Morgan Stanley Industry Analys' February 7, 2010 US Oil Services Groundhog Day: We Expect a Major OSX Rally, Similar to the 1998-2000 Cycle Ole Storer (be Sionemorgancaiaycon Paulo Loureiro. PaoLaserctinemataey om Igor Levi Ine e-em 2 reopertee When fundamentals don’t work anymore, turn to Punxsu- tawney Phil for help with the direction of the OSX. Accord- ing tothe furry rodent, we're on for six more weeks of winter. That's good news for a battered oll services tape. A combina- tion of "popular myth” bullish outcomes (Groundhog Day), a technical analysis of today's cycle vs. the 1998-2000 cycle, and a flury of recent positive fundamental data points all lead us to believe that a snap-back rally could be imminent, ‘Groundhog Day:’ Similar conditions 10 years ago. On February 2, 2010, Punxsutawney Phil forecast a long winter (source: www.groundhog.org). This week, the famous rodent, ‘came out with the same prediction of six more weeks of win tor. On February 2, 2000, the day Phi called for a longer win- ter, the OSX was hovering around 87. Six weeks later, the ‘OSX was ~20% higher. As we have previously written, the 11988-2000 and 2008-2010 cycies display many similarities. We are now calling for one more resemblance: a “Groundhog Day" in the OSX over the next six weeks, which could bring the index back to ~225 by mid-March (Exhibit 3, next page). Other recent positive (and maybe more serious?) data points include, amongst athers: (1) Awinter about to get colder than historical averages over the next two weeks (source: NOAA); (2) The US horizontal rig count reaching 659 units this wee Which is an all-sime high (previous high of 650 rigs was reached a the peak of the cycle in October 2008); (8) Last week's comments by Schlumberger's CEO that pressure pumping capacity is geting tighter with some areas. already witnessing a shortage of pressure pumping equip- ‘ment that wil kely lead to pricing improvement; (4) Shale gas piays, where most ofthe activity resides today, tearing equipment to pieces, which in turn could bring utliza- tion above 80% by mid-year; MORGAN STANLEY RESEARCH February 11,2010 Investment Perspectives — Global (5) Morgan Stanley raising 2010 GDP growth expectations for China (to 11% from 10%) and Japan (to 1.8% from 0.4%); (6) Rising China oll demand, as evidenced by seasonal re- ‘cord high oll shipments from the Middle East and West AMtica to the Far East Nows bulletins from the winter of 2000 ring familiar today: ‘+ "Negative API report pushed oil prices to the lower end of its range" + "Recent weather forecasts call for below-normal tempera- tures over much of the country” ‘+ "The risks are rising that cyclical inflation prossures are beginning to intensify" ‘+ "Yield curves may be priced for slower growth” ce Sa ater a Say emit? Intensity Adjusted Rig Count Just 20% below Peak 50% Industry Vow: Attractive —Oll Services, Dailing & Equipment We expect the foning sequence of vers. A posite ict n hae flowed by a pose icon cin ates followed Oy & inflection in deepwater alos. Stocks Sand wes expect allo ournarae i delve ask gine. 25MORGAN STANLEY RESEARCH Morgan Stanley obeury 12048 Investment Perspectives — Global Industry Analysis emits "Groundhog Day’: Second Leg of OSX Rally May Be Yet to Come Following Recent Pullback Toa Foe ey Roch mnt A Closer Look at History ee ee ee ee ee) 150 380 2000 20 $125 ss00 8 g £ s100 seo 8 ws $100 50 si20 ‘veo ammo snows inno 26Morgan Stanley Industry Analys' January 2, 2010 Europe Food Retai Initiating Coverage in Europe Edouard Aubin cous Animal om Geoff Ruddell February 11,2010 Investment Perspectives — Global Hf Carrefour can narrow the sales density gap by 2018, the shares could be worth as much as €87. Other than in Bel- ‘lum, we see no structural reasons why Carrefour's sales densities should be lower than peers’. Our analysis suggests, that if two-thirds ofthe gap could be closed gradually aver the next eight years, Carrefour shares could be worth as much as 67. This may seem fanciful, but itis worth remembering that the shares traded at more than €90 ten years ago. Fred Bjelland, CFA emit? Charlie J Mulr-Sands Carrefour: 2009-12: Bull/base/bear case scenarios Companies Featured ‘Total plan benefit Gnerementall ‘50680695975, Caretour (CARR.PA, €33:7, Overweight, PT €44) a N asass Graae Ge nHO TOOTS Delhaize Group (DELB.BR, €54.51, Overwoight, PT €62) Atul contbuton 21s 344 3685 4250 ld ale AC margin 32% 34% 36% 42m ‘Aholé (AHLN.AS, €9.02, Equa-weigh, PT €9.40) oe ah SAR Ge 42 msbulese Carrefour: Optionality of Becoming a Better Mi chant Not Priced in We initiate coverage with an Overweight rating and €44 price target (30% upside potential): We believe that Carre. four will generate EPS of €3.70 by 2012 (versus €3.22 for ‘consensus), on the assumption that the company is able to keep c.50% of the cosis/synergies benefits of its turnaround plan, In this scenario, we see fair value of €41 per share, but we add a further €3 to reflect some of the M&A and sales density recovery potential that we think is possible. Carrefour keeping 50% of plan benefits is realistic: We do not believe that the competitive environment in Carrefour's key markets will continue to deteriorate at the same pace as in recent years. Cumulative food inflation has been 1,000bps lower in France than in the rest of the EU since 2001, which we see as a testament to the extent of the shrinkage of the industry's profit pool. In other key markets like Spain, some key competitors are struggling due to high financial leverage, Carrefour doesn't need to reinvent the hypermarket con- ccopt. It just needs to be a better marchant: We believe that the ‘structural decine’ argument forthe hypermarket format has been overstated, It doesn't explain why competitors are able to generate much higher (25%*) sales densities than Carrefour is achieving. With leading consulting frm Simon Kucher & Partners, we have looked at how Carrefour could improve its price image. According to them, Carrefour can unlock additional profit potential though a better price image, Which will drive more shoppers into the stores and increase average licket sales. We also believe that giving more auton- ‘omy and better incentivisation for store managers should be an integral part of Carrefour’ strategy to become a better merchant, ‘Atty contibuon (E87) 2175 3283 4915 4607 Acmaan 82k AS 40K 4am i Neteales B5a6s U1 Aae GE OHD TOOTS en 32% 31% 30% 30% ES (6) 135217227 240 Consensus ES Ie) 135 235 275322 Valuation methodology and risks Our DOF analysis suggests a base case fair value of €41 por share. We assume a cost of equity of 8.8% and a WACC of 7.9% (calculated on the basis of a beta of 1.0, an equity risk premium of 3.25%, a risk-free rate of 5.5% and a cost of debt ‘f 6.0%), and a perpetual growth rate of 0.9%, We add €1.5 to reflect a 50% probability ofa relatively minor M&A disposal and €1.5 to reflect a 25% probability that 25% of sales density ‘gap with best-in-class local competitors is narrowed. Risks include: i) Failing to deliver all the cost and procurement sav- ings that Carrefour is targeting; i) may be necessary to re- invest more of the savings in the customer offer than we cur rently assume; and i Re-investment in the customer offer may prove insufficient to improve the group's sales trajectory. Industry View: Attention Retaling-Foos {Gics Sector: Consumer Discretionary ‘Sratogats Recommended Weight 2% MSI Ewope Weight: 7.2% 27