The Future of OilMike Lee, Roy Ju, Christine Chen, Jon Stein

Introduction• Recommendation• Industry Analysis

• Price Increase Drives• Additional Considerations

• Rise of Natural Gas• Interest Rate Impact

• Company Analysis• Strategies• Financial Ratios• Valuation and Projection

• Conclusion

Recommendation• Invest in ConocoPhillips

• Industry Analysis: Future Oil Price Increase• Favorable Company Analysis• Favorable Ratio Analysis• Relatively High NPV and Intrinsic Value Analysis

Industry Analysis: Price Increase Drivers• Spike Potential

• Geopolitical Turmoil• Natural Disasters• War• Depletion of Low-Cost Crude Oil Sources

• Weakening U.S. dollar• Emerging Markets Surge• Saudi Arabia

Industry Analysis: Additional Considerations • Sustainability

• Political Risk• Government restrictions in favor of environmentally friend sources

• Growth in Alternative Energy Sources• Nuclear Power• Wind Power• Solar Power

• Technological Improvements• Increase industry margins increase market supply• Pushes prices down• Expedite rise of natural gas

Industry Analysis: Additional Considerations • Rise of natural gas

• 3 themes in historical energy consumption• Regular energy transition• Diversification of fuel sources• De-carbonization as time passes

• Trend• Dominance for 50-80 years• Surpass oil as soon as 2030

Industry Analysis: Additional Considerations• Impact on CP and AR

• Comparable business mix• Extremely strong correlation between natural gas and oil prices

Crude Oil Natural Gas

Industry Analysis: Additional Considerations• Interest Rates

• Offsetting impacts on crude oil prices• Increase in rates

• Increase cost, driving down demand• Stronger U.S. dollar applies upward pressure on prices

• Minimal impact on oil

Company Analysis• CP

• First mover• High margins• Efficient operations• Intent to finish active projects• Shorter asset life cycles-capital flexibility

Company Analysis• AR

• Cutting production – higher break-even point• Reliance on fracking• Idle capacity• Recent downsizing

Ratio Analysis

Value Factor Desired Value Company Mean Range Acceptable/Poor/BadDebt to Assets < 1.10 Antero 33.81 16.21 Bad

ConocoPhillips 17.05 7.16 PoorCurrent Ratio > 1.5 Antero 0.87 0.85 Poor

ConocoPhillips 1.13 0.48 AcceptableEarnings per Share Consistent Antero 2.57 5.29 Acceptable

ConocoPhillips 3.56 20.20 BadPrice to Earnings < 9 Antero 50.04 3.86 Bad

ConocoPhillips 11.21 10.65 PoorPrice to Book < 1.2 Antero 2.71 3.54 Bad

ConocoPhillips 1.48 0.44 Poor

Regression Analysis• High correlations between oil prices and GDP, consumption, and production

• Utilized regression coefficient to predict future oil prices

Sensitivity Analysis

Probability of a Large Price Change

Model Assumptions• Projected Revenue

• Oil Prices• Natural Gas Price

• Growth Assumptions• ConocoPhillips – 4%• Antero- Initially massive, regression toward the mean

Model Assumptions• Price elasticity of demand -0.2• Terminal Growth is 4%

Commodity Prices Per Share Intrinsic Value

Oil Natural Gas CP AR

Optimistic $359.26 $51.42 $1,125.51 $347.77

Semi-Optimistic $233.35 $30.59 $613.47 $240.38

Base $118.29 $11.53 $145.23 $13.10

Semi-Pessimistic $61.45 $10.18 $(0.08) $(304.45)

Pessimistic $33.78 $5.60 $(112.67) $(3,372.07)

Optimistic Semi-Optimistic Base Semi-Pessimistic Pessimistic

$(200.00)

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

Intrinsic Value of ConocoPhillips

  Oil Natural Gas COP

Optimistic $359.26 $51.42 $1,125.51

Semi-Optimistic $233.35 $30.59 $613.47

Base $118.29 $11.53 $145.23

Semi-Pessimistic $61.45 $10.18 ($0.08)

Pessimistic $33.78 $5.60 ($112.67)

Optimistic Semi-Optimistic Base Semi-Pessimistic Pessimistic

$(4,000.00)

$(3,500.00)

$(3,000.00)

$(2,500.00)

$(2,000.00)

$(1,500.00)

$(1,000.00)

$(500.00)

$-

$500.00

$1,000.00

Intrinsic Value of Antero Resources

  Oil Natural Gas AROptimistic $359.26 $51.42 $347.77 Semi-Optimistic $233.35 $30.59 $240.38 Base $118.29 $11.53 $13.10 Semi-Pessimistic $61.45 $10.18 ($304.45)Pessimistic $33.78 $5.60 ($3,372.07)

Model Shortcomings• Extreme Intrinsic Value

• Price elasticity of demand increases at higher prices• Managers slow growth when prices fall

Qualitative Analysis• ConocoPhillips

• Established• Slow growth-mature firm• Dividend

• Antero Resources• Young firm• Obsessed with growth

Conclusion• CP has favorable long-term viability• Crude oil price recovery will enhance company performance