S&P Capital IQ Market Outlook 2012; Tech & O&G sector outlooks
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Transcript of S&P Capital IQ Market Outlook 2012; Tech & O&G sector outlooks
Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.Copyright © 2012 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw‐Hill Companies, Inc. All rights reserved.
Market OutlookShallow and Short Pullback
Lorraine Tan, CFAMarch, 2012
2. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Markets Rally
• Eurozone: Concerted central bank action, ECB liquidity moves send yields down
• U.S.: Fed pledge to keep interest rates low, improving macro signals
• Asia: Monetary relaxation
Source: S&P Capital IQ, Bloomberg
Risk Appetite Returns on Series of Positive News
‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
25%Australia
China
‐A
China‐H
Hon
g Ko
ng
India
Indone
sia
Japa
n
Malaysia
Philipp
ines
Singapore
South Korea
Taiwan
Thailand
S&P Asia 50
2012 YTD 2011
2012 Performance Year‐to‐Feb. 29
3. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
0.4%
1.3%
1.8%
3.0%
2.1%
‐3.5%
3.0%
1.7%2.1%
2.3%
‐4%
‐3%
‐2%
‐1%
0%
1%
2%
3%
4%
2009
2010
1Q11A
2Q11A
3Q11A
4Q11R
2011R
1Q12E
2012E
2013E
Real GDP Growth
Chain Linked Annualized Full Year (YoY)
US Outlook
Source: S&P Capital IQ, Standard & Poor’s Rating Services
Slow Growth Expectation Unchanged, but Risk of Recession Lowered
Revised higher
4. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
US Outlook
Source: S&P Capital IQ, Standard & Poor’s Rating Services
Base Case View – Equipment Spending Helps
(5.0)
‐
5.0
10.0
15.0
20.0
1Q11 2Q11 3Q11 4Q11e 1Q12e 2Q12e 3Q12e 4Q12e
Annu
alized
Growth %
Real GDP Consumer Spending
Equipment Spending Exports
State & Local Govt. Spending
5. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Looking for Relief in Housing Prices
• We’ve seen a triple dip in home prices – and the weakness remains problematic for U.S. banks
• 4% fall possible but this should be the “final” botttom – rents are rising and inventory is slowly shrinking
2.0
2.5
3.0
3.5
4.0
4.5
1975
1977
Q2
1979Q3
1981
Q4
1984
1986
Q2
1988
Q3
1990
Q4
1993
1995
Q2
1997
Q3
1999
Q4
2002
2004
Q2
2006
Q3
2008
Q4
2011
2013
Q2
2015Q3
Ratio of avg. hom
e price to avg. hou
seho
ld dispo
sable income
Existing New Quality‐adjusted
6. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Eurozone Outlook
Source: S&P Capital IQ, Standard & Poor’s Rating Services
Base Case View – Shallow 1H12 Recession
3.7
1.4 1.4
1.82.1
3
1.7
0.40.7
1.4
0.90.6 0.5
‐1
0 0
0.5
1.5
1
0
1 1 1
‐0.1
‐2
‐1
0
1
2
3
4
Germany France Italy Spain Eurozone U.K.Real GDP Growth (%) YoY
2010 2011p 2012e 2013e
7. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Eurozone Outlook
• Standard & Poor’s Ratings Services stress test indicates a potential shortfall of EUR287 bln from
the existing European support mechanism and the IMF (or around 2.7% of combined 2010 GDP)
Source: S&P Capital IQ, Standard & Poor’s Rating Services
Debt Worry a Prolonged Overhang
*Stress test scenarios are: (1) double dip recession and (2) double dip recession with an interest rate shock. Includes Germany, France, Greece, Spain, Italy, Portugal, and Ireland.
EUR bln 2011 2012 2013 2014Scenario 1Base‐case gross borrowing needs 1,664 1,677 1,375 1,237Additional deficits 0 115 175 167Bank recapitalization costs 0 39 39 39Projected gross borrowing needs 1,664 1,831 1,588 1,443Scenario 2Base‐case gross borrowing needs 1,664 1,677 1,375 1,237Additional deficits 0 156 219 247Bank recapitalization costs 0 44 44 44Projected gross borrowing needs 1,664 1,877 1,637 1,528
8. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Eurozone Outlook
Source: S&P Capital IQ, Bloomberg
Improved Appetite, Liquidity Reflected in Bond Yields
4
9
14
19
24
29
34
39Dec‐09
Feb‐10
Apr‐10
May‐10
Jul‐10
Aug‐10
Oct‐1
0Nov‐10
Jan‐11
Mar‐11
Apr‐11
Jun‐11
Jul‐11
Sep‐11
Oct‐11
Dec‐11
Feb‐12
Greece (%)
3
4
5
6
7
8
Spain & Italy (%)
Greece Spain Italy
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4.3 3.8 4.0 4.46.2
3.9 3.6 3.85.9
4.6 4.5 4.8
6.0 6.27.3
8.46.9
6.5 6.2 5.6
4.35.1 5.0 5.0
‐4.2‐2.9 ‐3.6 ‐3.6
‐1.2
0.60.7 1.0
‐0.4 ‐0.1 ‐0.1 ‐0.5
‐6
‐4
‐2
0
2
4
6
8
10
12
14
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
GDP Growth %
Consumption Gross Capital Formation Net Exports
China Outlook
Slower growth
Source: CEIC
No Repeat of Financial Crisis Lows
Expected to improve in 2H12
Slightly Slower
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China Outlook
• Broad based recovery from November low may be driven by restocking
Manufacturing Appears to Have Bounced Off Recent Low
Source: CEIC
30
35
40
45
50
55
60
65
70No
v‐07
Feb‐08
May‐08
Aug‐08
Nov‐08
Feb‐09
May‐09
Aug‐09
Nov‐09
Feb‐10
May‐10
Aug‐10
Nov‐10
Feb‐11
May‐11
Aug‐11
Nov‐11
Feb‐12
PMI (points)
PMI New Orders Production
Employment Suppliers' Delivery Time Raw Material Inventory
11. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
China Outlook
• A reduction in the exceptionally high RRR on track – is the preferred policy tool to
fine tune the economy. We see large banks RRR down to 19.0‐19.5%.
Loosening in Monetary Policy Likely
Source: CEIC
0.0
5.0
10.0
15.0
20.0
25.0Mar‐89
Dec‐90
Sep‐92
Jun‐94
Mar‐96
Dec‐97
Sep‐99
Jun‐01
Mar‐03
Dec‐04
Sep‐06
Jun‐08
Mar‐10
Dec‐11
RRR %
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Interest Rate %
RRR Lending Rate Time Deposit Rate SHIBOR 3 Mths Rate
12. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
China Outlook
• Deposits growth has lagged loans growth since Aug. 2011. Deposit rates will have
to rise in the mid‐term unless inflation falls sharply
Interest rates unlikely to decline
Source: CEIC
Inflation vs. Interest Rates
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12
%
CPI 3-Mths Time Deposit Rate 3-Mths SHIBOR
13. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
China Outlook
• While we expect the PBoC to relax monetary policy somewhat, we do not expect
overall government policy to be aggressively accommodative for the following
reasons:
– Wages are still rising: indications of pockets of tight labor
– Government linked entities debt levels have risen
– Funding limitations
– Heightened risks of NPLs
• We suspect tolerance of sub‐8% GDP growth as long as unemployment does not rise
distinctly
• Seen in recent decision to reduce budgeted railway expansion
Government may not expand agressively
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Asia‐Pacific OutlookModerating Growth
Source: S&P Capital IQ Standard & Poor’s Rating Services
Country
Country 2009 2010 2011a/e 2012f
Australia 1.3 2.7 1.8‐2.3 2.2‐2.7China 9.1 10.3 9.2 7.7‐8.2
Hong Kong ‐2.8 7.0 5.0 2.5‐3.0India 6.8 8.9 7.3‐7.8 6.8‐7.3
Indonesia 4.5 6.1 6.5 6.0‐6.5Japan ‐5.2 4.0 (2.3) 1.5‐2.0
Korea 0.2 6.2 3.6 2.8‐3.3Malaysia ‐1.7 7.2 5.1 4.4‐4.9
Philippines 1.1 7.6 3.8 4.0‐4.5Singapore ‐1.3 14.5 5.0 2.0‐2.5
Taiwan ‐1.9 10.9 4.5 2.3‐2.8Thailand ‐2.2 7.8 0.1 3.5‐4.0
Annual real GDP growth (% )
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Risk of Oil Shock
• We see the WTI averaging USD101 in 2012, USD114 in 2013 – barring an oil shock that
could conceivably send prices up to USD150 and lead to a recession
30
50
70
90
110
130
150
Jan‐08
Mar‐08
May‐08
Jul‐08
Sep‐08
Nov‐08
Dec‐08
Mar‐09
Apr‐09
Jun‐09
Aug‐09
Oct‐09
Dec‐09
Feb‐10
Apr‐10
Jun‐10
Aug‐10
Oct‐10
Dec‐10
Feb‐11
Apr‐11
Jun‐11
Aug‐11
Oct‐11
Dec‐11
Feb‐12
USD
/bbl
WTI Brent Dubai
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Equities Recovery to Continue
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Recovery has legs
• With our view that the global economic outlook will improve through 2012, we
believe higher beta markets should see a better year‐end performance.
• Second Greek bailout clears one hurdle but is priced‐in already. Key positive is that
yields of other sovereigns are declining.
• Higher beta / cyclical issues and markets may outperform on a recovery scenario.
• However, a short‐term pull back is possible given the strong start to the year.
• Risks:
– Rising oil prices
– Inflation may not ease as much as expected
– Excess liquidity from capital inflows into Asia raises bubble risk
– Eurozone overhang risk remains
18. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000May‐73
Aug‐77
Nov‐81
Feb‐86
May‐90
Aug‐94
Nov‐98
Feb‐03
May‐07
Aug‐11
HSI
0
5
10
15
20
25
30
35
40
45
50
PER x
'Hang Seng Index' PER
Hang Seng Still at Historically Attractive Valuation Levels
Source: CEIC
Still at historically attractive levels
19. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
FSSTI at Historically Attractive Valuation Levels
Source: S&P Capital IQ, CEIC
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Apr‐98
Apr‐99
Apr‐00
Apr‐0
1Apr‐02
Apr‐03
Apr‐04
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Apr‐09
Apr‐1
0Apr‐11
FSSTI
0.0
20.0
40.0
60.0
80.0
100.0
120.0
PERx
FSSTI PER x Std Dev ‐1
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Short and Shallow Pullback?
Source: Bloomberg
‐8.0%
‐7.0%
‐6.0%
‐5.0%
‐4.0%
‐3.0%
‐2.0%
‐1.0%
0.0%
1.0%Ch
ina‐H
Hon
g Ko
ng
Australia
India
Singapore
Taiwan
South Korea
Japa
n
China‐A
Indo
nesia
Thailand
Malaysia
Philippines
S&P Asia
50
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S&P Asia 50 Sector Ratios and Recommended Weightings
Source: S&P Capital IQ
Based on S&P Capital IQ market consensus estimates as of Feb. 29, 2012
YTD Rtn PER 2012 EPS 2011 EPS 2012 Div Yld 2012 PBV 2012 Recommended
% X YoY % YoY % est. % X S&P Sector Emphasis
Consumer Discretionary 6.4 11.1 0.8 12.0 1.2 1.8 Marketweight
Consumer Staples (0.7) 14.0 44.2 1.6 2.2 1.7 Overweight
Energy 21.1 9.8 36.6 9.7 3.8 1.6 Overweight
Financials ‐ Banks 20.7 8.1 39.2 7.6 4.9 1.4 Marketweight
Financials ‐ Insurance 26.7 16.2 42.8 38.5 1.6 2.4 Marketweight
Financials ‐ Real Estate 17.4 13.4 (11.6) (23.4) 3.1 0.9 Overweight
Industrials 20.6 14.0 (10.6) 10.4 2.7 1.6 Marketweight
Information Technology 14.7 12.5 (12.4) 18.7 2.1 2.3 Marketweight
Materials 12.8 15.7 (22.3) (6.9) 4.4 0.5 Marketweight
Telecom Services 7.3 11.0 26.9 2.4 4.4 1.9 Underweight
Utilities 3.8 19.7 5.2 7.4 2.7 2.1 Underweight
S&P Asia 50 11.1 11.5 21.8 9.6 3.6 1.8
S&P Asia 50 Recommended Sector Weightings (as of Feb.29, 2011)
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S&P Capital IQ Research Technical View
• Current pullback may be over (if S&P 500 holds above Friday’s close of 1370) – indices
held up by some large caps
• Dow Jones Transports, S&P Materials and S&P Energy rebounded from support levels
• Sets up for decent push to 1400‐1440 for S&P 500
• US Dollar in midst of completing bullish double bottom and this my hurt precious
metals
– Hence, gold may face continued volatile trade
• Crude oil movement has not be sensitive to USD, could hit USD130 in 2Q and set the
market up for a more significant correction
– However, fundamentals and smart money trades do not align with this happening yet
23. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Summary ‐ Recommendations
• Periodic pull backs expected ‐ we see these to be shallow and short at this juncture
• Fresh leads are needed as market rises – could come from better housing data,
improved earnings outlooks, Eurozone recovery
• We regard recent pullback as an opportunity to pick up selective cyclical issues:
– Energy and Real Estate are still largely preferred but there are also select banks, consumer
and industrials names
– Continue to prefer oil over other commodities
• Defensive sectors (Consumer Staples, Telcos and Utilities) are likely to lag on a
recovery story although there may be positive from M&A drivers
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Thank You
Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.Copyright © 2012 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw‐Hill Companies, Inc. All rights reserved.
2012 Technology OutlookThe Tide is Turning
Technology Outlook Seminar
Apurva PatelMarch 14, 2012
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2012 Global IT Spending Will Increase by +3.7% YoY
Global IT Spending Tracks Global GD P Grow th
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
G lo b a l IT Sp e n d in g (U SD tr illio n s) G lo b a l IT Sp e n d in g (Y o Y c h a n g e )
2008 Global GDP +1.5% 2009 Global GDP -2.3%2010 Global GDP +4.2%So urc e: Wo rld B ank
Source: Gartner (January 3, 2012 update)
Spending in 2H12 expected to pick‐up, but Eurozone is a wildcard
3. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Technology SectorsHardware and Software spending above Global IT spending
To simplify, we have combined Telecom Equipment and Telecom Services into Telecom
Software Spending Resilient Throughout the Business Cycle
-15%
-10%
-5%
0%
5%
10%
15%
2009A 2010A 2011E 2012E 2013E 2014E 2015E
Telecom Services Hardware Software Global IT Spending
Source: Gartner (January 3, 2012 update)
YoY
Cha
nge
(%)
4. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Technology SectorsTechnology Sub‐Industries and Companies
Deeper look at the various sub‐
industries
A list of public companies in the
various sub‐industries
Telecom Services Hardware SoftwareNetwork Equipment Planning PCs Applications
Fixed-Line Telecom Services Implementation Servers Application development
Mobile Voice Support Monitors Deployment tools
Data and Multimedia Services Operations Printers System Infrastructure
Training Peripherals
Education Mobile Phones/Smartphones
Tablets
StorageSource: S&P Capital IQ
Telecom Services Hardware SoftwareAT&T Cognizant Tech Apple Microsoft
Americas Verizon Amdocs Intel Oracle
Cisco Systems Computer Sciences Corp. Qualcomm VMware
BT Accenture Nokia SAP
EMEA Vodafone Cap Gemini STMicroelectronics NA
Ericsson Atos SA Infineon NA
China Mobile Tata Consultancy Samsung Electronics NA
Asia Pacific China Telecom Infosys TSMC NA
ZTE Wipro Hitachi NASource: S&P Capital IQ
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Asian IT Sector Dominated by HardwareWe will focus on Hardware
– Hardware market is interconnected via supply chain
– Services market still developing in Asia, dominated by Indian companies
– Limited Software industry outside the U.S. (excludes Internet companies)
– Software companies in China rising (based on China’s MIIT), but today most of these companies are not standalone companies (i.e., Huawei, ZTE, Haier)
Telecom Services Hardware SoftwareAT&T Cognizant Tech Apple Microsoft
Americas Verizon Amdocs Intel Oracle
Cisco Systems Computer Sciences Corp. Qualcomm VMware
BT Accenture Nokia SAP
EMEA Vodafone Cap Gemini STMicroelectronics NA
Ericsson Atos SA Infineon NA
China Mobile Tata Consultancy Samsung Electronics NA
Asia Pacific China Telecom Infosys TSMC NA
ZTE Wipro Hitachi NASource: S&P Capital IQ
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Technology Supply ChainA sample view of the hardware supply chain
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Technology Themes
• Mobile devices (semiconductors, hardware, software)
– Greater wireless broadband speeds, falling prices, desire for Internet/e‐mail access from any location for personal and professional purposes
• Internet advertising (services)
– Users/usage of Internet increasing, spending still trailing activity on percentage basis, high relative ROI (with sophisticated targeting, personalization, measurement, reporting)
• Electronic content in autos (semiconductors, hardware, software)
– Government pollution guidelines, safety and security regulations, and high oil prices
• Software as a service (SaaS) (software)
– Ease of deployment/customization, lower total cost of ownership, access from any Internet‐enabled device, scalability
• Solar energy (semiconductors)
– High oil prices, government subsidies, national/corporate/individual energy independence, conservation/sustainability, nuclear questions
• Electronic Medical Records (semiconductors, hardware, software)
– Simplify transfer of medical records, lower costs of medical insurance/drugs, reduce human errors, new federal health privacy laws
• Connected Home (semiconductors, hardware, software)
– Intelligent home electronic devices/appliances, enhanced electric power requirements, lower maintenance costs
Internet is the driving force for the hardware industry
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Previously, the PC market drove the Hardware market…
• Desktop units and ASP declining
• Notebooks units rising, while ASP declining
• Blended ASP declining
PC Shipments (units)
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015
Uni
ts (m
illio
ns)
Global Desktops (units) Global Notebooks (units)
Source: IDC (December 2011update)
58% 59%61%
64%
67%
69%
Notebook as % of total PC shipments
9. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
Smartphone Units RisingIndustry shifting to high‐volume smartphone market
Mobile Phone and Smartphone Shipments
0
500
1000
1500
2000
2500
3000
3500
2010 2011 2012 2013 2014 2015
Uni
ts (m
illio
ns)
Mobile Phone Shipments (units) Smartphone Shipments (units)
18%
Smartphones as % of total mobile phone shipments
24%28%
30%32%
34%
Source: IDC
10. Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.
…Now, the smartphone market will drive the Hardware market
• Dec 4Q11 Smartphone shipments totaled 158 million units
• Dec 4Q11 PC shipments forecasted to be 92 million units
Smartphone and PCs are at inflection point
Smartphones vs. PCs shipments (units)
0
200
400
600
800
1000
1200
2010 2011 2012 2013 2014 2015
Uni
ts (m
illio
ns)
Smartphone Shipments (units) PC Shipments (units)
Source: IDC
Inflection point
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2011 Stock Performance
• On November 23, 2011, we raised our recommendation to Marketweight from Underweight
– As of November 22, 2011, the Asian IT sector was in the negative territory
Technology Stocks Performed Poorly, but better than S&P Asia 50
Asia 50 Stock Performance (2011)
(30.0)
(25.0)
(20.0)
(15.0)
(10.0)
(5.0)
0.0
5.0
10.0
Cons
umer
Dis
cret
iona
ry
Util
ities
Info
rmat
ion
Tech
nolo
gy
Tele
com
Serv
ices
Cons
umer
Stap
les
Ener
gy
S&P
Asi
a 50
Mat
eria
ls
Indu
stria
ls
Fina
ncia
ls -
Ban
ks
Fina
ncia
ls -
Real
Esta
te
Fina
ncia
ls -
Insu
ranc
e
Stoc
k Pe
rform
ance
(%)
Source: S&P Capital IQ
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2012 Outlook Slightly More Positive
• Higher global GDP growth expectations vs. 2011
• IT Hardware supply/demand expected to rebalance sometime 2H12
• Smartphones shifting from high‐end/premium to high‐volume/lower price points
• Notebooks (Ultrabooks) could be fueled by Windows 8 (2H12)
• Signs of a bottom in the LCD TV market (lower global industry capacity)
• M&A: consolidation in the DRAM market (shifting to NAND) and more to come
• Valuation attractive ‐multiple compression (2011)
What’s Driving 2012 Outlook?
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Asian IT Sector Challenges
• Exports primary driver
– Businesses tied to global macro environment
– Domestic consumption is low, but rising
• Higher inflation
– Negatively impacts profits
• Excess capacity
– China building capacity in various IT sectors
• Larger companies benefiting
– Shifts in product cycles benefiting mostly established players
– Smaller companies unable to maintain R&D investments
Domestic consumption is key
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2012 Technology Performance (YTD) Starting on a solid footing
Asia 50 Stock Performance (YTD, pricing as of 3/9/12)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Cons
umer
Stap
les
Util
ities
Cons
umer
Dis
cret
iona
ry
Tele
com
Serv
ices
Mat
eria
ls
S&P
Asi
a 50
Fina
ncia
ls -
Real
Esta
te
Fina
ncia
ls -
Insu
ranc
e
Info
rmat
ion
Tech
nolo
gy
Fina
ncia
ls -
Ban
ks
Ener
gy
Indu
stria
ls
Stoc
k Pe
rform
ance
(%)
Source: S&P Capital IQ
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Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.Copyright © 2012 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw‐Hill Companies, Inc. All rights reserved.
Oil & Gas Sector Update Increasing Supply Side Risks
Ahmad Halim, CFAMarch 14, 2012
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Oil prices: where are we now vs 2008?
• Still some 14‐27% off July 2008 peak
Source: S&P Capital IQ, Bloomberg
0
20
40
60
80
100
120
140
160
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
WTI Dated Brent Dubai
USD/bbl
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Demand Outlook (cont)
Source: S&P Capital IQ, EIA
Emerging markets to drive oil demand in 2012
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
China Middle East Brazil Africa India Russia NorthAmerica
Japan Europe Others
mbpd
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88.5
89.0
89.5
90.0
90.5
91.0
Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12
IEA EIA OPEC
mbpd
Demand outlook
Source: S&P Capital IQ, International Energy Agency, Energy Information Administration, OPEC
Continuous downward revision over the last six months
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-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
-5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Average crude oil price YoY
Demand growth YoY
SS & DD drives oil prices
Source: S&P Capital IQ, BP, EIA
…
but what about the outliers?
Iran Revolution
Outbreak of the Iran-
Iraq War
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Supply Outlook
Source: S&P Capital IQ, EIA
Nothing out of the ordinary on the surface
0
10
20
30
40
50
60
70
80
90
100
2010 2011E 2012F 2012F
OECD OPEC crude OPEC non-crude FSU China Other non-OECD
mbpd
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Supply Outlook (cont)
Source: S&P Capital IQ, BP, EIA, Bloomberg
Global oil supply disruptions since 1970
0
20
40
60
80
100
12019
50
1960
1970
1980
1990
2000
2010
USD/bbl (2010 prices)
Arab-Israeli War & oil embargo
Iranian revolution and outbreak of Iran-Iraq war
First Gulf War
Second Gulf War, Venezuelan strikes
Arab Spring, Libyan supply cut
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Supply Outlook (cont)
Source: S&P Capital IQ, EIA
What lies beneath?
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The flashpoints: Iran
Source: EIA
Plenty of saber‐rattling but all‐out war unlikely
• Oilfields near border with Iraq, main gas field is offshore South Pars
• 4th largest oil reserves and 2nd largest gas reserves in the world
• Total exports in 2010 = 2.2 mbpd
• Bilateral sanctions increasing, with EU oil embargo the latest step
• Effective lost supply could amount to 1 mbpd, if no alternative buyer found.
• Tactical strike by Israel?
• Straits of Hormuz chokepoint potentially at risk (but unlikely).
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The flashpoints: Iran (cont)Supply with no (capable & willing) buyers = lost supply
Source: EIA
Iran's 1H11 exports by destination, kbpd
China, 543
EU, 450
Japan, 341
India, 328
South Korea, 244
Turkey, 182
Others, 170
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The flashpoints: Syria
• Violent crackdown by Bashar
Al‐
Assad’s forces on protestors since
early 2011
• Economic sanctions by the US and
EU in place. Additionally, US also
imposed energy sector sanctions
• Total reserves = 2.5 bln
bbls
(2010)
• Production = 387 kbpd
(2010),
declining rapidly.
• Exports 109 kbpd
in 2010, almost
exclusively to EU. 75% heavy, sour
crude.
Small but vital exporter to EU countries
Source: S&P Capital IQ, EIA
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The flashpoints: Sudan & South Sudan
• Continuing dispute between South
Sudan and Sudan on pipeline transit
fees.
• Border conflicts in the Blue Nile region
and the vital oil producing Abyei
region
• US energy sanctions in place, and EU
and UN general embargoes.
• Total reserves = 4 bln‐7 bln
bbls
(2010)
• Production = 470 kbpd
(2010), expected
to be in decline
• Exports 372 kbpd
in 2010, almost
exclusively to Asia (China 67%, Malaysia
12%). 55% heavy, sour crude, balance is
medium sweet.
Significant exporter to Asia
Source: S&P Capital IQ, EIA
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The flashpoints: Yemen
• Rising piracy and political unrest
damages existing infrastructure and
deters investments
• Total reserves = 3 bln
bbls
(2011)
• 2010 production = 259 kbpd, 2011
expected at 170 kbpd.
• Exported 103 kbpd
in 2010, largely
to Asia.
• Turned net importer of crude and
refined products by January 2012,
due to continued pipeline attacks
• Production is largely light, sweet
crude.
Minor exporter but in control of vital Bab
el Mandab
chokepoint
Source: S&P Capital IQ, EIA
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The flashpoints: Libya
• Production picking up following
overthrow of Muammar Ghaddafi,
but recent news from Eastern
region is discouraging.
• Total reserves = 46 bln
bbls
(2010)
• 2010 production = 1.6 mbpd‐1.8
mbpd, 2011 production affected by
revolution.
• Crue
oil and product exports = 1.5
mbpd
in 2010 .
• Production is largely light, sweet
crude, exported largely to Europe.
Biggest reserve size in Africa, major exporter to EU
Source: S&P Capital IQ, EIA
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The flashpoints: in summary
• China unlikely to pull back from Iran. Would likely increase imports, but unlikely to
be able to absorb all.
• Syria, Sudan & Yemen troubles = 400 kbpd
loss in supply
• Too early to tell on Libya.
• Potential supply loss = 700 kbpd
–
1 mbpd.
• Saudi Arabia to offset loss of Iran heavy?
Likely some loss to global supply
Source: CEIC
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S&P Capital IQ crude oil price outlook
• Our average WTI crude price assumptions for 2012‐2013 stand at USD91/bbl and
USD108/bbl
– Last updated early January 2012, does not reflect higher geopolitical tension since then
• Oil price response to supply disruptions have diminished in recent times, but still
represents a substantial risk
• Short‐term price increase to benefit upstream producers
• Long‐term higher prices can negatively impact global economy and push
demand
lower.
• S&P believes US can tolerate USD4/gallon oil (currently averaging USD3.72/gallon)
due in part to low gas price and declining unemployment
• …
but what about USD5/gallon gas?
Plenty of upside risk to our WTI assumptions
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Valuation tables
Company Name CIQ Ticker TradingShare Price 1 Mth 3 Mths 6 Mths FY2012 FY2013 FY2012 FY2013O&G (Integrated)PetroChina SEHK:857 HKD 11.42 296,217 -1.2% 20.1% 22.9% 10.6x 10.0x 15.7% 5.7%Sinopec SEHK:386 HKD 8.90 102,940 -3.4% 10.4% 23.1% 7.7x 7.0x 10.4% 9.4%Exxon Mobil NYSE:XOM USD 84.30 397,325 0.6% 5.3% 17.3% 10.3x 9.4x -9.4% 7.7%Royal Dutch Shell LSE:RDSA GBP 22.80 224,783 -0.2% 0.8% 14.6% 7.8x 7.5x -11.4% 6.3%Chevron Corp NYSE:CVX USD 109.57 216,616 4.1% 6.3% 14.2% 8.5x 8.2x -5.6% 1.7%ConocoPhillips NYSE:COP USD 77.16 98,741 6.8% 9.5% 20.1% 9.0x 8.4x -12.7% 2.9%BP plc LSE:BP. GBP 4.94 146,678 0.7% 11.1% 31.5% 7.0x 6.7x -18.6% 3.8%PTT PCL SET:PTT THB 351.00 32,790 0.9% 9.7% 11.8% 8.7x 7.7x 10.0% 13.9%Average 1.04% 9.15% 19.45% 8.7x 8.1x -2.7% 6.4%
O&G (E&P)CNOOC Ltd. SEHK:883 HKD 16.70 97,705 -3.4% 13.5% 24.6% 9.1x 8.9x -2.2% 1.8%Statoil ASA OB:STL NOK 160.70 89,589 2.9% 7.9% 31.2% 9.2x 8.5x 9.3% 3.9%Suncor Energy TSX:SU CAD 34.24 54,029 1.1% 17.8% 20.1% 10.2x 9.5x 22.6% 12.3%Apache Corp. NYSE:APA USD 107.45 41,295 2.2% 14.4% 13.5% 8.7x 7.7x 10.7% 12.1%Anadarko NYSE:APC USD 85.25 42,491 -2.1% 9.6% 21.2% 23.9x 17.9x NM 34.8%Woodside Petroleum ASX:WPL AUD 35.93 30,654 1.5% 11.0% 10.3% 16.1x 13.4x 16.5% 19.8%Hess Corporation NYSE:HES USD 63.04 21,278 2.0% 11.9% 8.7% 9.4x 7.9x 31.1% 15.2%PTT EP PCL SET:PTTEP THB 179.50 19,437 0.6% 7.5% 11.5% 11.2x 9.3x 18.4% 19.8%Average 0.60% 11.68% 17.65% 10.6x 9.3x 15.2% 15.0%
Market Cap (USD mln)
Price Performance P/E (x) Net Profit Growth
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Valuation tables (cont)
Company Name CIQ Ticker FY2012 FY2013 FY2012 FY2013 FY2012 FY2013 FY2012 FY2013 FY2011 FY2012O&G (Integrated)PetroChina SEHK:857 5.7x 5.3x 1.6x 1.4x 14.9% 14.8% 36.58% 46.90% 4.16% 4.50%Sinopec SEHK:386 4.6x 4.2x 1.2x 1.1x 16.3% 15.7% 16.89% 17.25% 3.48% 3.62%Exxon Mobil NYSE:XOM 4.7x 4.5x 2.3x 2.1x 21.7% 20.4% 47.50% N/A 2.33% 2.47%Royal Dutch Shell LSE:RDSA 4.0x 3.8x 1.2x 1.1x 15.5% 14.9% 17.80% N/A 4.70% 4.87%Chevron Corp NYSE:CVX 3.6x 3.5x 1.6x 1.4x 19.2% 17.8% 46.00% N/A 3.01% 3.15%ConocoPhillips NYSE:COP 4.0x 3.9x 1.4x 1.3x 15.6% 14.9% 29.40% N/A 3.59% 3.81%BP plc LSE:BP. 3.9x 3.7x 1.2x 1.1x 17.7% 16.7% 19.80% N/A 4.14% 4.57%PTT PCL SET:PTT 5.9x 5.3x 1.6x 1.4x 19.7% 19.6% 9.10% 10.12% 3.87% 4.27%Average 4.5x 4.3x 1.5x 1.3x 17.6% 16.8% 27.88% 24.76% 3.66% 3.91%
O&G (E&P)CNOOC Ltd. SEHK:883 4.7x 4.5x 2.0x 1.8x 23.7% 21.1% 57.15% 62.45% 3.79% 3.99%Statoil ASA OB:STL 2.3x 2.2x 1.6x 1.5x 18.7% 18.1% 47.38% 46.07% 4.23% 4.45%Suncor Energy TSX:SU 5.2x 4.7x 1.2x 1.1x 13.1% 12.1% 60.80% 62.60% 1.32% 1.42%Apache Corp. NYSE:APA 3.7x 3.4x 1.3x 1.1x 15.3% 14.9% 79.30% N/A 0.60% 0.61%Anadarko NYSE:APC 6.3x 5.4x 2.1x 1.9x 8.9% 11.2% 71.30% N/A 0.43% 0.43%Woodside Petroleum ASX:WPL 8.8x 7.3x 2.2x 1.9x 14.2% 15.8% 68.90% 68.90% 3.17% 3.67%Hess Corporation NYSE:HES 3.6x 3.2x 1.0x 0.9x 11.4% 11.1% 36.30% 37.60% 0.66% 0.66%PTT EP PCL SET:PTTEP 5.0x 4.2x 2.5x 2.1x 23.5% 24.0% 51.47% 51.12% 3.47% 4.24%Average 4.9x 4.4x 1.7x 1.5x 16.1% 16.0% 59.07% 54.79% 2.21% 2.43%
Gross Margin Div YieldEV/EBITDA P/B ROE
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GlossaryS&P Capital IQ EPS Estimates – S&P Capital IQ earnings per share (EPS) estimates reflect analyst projections of future EPS from continuing operations, and generally exclude various items that are viewed as special, non-recurring, or extraordinary. Also, S&P Capital IQ EPS estimates reflect either forecasts of S&P Capital IQ equity analysts; or, the consensus (average) EPS estimate, which are independently compiled by Capital IQ, a data provider to S&P Capital IQ Equity Research. Among the items typically excluded from EPS estimates are asset sale gains; impairment, restructuring or merger-related charges; legal and insurance settlements; in process research and development expenses; gains or losses on the extinguishment of debt; the cumulative effect of accounting changes; and earnings related to operations that have been classified by the company as discontinued. The inclusion of some items, such as stock option expense and recurring types of other charges, may vary, and depend on such factors as industry practice, analyst judgment, and the extent to which some types of data is disclosed by companies.
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Abbreviations Used in S&P Capital IQ Equity Research Reports CAGR- Compound Annual Growth RateCAPEX- Capital ExpendituresCY- Calendar YearDCF- Discounted Cash FlowEBIT- Earnings Before Interest and TaxesEBITDA- Earnings Before Interest, Taxes, Depreciation and AmortizationEPS- Earnings Per ShareEV- Enterprise ValueFCF- Free Cash FlowFFO- Funds From OperationsFY- Fiscal YearP/E- Price/Earnings PEG Ratio- P/E-to-Growth RatioPV- Present ValueR&D- Research & DevelopmentROE- Return on EquityROI- Return on InvestmentROIC- Return on Invested CapitalROA- Return on AssetsSG&A- Selling, General & Administrative ExpensesWACC- Weighted Average Cost of Capital
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