Global Energy: 2018 Outlook - Guinness Atkinson Funds · 2018. 1. 31. · Energy equity performance...
Transcript of Global Energy: 2018 Outlook - Guinness Atkinson Funds · 2018. 1. 31. · Energy equity performance...
Global Energy:
2018 Outlook
January, 2018Tim Guinness (Co-manager)Will Riley, CA (Co-manager)Jonathan Waghorn (Co-manager)
For Registered Investment Professional Use Only
1Energy sector: outlook
• We believe OPEC has shown clear determination to defend an oil price floor; we expect a $55-60/bl range
• US onshore oil production will need to grow faster in 2019/2020, in our view, to offset existing production declines and to satisfy growing demand globally for oil products
• The energy equity sector has adjusted to lower oil prices with profitability and free cashflow generation improving
• We see it as unlikely that extreme sector valuation levels will be sustained as the companies continue to recover
Review of 2017: spot oil prices higher; long dated prices lower
Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017
2
Brent and WTI oil futures curves
• Brent and WTI spot oil prices rose in 2017, pulled higher by a tighter market (global oil
demand growth and OPEC discipline holding sway over US onshore supply growth)
• Longer dated prices fell, and the futures curve to shift from contango to backwardation
50525456586062646668
Brent oil price: futures curves
31-Dec-16 31-Dec-17
$/bl
46
48
50
52
54
56
58
60
62
WTI oil price: futures curves
31-Dec-16 31-Dec-17
$/bl
Energy equity performance in 2017
Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017Past performance should not be taken as an indicator of future performance. The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations as well as other factors.
3
Global energy equity subsectors: median total return in 2017 (%)
• Guinness Atkinson Global Energy Fund produced a return in 2017 of -1.0% (total return)
• Year of divergence between sectors: strong for integrateds/refiners; weak for E&Ps/services
-60%
-40%
-20%
0%
20%
40%
60%
-4.00 -2.00 0.00 2.00 4.00
OMV AG
VALERO ENERGY CORP
ROYAL DUTCH SHELL PLC-A SHS
STATOIL ASA
CNOOC LTD
BP PLC
CANADIAN NATURAL RESOURCES
SUNCOR ENERGY INC
TOTAL SA
JA SOLAR/SUNPOWER
CONOCOPHILLIPS
CHEVRON CORP
OCCIDENTAL PETROLEUM CORP
ENI SPA
MSCI WORLD ENRGY INDEX
GUINNESS GLOBAL ENERGY FUND
PETROCHINA CO LTD-H
GAZPROM PAO -SPON ADR
IMPERIAL OIL LTD
RESEARCH PORTFOLIO/OTHER
DEVON ENERGY CORP
HALLIBURTON CO
ENBRIDGE INC/EXXON MOBIL
SOCO/TULLOW
HELIX ENERGY/UNIT CORP
SCHLUMBERGER LTD
NEWFIELD EXPLORATION CO
HESS CORP
NOBLE ENERGY INC
APACHE CORP
QEP RESOURCES/OASIS/CARRIZO
Contribution to return (percent)
Indicative fund contribution, per position
2017 indicative contribution
4
Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017Past performance should not be taken as an indicator of future performance. The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations as well as other factors.
0
20
40
60
80
100
120
140
1601
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
92
01
02
01
12
01
22
01
32
01
42
01
52
01
62
01
7
Oil
Pri
ce (
$/b
bl)
Brent oil price
Incentive price for new supply
Estimated demand destruction level
Cash cost of marginal current supply
Economics: marginal cost of supply has historically defined prices
• The oil price trades between the cash cost of supply and the price at which demand falls
• Marginal cost tends to determine the oil price in the longer term
Economics of crude oil
Source: Bernstein, Guinness Atkinson Funds, Jan 2018
5
Near term oil demand: world oil demand up 1.5m b/day in 2017
Source: IEA Oil Market Report Dec 2017
Forecasts are inherently limited and cannot be relied upon.
• 2017 world oil demand up around 10m b/day on pre-recession peak (2007)
• Non-OECD demand has grown unchecked for over a decade, not unseated by financial crisis
• Estimates for 2018 indicate healthy demand growth of 1.3m b/day – all from non-OECD
Global oil demand (m b/day)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
OECD demand IEA IEA
North America 25.7 25.8 24.5 25.8 24.5 23.7 24.1 24.0 23.6 24.2 24.2 24.6 24.7 24.9 25.0
Europe 15.6 15.7 15.7 15.6 15.5 14.7 14.7 14.3 13.8 13.6 13.5 13.8 14.0 14.3 14.3
Pacific 8.8 8.9 8.7 8.7 8.3 8.0 8.2 8.2 8.5 8.3 8.1 8.1 8.1 8.1 8.0
Total OECD 50.1 50.4 48.9 50.1 48.3 46.4 47.0 46.5 45.9 46.1 45.8 46.4 46.9 47.3 47.3
Change in OECD demand 0.3 -1.5 1.2 -1.8 -1.9 0.6 -0.5 -0.6 0.2 -0.3 0.6 0.5 0.4 0.0
NON-OECD demand
FSU 3.8 3.9 4.0 4.0 4.2 4.0 4.1 4.4 4.6 4.5 4.6 4.5 4.8 4.8 4.9
Europe 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.8
China 6.4 6.7 7.2 7.6 7.7 7.9 8.9 9.3 9.9 10.4 10.8 11.6 11.9 12.4 12.8
India 2.6 2.6 2.7 2.9 3.1 3.2 3.3 3.5 3.7 3.7 3.8 4.2 4.6 4.7 5.0
Other Asia 6.4 6.4 6.6 6.9 6.8 7.1 7.5 7.6 7.6 7.9 8.0 8.2 8.4 8.7 8.9
Latin America 4.9 5.0 5.2 5.3 5.6 5.7 6.1 6.2 6.5 6.6 6.8 6.7 6.6 6.6 6.7
Middle East 5.5 5.9 6.1 6.4 6.7 7.1 7.3 7.5 7.9 8.0 8.4 8.4 8.3 8.3 8.5
Africa 2.8 2.9 2.9 3.3 3.3 3.4 3.5 3.5 3.8 3.8 3.9 4.1 4.1 4.2 4.3
Total Non-OECD 33.1 34.1 35.4 37.1 38.1 39.1 41.4 42.7 44.8 45.6 47.3 48.5 49.4 50.6 51.9
Change in non-OECD demand 1.0 1.3 1.7 1.0 1.0 2.3 1.3 2.1 0.8 1.7 1.2 0.9 1.2 1.3
Total Demand 82.5 83.8 85.1 87.2 86.4 85.5 88.4 89.2 90.7 91.7 93.1 95.0 96.3 97.8 99.1
Change in demand 1.3 1.3 2.1 -0.8 -0.9 2.9 0.8 1.5 1.0 1.4 1.9 1.3 1.5 1.3
6
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Wo
rld
oil
bill
/ G
DP
(%
) $100 oil in 2014 = 4.3% of GDP$53 oil in 2017 = 2.4% of GDP
$100
$75
$50
Oil price: $53 oil implies spend of 2.4% of world GDP in 2017
Source Bloomberg LP; Guinness Atkinson Funds, data as of Dec 2017*World oil bill = total global spend on oil consumption / world GDP
Forecasts are inherently limited and cannot be relied upon.
• We believe Saudi is targeting a price that gives a “reasonable” world oil bill
• Ten year average world oil bill* is 4.2%, 20yr average is 3.2%, 30yr average is 2.8%
• If oil averages $75 it will mean in 2020 the world oil bill is 3.1% of GDP
• If oil averages $50 it will mean in 2020 the world oil bill is 2.1% of GDP
The world oil ‘bill’ as a percentage of world GDP
7
Oil demand: global demand trends still remain upwards
• Non-OECD oil demand has grown at 3.8%pa since 1965, vs the OECD at 1.5%pa
• Per capita oil demand in China & India remains at a fraction of developed OECD levels
Per capita oil consumption (barrels per head pa)
Source IEA; Guinness Atkinson Funds (Nov 2017)
8
0
5
10
15
20
25
30
3519
50
195
5
196
0
196
5
197
0
197
5
198
0
198
5
199
0
199
5
200
0
200
5
201
0
201
5
Oil
con
sum
pti
on
per
cap
ita
(bls
per
yea
r)
Japan USA South Korea China India
-
500,000
1,000,000
1,500,000
2,000,000
'00
0s
veh
icle
s
Russia
Indonesia
India
Brazil
China
Other
USA
50 years: fleet grows by 890 million
20 years: fleet grows by 850 million vehicles
Oil demand: vehicle growth is creating an oil demand shock 9
Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017
Forecasts are inherently limited and cannot be relied upon.
• Long term oil demand will be driven by the non-OECD adopting mass transportation
• The global vehicle population grew by 890m from 1960 to 2010…
… but we think could grow by 1,000m in the next twenty years
World vehicle population (1960-2030e)
Oil demand: vehicle growth is creating an oil demand shock 10
Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017
Forecasts are inherently limited and cannot be relied upon.
• Crude oil is 60% used in transportation and there are limited substitutes currently
• We expect the global fleet of ICE vehicles to expand by around 20% over next 10 years
Electric vehicles vs non-electric vehicles
-
250
500
750
1,000
1,250
1,500
1,750
2,000
Global vehicle population (end of year)
Electric vehicle population (end of year)
Global vehicle population ex electric vehicles
(million vehicles)
EVs at around 1% of world vehicle fleet in 2020 (15m vehicles vs 1.5m today)
Assumes 1 in 5 cars sold in 2025 is an EV
Assumes 1 in 2 cars sold in 2030 is an EV
Oil demand: what about the rest? 11
Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017
Forecasts are inherently limited and cannot be relied upon.
• Passenger vehicles account for less than 30% of oil demand. Other key sources of demand (heavy transport; petrochemicals) more closely linked to GDP growth
Source of demand %
Power 6%
Petrochemicals 13%
Other industry 11%
Cars & light trucks 26%
Heavy vehicles 18%
Air travel 6%
Shipping 6%
Rail 1%
Other 13%
Total 100%
Global truck fleet rising from 377m in 2015 to 600m in 2030 (+c.60%)
Air revenue passenger kms rising from 9trn in 2015 to 15trn in 2030 (+c.70%)
Seaborne trade rising from 54trn ton miles in 2015 to 90trn ton miles in 2030 (+c.70%)
Ethylene demand rising from 141m tons to 230m tons in 2030 (+c.65%)
Cars & light trucks 26%
Other 74%
Structure of global oil demand
Global oil supply: three main components 12
Source : IEA; Guinness Atkinson Funds (Jan 2018)
1) Non-OPEC (ex-US onshore): holding up thanks to legacy projects, but facing decline
2) OPEC (inc natural gas liquids): low cost production, but in countries struggling to breakeven fiscally
3) US onshore: shorter cycle, able to grow at $50/bl
Global oil supply in 2017 (m b/day)
51m b/day 40m b/day 7m
0 20 40 60 80 100 120
Non-OPEC (ex-US onshore) OPEC (inc NGLs) US onshore
m b/day
13Non-OPEC oil supply: concentrated growth from North America
Source: IEA, Guinness Atkinson Funds (Nov 2017)
• North America delivered nearly all of non-OPEC oil production growth over the last six years
• Despite $100 oil and high capex levels, other non-OPEC countries had flat production
Non-OPEC oil growth: 2017 vs 2012 pa (m b/day)
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Mex
ico
Chi
na
Syri
a
Yem
en
Au
stra
lia
Oth
er E
uro
pe O
ECD
Oth
er A
sia
non
OEC
D
Egyp
t
Col
umbi
a
Arg
en
tin
a
Ind
ia
Oth
er L
atin
Am
eric
a
Oth
er
Euro
pe
no
n O
EC
D
Oth
er
Pac
ific
OE
CD
Oth
er
no
n O
PE
C M
E
Mal
ays
ia
Oth
er A
fric
a no
n O
PEC
Om
an
No
rway U
K
FSU
Proc
essi
ng
Gai
ns
Ru
ssia
Glo
bal
Bio
fue
ls
Bra
zil
Can
ada
US
A
Tota
l non
-OP
EC
Sector holdings are subject to change.
Non-OPEC oil supply (ex-US): upstream capex has fallen sharply 14
Source : Simmons International and Rystad, January 2018
• Global upstream capex has fallen by more than 20%pa in both 2015 and 2016
Year over year change in global upstream capex
0
100
200
300
400
500
600
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
Up
stre
am i
nte
rnat
ion
al c
apex
(re
al 2
01
6 U
SD$
bn
)
An
nu
al p
erce
nta
ge c
han
ge (
%)
Non-OPEC oil supply (ex-US): spending 15
Source : Simmons International, April 2017
“The 2017 E&P spend for this part of the global production base, which still makes up around 50 million barrels-per-day of production is expected to be down 50% compared to 2014. At no other time in the past 50 years has our industry experienced cuts of this magnitude and this duration.
While the market continues to focus on the headline numbers which suggest that production is holding-up well even in the third successive year of underinvestment, a closer look at the underlying data reveals that the current situation is not sustainable.”
Paal Kibsgaard, CEO, Schlumberger (March 2017)
Non-OPEC oil supply (ex-US): production flat to declining 16
Source : Kessler Energy, Guinness Atkinson Funds, Jan 2018
Forecasts are inherently limited and cannot be relied upon.
• Non-OPEC supply (ex-US) project start-ups still strong in 2017/18 then sharp drop in 2019/20
Major non-OPEC (ex-US onshore) project start-up schedule
0.0
20.0
40.0
60.0
80.0
100.0
120.0
0
1,000
2,000
3,000
4,000
5,000
6,000
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
E
20
21
E
Bre
nt
oil
pri
ce (
US$
/bl)
Oil
pro
du
ctio
n c
apac
ity
rece
ivin
g fi
nal
in
vest
men
t ap
pro
val (
kb/d
)
Non-OPEC oil supply: US onshore production and rig count 17
Source: EIA (oil production to July 2017); Bloomberg (oil rig count) at end October 2017
• The decline of US onshore oil production in 2015/16 now reversed to growth
• The US oil directed rig count has recovered from low of 330 mid-2016 to 750 in Sept 2017
US onshore oil production vs oil rig count (table shows US onshore total rig count by shale basin)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Rig
co
un
t
Oil
pro
du
ctio
n (
kb/d
)
Onshore US crude oil production (ex Alaska)
Onshore oil-directed drilling rig count
Non-OPEC oil supply: US oil supply response 18
Source: Guinness Atkinson estimates, as of Jan 2018
Potential trajectories for US onshore oil production
Brent oil price Production change
$30-40/bl Declining 0.3-0.5m b/day
$40-50/bl Broadly flat
$50-60/bl Increasing around 0.6-1.2m b/day
$60-70/bl Increasing around 1.2-1.6m b/day
• We expect marginal investment (from higher oil prices) to be invested in US shale
• The resource is available, payback is quick and technical, fiscal and political risks are low
• Efficiency gains will compete with cost inflation and infrastructure access
• We believe that a trajectory towards $60/bl will be required, to:• Offset the increasing decline rates of new wells in order to sustain the growth trajectory
• Deliver more growth in 2019/2020 as non-OPEC ex-US sees production declines
OPEC oil: call on OPEC around 0.5m b/day above actual supply
Source: Bloomberg; Guinness Atkinson Funds (Data as of December 2017)* OPEC-12: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi , U.A.E., Venezuela
• OPEC-12 production was 1.2m b/day lower in Nov 2017 than in Nov 2016
• This is despite growth of 0.5m b/day from Nigeria and Libya
• “Call on OPEC” for 2018 is now 32.5m b/day; 0.5m b/day above Nov 2017 production
OPEC-12* production (m b/day)
19
22
24
26
28
30
32
34
20
00
20
01
20
02
20
03
20
04
20
05
20
06
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07
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08
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20
15
20
16
20
17
20
18
Mill
ion
bar
rels
per
day
OPEC-12* production
Call on OPEC-12
Call on OPEC-12:2017 = 32.9m b/day2018 = 32.5m b/day
IEA Nov 2017 production= 32.0m b/day
OPEC oil supply: OPEC staying disciplined with cuts
Source: Bloomberg, December 2017, red dot indicates November 2014 OPEC meeting; green dot indicates Jan 2017 quota change
• OPEC oil production grew by nearly 2.0 m b/day after the Nov 2014 meeting, peaking in Dec 2016
• Ex Nigeria & Libya, OPEC cut in 2017 by 1.2m b/day
• Nigeria & Libya have recovered and are now part of the quota system again
Libya
OPEC ex Nigeria/Libya
IranNigeria
Saudi Arabia Venezuela
7,500
8,000
8,500
9,000
9,500
10,000
10,500
11,000
Jun
-20
10
Jun
-20
11
Jun
-20
12
Jun
-20
13
Jun
-20
14
Jun
-20
15
Jun
-20
16
Jun
-20
17
'00
0 b
bl/
day
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
Dec
-20
08
Dec
-20
09
Dec
-20
10
Dec
-20
11
Dec
-20
12
Dec
-20
13
Dec
-20
14
Dec
-20
15
Dec
-20
16
'00
0 b
bl/
day
0200400600800
1,0001,2001,4001,6001,800
Dec
-20
08
Dec
-20
09
Dec
-20
10
Dec
-20
11
Dec
-20
12
Dec
-20
13
Dec
-20
14
Dec
-20
15
Dec
-20
16
'00
0 b
bl/
day
2,0002,2002,4002,6002,8003,0003,2003,4003,6003,8004,000
Jun
-20
10
Jun
-20
11
Jun
-20
12
Jun
-20
13
Jun
-20
14
Jun
-20
15
Jun
-20
16
Jun
-20
17
'00
0 b
bl/
day
20
OPEC oil supply: fiscal budgets imply high oil price needs
• The actual economic cost of developing most OPEC oil remains very low
• Higher levels of government expenditure necessitate greater oil revenues
• The fiscal breakeven oil price* for Saudi in 2018 is estimated to be $70 per barrel
Source: IMF; Guinness Atkinson Funds
*‘Required oil price’ is defined as the oil price that is needed by each country to balance fiscal budgets
21
OPEC (selected) fiscal breakeven oil prices - 2018 ($/bbl)
0
20
40
60
80
22
Oil supply/demand: OECD inventories need to normalise
OECD oil inventories (million bbls)
Source: IEA Oil Market Report (November 2017); Guinness Atkinson Funds
• In 2015, OECD inventories moved well above the top of the ten year range…
….the move implied average oversupply of c.0.8m b/day
• In 2016, inventories fell slightly, indicating a tightening in the second half of the year
• In 2017, inventory levels tightening thanks to OPEC cuts, albeit slower than first hoped
2,400
2,600
2,800
3,000
3,200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OEC
D s
tock
s (m
bar
rels
)
2005 - 2014 spread 2014 2015 2016 2017
2,200
2,400
2,600
2,800
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OEC
D s
tock
s (m
bar
rels
)
1994 - 1997 spread 1998 1999
23
Inventories - parallel with 1998-99 down cycle
OECD oil inventories 1994-1999 (million bbls)
Source: IEA Oil Market Reports (1994-1999); Guinness Atkinson Funds
• In the 1998/99 downcycle, oil inventories peaked at around 300m above average…
…. very similar to magnitude of oversupply in 2015/16
• Oil price recovery and end of 1998 coincided with inventories starting to fall
Inventories – the path to a lower inventories in 2018
2018 global oil market balance (assuming OPEC deal is adhered to)
Source: Guinness Atkinson Funds, Jan 2018
• As usual, the picture of oil supply and demand in 2018 will be dynamic
• Our ‘base’ case shows that the oil market is likely to be undersupplied in 2018, by something around 0.3m b/day
• We assume that the market averaged 2017 in undersupply (c.0.3-0.5m b/day)
• ‘Core’ OPEC cuts and growing global oil demand tighten the market
• US shale, Canada and Brazil loosen the market
-2.0-1.5-1.0-0.50.00.51.0
Averageover/(under)
supply in2017
OPEC supply Global oildemandgrowth
non-OPECsupply (ex-US
onshore)
US onshoresupply
Averageover/(under)
supply in2018
mb/day
loosening
tightening
24
Natural gas: summary views
• The gap between US and international gas prices widened in 2017
• US continues to see high levels of new supply, economic at $3/mcf, from the Marcellus
• New US LNG export facilities starting up over next three years, with major wave in 2019
Global natural gas prices (US$/mcf)
Source: Bloomberg, Guinness Atkinson Funds (data as of Dec 2017)
02468
101214161820
Dec
-05
Jun
-06
Dec
-06
Jun
-07
Dec
-07
Jun
-08
Dec
-08
Jun
-09
Dec
-09
Jun
-10
Dec
-10
Jun
-11
Dec
-11
Jun
-12
Dec
-12
Jun
-13
Dec
-13
Jun
-14
Dec
-14
Jun
-15
Dec
-15
Jun
-16
Dec
-16
Jun
-17
Dec
-17
Nat
ura
l gas
pri
ce (
$/m
cf)
Euro Spot US Spot Japan LNG Price
25
0
10
20
30
40
50
60
70
8020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Expected growth 2018 to 2030 - 9% p.a.
Growth 2000 to 2011 - 15% p.a.
Growth 2012 to 2017 - 9% p.a.
Global natural gas: non-OECD gas intensity very low, esp China 26
Source: BP Statistical Review of World Energy; Guinness Atkinson Funds, data as of end Dec 2017
Forecasts are inherently limited and cannot be relied upon.
• Gas in China taking share from coal; tripling from 25 Bcf/day in 2017 to 75 Bcf/day in 2030, in our view
• This implies a market share for gas in China of around 16% in 2030 (up from 7% in 2017)China natural gas demand (bcf/day)
0
50,000
100,000
150,000
200,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
Super-majors: free cashflow vs CAPEX and dividends
CAPEX Dividends Free cashflow from operations
$m
Energy equities: super-major FCF yield improving
• Super-major oil and gas companies are emerging from a period in which dividend was being paid by debt to a period where they will have the ability to raise dividends by up to 40% (at $60 Brent)
27
Source: Guinness Atkinson Asset Management (Nov 2017)
Forecasts are inherently limited and cannot be relied upon.
Super-majors have the scope to increase dividend by c.40% in 2019/2020 (at $60 Brent / $58 WTI)
• Exxon; Chevron; BP; Royal Dutch Shell; Total
0
20,000
40,000
60,000
80,000
100,000
120,000
2012 2013 2014 2015 2016 2017 2018 2019 2020
Other large-caps: free cashflow vs CAPEX and dividends
CAPEX Dividends Free cashflow from operations
$m
Energy equities: other large-cap FCF yield improving even more
• Other large cap oil and gas companies also emerging from a period in which dividend was being paid by debt to one of expanding FCF – greater scope to expand dividends than majors (at $60 Brent)
28
Source: Guinness Atkinson Asset Management (Nov 2017)
Forecasts are inherently limited and cannot be relied upon.
Other large caps have the scope to increase dividend by c.80% in 2019/2020 (at $60 Brent / $58 WTI)
• Statoil; ENI; OMV; Conocophillips; Occidental; Suncor; CNOOC; Imperial Oil; Canadian Natural Resources
Guinness Atkinson Energy Fund: FCF returns improving well
FCF return of current Guinness Atkinson Global Energy fund portfolio holdings
29
Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017. Forecasts are inherently limited and cannot be relied upon.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17E
20
18E
Free
cas
h f
low
ret
urn
(%
)
• FCF (cashflow from operations less CAPEX) return was essentially zero between 2012 and 2016, but has now returned to the longer-term average, as companies have adjusted
2000
2001
20022003
2004
2005 20062007
2008
20092010 20112012
20132014
2015
20162017E 2018E
R² = 84%
1.2x
1.4x
1.6x
1.8x
2.0x
2.2x
2.4x
2.6x
2.8x
3.0x
-2% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Pri
ce/B
oo
k m
ult
iple
Free Cash Flow Return
Guinness Atkinson Energy Fund: FCF returns improving well
• The long-term relationship between FCF return and P/B implies c.40% upside
FCF return of current Guinness Atkinson Global Energy fund portfolio holdings
30
Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017. Forecasts are inherently limited and cannot be relied upon.
Guinness Atkinson Global Energy Fund: at a trough level of ROCE
• The combination of lower oil prices and legacy higher cost structures leave ROCE depressed
• We expect reported ROCE to improve as a result of
• External factors: improvements in oil and natural gas prices
• Internal factors: Cost deflation, efficiency improvements and M&A activity
ROCE of current Guinness Atkinson Global Energy portfolio
31
Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017
0%
5%
10%
15%
20%
25%
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Ret
urn
on
cap
ital
em
plo
yed
(R
OC
E)
1998-2016 average 12%
2000
20012002
2003
2004
200520062007
2008
20092010
2011
20122013
2014
2015
2016
2017E
R² = 78%1.0x
1.2x
1.4x
1.6x
1.8x
2.0x
2.2x
2.4x
2.6x
2.8x
3.0x
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%
Pri
ce/B
oo
k m
ult
iple
Return on Capital Employed (ROCE)
ROCE vs P/B multiple for Guinness Atkinson Global Energy portfolio
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
Dec
-16
Dec
-17
Pri
ce/C
ash
flo
w m
ult
iple
US Super Majors Chinese Majors
Energy equities: Importance of looking globally for opportunities
• Not all energy super-majors are valued the same: for example, there has been a major divergence since 2008 between the P/CF of US vs Chinese major oil & gas companies
• As a result, we have shifted our portfolio towards China and away from US
Source: Bloomberg; Guinness Atkinson Asset Management (Jan 2018)
US & Chinese oil & gas majors: price to cashflow multiple
32
33Fund positioning: key themes in the fund for 2018
Source: Guinness Atkinson Funds, at end December 2017
Theme Example holdings
1 Expanding free cashflow yields from large-cap oil & gas 29.2%
2 North American shale oil & gas growth 27.4%
3 Growing return on capital from oil & gas majors 17.7%
4 Emerging market natural gas demand growth 10.8%
5 Strong refining margins resulting from global GDP growth 7.2%
6 Deleveraging balance sheets 2.7%
7 Growth in global solar market 1.4%
8 Other (incl cash) 3.5%
Weighting (%)
Top 10 holdings as of 12/31/2017: 1. Suncor Energy 3.66% 2. Conocophillips 3.63% 3. Halliburton Co 3.63% 4.Petrochina Co Ltd 3.62% 5.Devon Energy 3.62% 6. Royal Dutch Shell PLC 3.60% 7. Schlumberger Ltd 3.60% 8. OMV AG 3.58% 9. CNOOC Ltd 3.57% 10. Occidental Petroleum Corp 3.55%
The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase or sell such securities, and the information provided regarding such individual securities is not a sufficient basis upon which to make an investment decision.
Fund and index performance, as of December 31, 201734
Expense ratio: 1.53% (gross); 1.45% (net) *Periods over 1 year are annualized returns
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 800-915-6566 and/or visiting www.gafunds.com
Source: Bloomberg
• Underperformance from energy vs S&P500 in 2017, leaving the sector, in our analysis, a long way from historical normalized valuation levels
Q4 2017 1 Year 5 Years* 10 Years* Since Inception(June 30, 2004)*
Global Energy Fund 5.85% -1.06% -1.67% -2.10% 6.82%
MSCI World Energy Index 6.85% 5.93% 2.21% 0.26% 6.75%
S&P 500 6.63% 21.80% 15.77% 8.48% 8.74%
Fund characteristics 35
Single sectorCompanies engaged in the production and distribution of energy (oil, natural gas, coal, alternative energy, nuclear and utilities)
High conviction Equally weighted, concentrated portfolio (30 positions)
Unconstrained No reference to index
Global Diversified globally
Investment type Listed equities (long-only)
Investmentobjective
Long-term capital appreciation
36Fund manager biographies
Timothy Guinness
• Executive Chairman and Chief Investment Officer of Guinness Atkinson Asset
Management
• Portfolio manager of the Investec Global Energy Fund from November 1998 to
February 2008
• Co-founder of Guinness Flight Global Asset Management and, after its acquisition
by Investec, chairman of Investec Asset Management until March 2003
• Graduated from Cambridge University in 1968 with a degree in Engineering. After
obtaining an MBA at MIT, worked for 10 years as a corporate financier
Will Riley CA
• Joined Guinness Atkinson Asset Management in 2007
• Company valuation expert for PricewaterhouseCoopers 2000-2007
• Qualified as a Chartered Accountant in 2003
• Graduated from Cambridge University with a Masters degree in Geography in 1999
Jonathan Waghorn
• Joined Guinness Atkinson Asset Management in 2013
• Co-portfolio manager of the Investec Global Energy Fund from February 2008 to May 2012
• Co-head of energy equity research at Goldman Sachs from 2000-2008
• Drilling engineer in Dutch North Sea for Shell
Contact details 37
Corporate Office (California)
Sarah Sollesa [email protected] 1-818-716-2741
21550 Oxnard StreetSuite 850Woodland HillsCalifornia 91367
Investment management team (London)
Tim Guinness [email protected] +44 (0) 20 7222 7978
Will Riley [email protected] +44 (0) 20 7222 3451
Jonathan Waghorn [email protected] +44 (0) 20 7222 3457
14 Queen Anne’s GateLondonSW1H 9AA
For your protection, calls to these numbers may be recorded
Guinness Atkinson Asset Management
• Guinness Atkinson Asset Management: founded in 2003, along with UK sister firm Guinness Asset Management
• Four core areas of expertise: Global Equities, Energy, Asia & Financials
• Guinness Group AUM (at December 31, 2017): $1.6bn
• Staff of 30, including 14 investment professionals
• Company is 100% owned by employees
38
AUM = assets under management
39Disclosure
Opinions expressed are subject to change, are not guarantee and should not be considered investment advice.
The Fund’s holdings, industry sector weightings and geographic weightings may change at any time due to on-going portfolio management. References to specific investments and weightings should not be construed as a recommendation by the Fund or Guinness Atkinson Asset Management, Inc. to buy or sell the securities. Current and future portfolio holdings are subject to risk. References to other mutual funds should not be interpreted as an offer of these securities.
Mutual fund investing involves risk and loss of principal is possible. The Fund invests in foreign securities which will involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund’s focus on the energy sector to the exclusion of other sectors exposes the Fund to greater market risk and potential monetary losses than if the Fund’s assets were diversified among various sectors. The decline in the prices of energy (oil, gas, electricity) or alternative energy supplies would likely have a negative effect on the funds holdings.
While the fund is no-load, management and other expenses still apply. Please refer to the prospectus for further details.
The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling 800-915-6566 or visiting gafunds.com. Please read it carefully before investing.
You cannot invest directly in an index.
Fund holdings & sector allocations are subject to change and are not recommendations to buy or sell any security.
Diversification does not assure a profit nor protect against a loss in a declining market.
For Institutional Use Only. Not for use with the retail public. Distributed by Foreside Fund Services, LLC