoPhillips – NAV, P&L, Cashflow........................................... 29
Occidental – NAV, P&L, Cashflow.................................................. 31
Marathon – NAV, P&L, Cashflow ................................................... 33
Hess – NAV, P&L, Cashflow............................................................ 35
Murphy – NAV, P&L, Cashflow....................................................... 37
Suncor – NAV, P&L, Cashflow........................................................ 39
Petro-Canada – NAV, P&L, Cashflow............................................. 41
Canadian Natural Resources – NAV, P&L, Cashflow.................... 43